This month, the IASB discussed its findings from the external testing of a draft of the forthcoming insurance contracts standard (IFRS 17), and addressed some of the issues raised.
The testing covered, among other topics, level of aggregation, recognition of changes in estimates, derivatives used to mitigate financial risk, and
The objective was to provide the Board with evidence about how entities interpret specific requirements and what operational difficulties, if any, they may encounter in applying the requirements.
“The decisions made this month should easesome of the operational burden and costs in key areas when implementing andapplying IFRS 17.”
A portfolio of contracts would be divided at least between those contracts that are onerous on initial recognition, contracts that have no significant risk of becoming onerous after initial recognition and other contracts. However, entities would be prohibited from grouping contracts issued more than one year apart.
The Board agreed that when an experience adjustment directly causes a change in the estimate of the present value of future cash flows, the combined effect would be recognised in profit or loss.
The Board agreed that if an entity uses a derivative to mitigate
financial risks arising from an insurance contract, subject to the variable
fee approach, then the entity would be permitted to exclude the effect of
those changes in the financial risk from the contractual service margin when
specific criteria are met.
The Board made changes to sometransition requirements and confirmed that an entity would apply IFRS 17 retrospectively, unless this is impracticable. If it is impracticable, then an entity would be permitted to choose between a modified retrospective approach and the fair value approach.
The Board agreed that an entity would apply IFRS 17 for annual periods beginning on or after 1 January 2021, assuming that it is published in the first half of 2017. Entities would be able to apply it earlier if they also apply IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.
The staff are continuing the drafting process and expect to issue IFRS 17 in H1 2017.
Visit our IFRS – Insurance hot topics page for the latest developments in the insurance contracts project.
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