Intersection ahead in IFRS 17 and IFRS 9 for insurers
The International Accounting Standards Board (IASB) expects to finalise the new insurance contracts Standard in March 2017, not effective before 2020. IFRS 9 Financial Instruments is effective from 1 January 2018.
Many insurers raised concerns about the gap in effective dates of the new Standard for insurance contracts and IFRS 9 and the fact that they result in two consecutive major accounting changes with operation and business implications for full implementation. Consequently, insurers believe that additional volatility in profit or loss could arise in this period.
On 12 September 2016, the IASB has issued amendments to IFRS 4 to address concerns relating to the temporary effects of applying IFRS 9 in conjunction with IFRS 4.
The amendments introduced the ‘Overlay Approach’ and the ‘Deferral Approach’. The amended IFRS 4 will:
- Give all companies that issue insurance contracts the option to recognise in other comprehensive income, rather than in profit or loss, the volatility that could arise when IFRS 9 is applied before the new IFRS 17 is issued (known as the “Overlay Approach”); and
- Give companies whose predominant activities are connected with inruance an optional temporary exemption from applying IFRS 9 until 2021 (known as the ‘Deferral Approach’). The entities that defer the application of IFRS 9 will continue to apply the existing financial instruments standard – IAS 39.
The approaches included in the Exposure Draft were reconfirmed by the IASB in April 2016 where the IASB approved the staff recommendations with majority of votes.
The main objective of the Overlay Approach is to remove any increased volatility from profit or loss in a transparent and consistent manner while maximising comparability. Under this approach, entities reclassify from profit and loss to other comprehensive income (OCI) the difference between amounts recognised under IFRS 9 and amounts that would have been recognised under IAS 39. This approach is applicable for financial assets designated as related to insurance contracts and measured at fair value through profit or loss (FVTPL) under IFRS 9 that were not measured at FVTPL under IAS 39.
In the other hand, the Deferral Approach, at the reporting entity level, has two different perspectives of application, depending if the predominant activities of the insurance conglomerate are related to insurance:
- If the predominant activities of the conglomerate are related to insurance, the conglomerate could choose to apply IAS 39 to all financial assets in consolidated financial statements. However, if a subsidiary is a Bank, for example, and publishes standalone IFRS financial statements, it must apply IFRS 9.
- If the predominant activities of the conglomerate are not related to insurance, the conglomerate must apply IFRS 9 to all financial assets in consolidated financial statements. However, if a subsidiary that holds insurance activities publishes standalone IFRS statements it could choose to apply IAS 39.
The qualifying criteria regarding the quantification of ‘insurance related activities’ includes:
- Not previously applied IFRS 9 (other than the ‘own credit’ requirements in isolation). This new
- Significant IFRS 4 liabilities compared to total liabilities of the reporting entity using a predominance ratio.
The IASB declared that it expects more entities to qualify for the exemption compared to the previous Exposure Draft.