Viewpoint: IFRS 9 Financial Instruments – To implement in 2018 or to temporarily defer?

IFRS 9 – Implement in 2018 or temporarily defer?

The IASB’s recent decisions confirm that many insurers will enjoy a temporary relief from implementing IFRS 9 on 1 January 2018.

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For the last few years banks have been marching on with their major IFRS 9 implementation programs, whereas many insurers have put plans on hold, waiting for the IASB to complete their deliberations on amendments to the forthcoming insurance contracts standard.

The IASB’s recent decisions confirm that many insurers will enjoy a temporary relief from implementing IFRS 9 on the mandatory effective date of 1 January 2018, allowing them to defer the implementation of the standard until the earlier of the mandatory effective date of the new insurance contracts standard or 1 January 2021.  However, those insurers that are eligible and elect to defer their implementation of IFRS 9, will still need to meet minimum disclosure requirements starting with their 2018 financial statements.

In this article we look at the considerations and benefits for the options insurers have and how the market is responding to the recent decisions taken by the IASB. While the IASB responds to comments and finalizes the amendments, now is the time for insurers to start making a well-informed decision regarding which approach is most appropriate for their circumstances. The choices insurers make can have far reaching operational implications and should be considered carefully.

Option 1 – Temporarily deferring the implementation of IFRS 9

In April 2016, the IASB confirmed certain disclosure requirements and amended others to provide more useful information to users of financial statements. While some information may already be available – e.g. fair value information is already required by IFRS 7 Financial Instruments: Disclosures – other information will not be.  The most relevant for insurers is the presentation of fair value information (both balances and movements) separately for those financial assets that do not meet the ‘solely payments of principal and interest’ (SPPI) test and all other financial assets.

Impacts on systems and processes – These disclosures will warrant an accelerated development and implementation of systems and processes to perform the SPPI test, and to capture and report that information, despite not fully adopting IFRS 9.

Parallel running of accounting processes - The temporary exemption from applying IFRS 9 will not provide full relief on all reporting levels within a group, more specifically:

  1. Insurance companies applying the temporary exemption with upstream reporting requirements to entities who do not qualify for the temporary exemption; or
  2. Subsidiaries who do not qualify for the temporary exemption and have upstream reporting requirements to insurance companies applying the temporary exemption.

The requirement for uniform accounting policies within a group may create the need for some entities to run parallel accounting systems and processes under both IAS 39 and IFRS 9. If they apply IAS 39 and IFRS 9 at different levels within the same group, they will have to adapt their consolidation or group reporting processes to adjust from one basis to another.

Therefore insurers will need to consider the full impacts of deferring and whether it would be simpler to implement IFRS 9 by 2018.

Option 2 - Implementing IFRS 9 from 1 January 2018 (with or without an overlay adjustment)

IFRS 9 introduces significant new requirements for the classification of financial assets and introduces a new model for the measurement of impairment of financial assets. This will require insurers to re-visit their existing systems and processes within investment accounting and financial reporting, with possible impacts on asset-liability management and investment management as well. Each area has different impacts:

  • Identification of business models –new judgments and additional data requirements;
  • Evaluation of contractual cash flows – new judgments and additional data requirements;
  • Measurement of impairment –new judgments, additional data requirements and new calculations and models; and
  • Overlay Approach –additional data requirements, new calculations and reporting outputs.

Looking specifically at the overlay approach - The overlay approach permits entities that issue insurance contracts accounted for under IFRS 4 to re-classify from profit or loss, and recognize in other comprehensive income (OCI), the difference between the amounts that would be recognized in profit or loss under IFRS 9 and under IAS 39 Financial Instruments: Recognition and Measurement. Entities applying the overlay approach are expected to fully implement IFRS 9 and calculate a top-side adjustment to reclassify temporary volatility in profit or loss caused by the implementation of IFRS 9 in advance of the forthcoming insurance contracts standard. Therefore, entities wishing to adopt the overlay approach will need to design and implement processes to calculate and report the adjustment at the end of each reporting period and enhance or develop systems to maintain this dual information. This requires a careful cost-benefit analysis.

The amendments will require disclosures to facilitate comparison between those entities that apply the overlay approach and those which do not. Entities who apply the overlay approach, and hence implement IFRS 9, are likely to have the information necessary to populate the required disclosures. However, they should give some thought to the impact of the presentation and disclosure requirements on key performance indicators and the most effective way to communicate that information to users of the financial statements.

Benefits of implementing early? If a group will have to apply IFRS 9 from 2018 while the insurer(s) in the group may qualify for the temporary exemption, the biggest advantage for the insurer(s) to adopt IFRS 9 jointly with the group would be that it avoids the complexity of maintaining two accounting systems. It would also lead to spreading the implementation of IFRS 9 and the forthcoming insurance contracts standard over time, which could alleviate pressure on the finance organization. This has to be weighed against the consequences of potential additional temporary volatility that may be created in the intermediate period.

In both scenarios, insurers will also need to consider specific local regulatory requirements that may be formulated as IFRS 9 is implemented in their jurisdictions.

In conclusion

IFRS 9 is an accounting change that will significantly impact the financial reporting of an insurer. When making the choices as listed above, we believe insurers should also consider wider reporting and stakeholder communications. They should assess how analysts will compare them against peers, what additional information analysts may request from them and how they should educate and explain the impact to investors, regardless of whether they plan a single accounting change or two consecutive ones.

In our discussions with clients to date, we see little to no appetite for the application of the overlay approach due to perceived complexity and cost with insufficient additional benefit. Most insurers appear inclined to use the temporary exemption from applying IFRS 9 and postpone their implementation of IFRS 9 to the earlier of the effective date of the forthcoming insurance contracts standard or 2021. Some bancassurance conglomerates, where the banking activities dominate the group, are leaning towards implementing IFRS9 for the whole group at the same time and not apply the overlay approach to avoid the cost and complexity around the need to maintain two accounting and reporting systems. There are also some insurers who are continuing with their IFRS 9 programs, regardless of the option to defer, so that they avoid the expected strain on resources which they expect the forthcoming insurance contracts standard to bring.

IFRS – Insurance

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