Impact of IFRS 9 on insurers | KPMG | BS

Impact of IFRS 9 on insurers

Impact of IFRS 9 on insurers

The IASB’s proposals aim to reduce the impact of the differing effective dates of the forthcoming insurance contracts standard and IFRS 9 Financial Instruments.

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The insurance industry raised significant concerns about the differing effective dates of the two standards – 2018 for IFRS 9 and probably 2020 or 2021 for the forthcoming insurance contracts standard.

These include potential temporary increases in accounting mismatches and volatility in profit or loss and other comprehensive income (OCI) created by the change in classification of financial assets, having two consecutive major accounting changes in a short period and having to apply the IFRS 9 classification and measurement requirements before the adoption of the forthcoming insurance contracts standard. These consequences would result in added costs and complexity for both preparers and users of insurers’ financial statements.


The Board has responded with its proposed amendments to IFRS 4 Insurance Contracts. The exposure draft ED/2015/11 Applying IFRS 9 Financial instruments with IFRS 4 Insurance Contracts (the ED) includes approaches allowing:

  • temporary exemption from applying IFRS 9 for certain entities that issue contracts in the scope of IFRS 4 (temporary exemption, also known as the deferral approach); and 
  • exclusion from profit or loss of the difference between the amounts recognized under IFRS 9 and under IAS 39 Financial Instruments: Recognition and Measurement for specified assets relating to insurance activities (overlay approach).

The IASB has asked for comments on its proposals by 8 February 2016.

 

Proposals

The IASB proposes two approaches, which are described below. Application of either of these approaches would be optional.


1. Temporary exemption

The IASB proposed that certain entities would be allowed a temporary exemption from applying IFRS 9; this would be permitted for entities that issue contracts in the scope of IFRS 4, if this activity is predominant for the reporting entity.


The temporary exemption would apply to all financial assets and financial liabilities held by the reporting entity – i.e. at the reporting entity level. However, an entity that elects the exemption could choose instead to apply only the requirements in IFRS 9 on the presentation of gains and losses on financial liabilities designated at fair value through profit or loss (FVTPL).


An entity that has already any version of IFRS 9 would not be permitted to stop applying it and revert to applying IAS 39. However, an entity that applies only the presentation requirements in IFRS 9 for gains and losses on financial liabilities designated at FVTPL would not be disqualified.

 

2. Overlay approach

The IASB proposes that for specified financial assets, an entity would be permitted to remove from profit or loss, and recognize in OCI, the difference between the amounts that would be recognized in profit or loss under IFRS 9 and under IAS 39.


The overlay approach could be applied by any entity that issues contracts that are accounted for under IFRS 4 which applies IFRS 9 in conjunction with IFRS

Financial assets eligible for the overlay adjustment would have to be:

  • designated as relating to contracts that are in the scope of IFRS 4 (i.e. this would not include financial assets held in funds relating to investment contracts that are outside the scope of IFRS 4); 
  • classified as at FVTPL under IFRS 9; and
  • not classified as at FVTPL in their entirety under IAS 39.

An entity would be able to change the designation of financial assets as relating to contracts in the scope of IFRS 4 only if there were a change in the relationship between those financial assets and contracts.

An entity would be permitted to apply the overlay approach prospectively to financial assets when the eligibility criteria are met. When a financial asset no longer meets the eligibility criteria, an entity would cease applying the approach and any accumulated OCI would be reclassified to profit or loss.

 

Presentation and disclosure

1. Temporary exemption

The IASB is proposing disclosure requirements that would enable users to make comparisons between entities that apply the temporary exemption and those that do not. However, they are intended to reduce the need for an entity applying the temporary exemption to assess the business model for financial assets before the application of the forthcoming insurance contracts standard.


These include:

  • Credit risk information about financial assets that would meet the SPPI test under IFRS 9 and are not held for trading or managed on a fair value basis; and
  • For financial assets that would be measured at FVTPL under IFRS 9 because they do not meet the SPPI test in IFRS 9, the fair value at the reporting date and the fair value change during the reporting period.

An entity would have to disclose how it concluded that it is eligible for the temporary exemption. Additional disclosures would be required in a reporting period if an entity’s insurance activities were no longer its predominant activity.

 

2. Overlay approach

The IASB is proposing presentation and disclosure requirements that provide comparability between entities that apply and do not apply the overlay approach. The proposed requirements would permit an entity to determine the presentation that is most relevant to an understanding of its financial performance. Entities that apply the overlay approach would be required to comply with disclosure requirements of IFRS 7, including, but not limited to, the disclosures related to IFRS 9.

The proposed requirements would include disclosing an entity’s accounting policy for determining the financial assets for which an overlay adjustment is made and an explanation of how the overlay adjustment was derived in the period. Additional disclosures are proposed for the transfer or re-designation of financial assets.

Under the proposals, the overlay adjustment would be presented as a single line item before tax in profit or loss, or OCI, or both. The following examples (excluding the tax impacts) present the available presentation options.

Example A – Presented in both   
Profit or loss   
Profit or loss before overlay adjustment and before tax  100
Overlay adjustment  (30)
Profit or loss before tax  70
Other comprehensive income   
Overlay adjustment 30
Total comprehensive income 100

 

Example B – Presented in profit or loss only   
Profit or loss   
Profit or loss before overlay adjustment and before tax   100
Overlay adjustment ( (30)
Profit or loss before tax  70
Other comprehensive income   
Total comprehensive income 100

 

Example C – Presented in OCI only   
Profit or loss   
Profit or loss before tax  70
Other comprehensive income   
Overlay adjustment 30
Total comprehensive income 100

If an entity does not present the impact of the overlay adjustment on individual line items in profit or loss on the face of the statement of profit or loss itself, then the impact on individual line items would be disclosed in the notes.

 

Effective and expiry dates, and transition

1. Effective and expiry dates

The effective date of the proposed requirements would be for annual reporting periods beginning on or after 1 January 2018, and early adoption would be permitted if an entity adopts IFRS 9 early.

The temporary exemption would expire once the forthcoming insurance contracts standard become effective, and no later than reporting periods beginning on or after 1 January 2021. If the forthcoming insurance contracts standard is not effective on 1 January 2021, then an entity could choose to apply the overlay approach. The proposed expiry date should provide confidence to stakeholders that the forthcoming insurance contracts standard will be finalized and issued in the near term and therefore that a temporary exemption would not persist for a prolonged period.

An entity would be permitted to start applying the overlay approach only when it first applies IFRS 9 or when it first applies IFRS 9 after previously applying only the presentation requirements in IFRS 9 for gains and losses on financial liabilities designated as at FVTPL. An entity would be permitted to stop applying either approach in any reporting period and start applying IFRS 9. First-time adopters of IFRS would be prohibited from applying either approach.

2. Transition

The IASB proposed the following requirements.

Approach When an entity starts applying the approach  When it stops applying the approach
Temporary exemption The entity would use the applicable transition provisions in IFRS 9 to the extent needed to provide the disclosures required, as stated above.  The entity would follow the transition provisions under IFRS 9. 
Overlay The approach would be applied retrospectively with an adjustment to the opening balance of OCI equal to the difference between the qualifying assets’ fair values and their carrying amounts under IAS 39. Restatement of comparative information would be required if the entity also restates that comparative information under IFRS 9. The entity would follow IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors to account for the change in accounting policy.


  
 
 
 

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