Insurance – Finalisation of new standard may slip

Insurance – Finalisation of new standard may slip

Effective date for new standard now expected after IFRS 9; transition method modified.

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Insurers face an extended wait for completion of the IASB’s insurance contracts project.

IFRS 9 to be effective before insurance standard

Deliberations on the IASB’s insurance contracts project look set to extend further into 2015, following an October meeting in which the Board did not discuss its model for participating contracts.

With the European CFO Forum expected to set out its proposals for an alternative model during an education session in November, it no longer appears likely that a final standard will be issued in mid-2015.

Given an expected three-year lead time from publication to implementation, the new standard’s effective date is likely to fall after that of IFRS 9 Financial Instruments – i.e. 1 January 2018.

 

"Companies may end up applying IFRS 9 before the forthcoming insurance contracts standard. They will need to prepare for this scenario, and consider the impacts on project management, accounting policies, the use of options available under IFRS 9 and stakeholder communications."

Retrospective application approaches modified

However, the October meeting did see the IASB modify its initial application proposals in the 2013 exposure draft for contracts with no participating features.

Initial application  Summary of decisions
Retrospective application The Board confirmed that the forthcoming insurance contracts standard would be applied retrospectively, unless this is ‘impracticable’ as defined in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Simplified approach (modified)

The Board confirmed the simplified approach to retrospective application proposed in the 2013 ED for cases where full retrospective application is ‘impracticable’ – i.e. practical expedients for determining the contractual service margin at transition and the discount rate at initial recognition.

However, it made a modification to this approach. The risk adjustment at the date of initial recognition would be estimated by modifying the risk adjustment at the beginning of the earliest period presented by the expected release of risk before the beginning of the earliest period presented.

Fair value approach (new)

The Board introduced the fair value approach to retrospective application for cases where both full retrospective application and the simplified approach are ‘impracticable’.

A company would determine:

  • the contractual service margin at the beginning of the earliest period presented as the difference between the fair value of the insurance contract at that date and the fulfilment cash flows measured at that date; and
  • interest expense in profit or loss, and the related amount of OCI in accumulated equity, by estimating the discount rate at the date of initial recognition using the method outlined in paragraphs C6(c)–(d) of the 2013 ED – i.e. the same method as the simplified approach.

A company would disclose the information proposed in paragraph C8 of the 2013 ED separately for contracts measured using the fair value approach.

 

However, the October meeting did see the IASB modify its initial application proposals in the 2013 exposure draft for contracts with no participating features.
However, the October meeting did see the IASB modify its initial application proposals in the 2013 exposure draft for contracts with no participating features.

Next steps for the project

Visit our IFRS – Insurance hot topics page for the latest developments in the insurance contracts project.

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