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IFRS Project Insights: Insurance Contracts

The IASB issued IFRS 17 Insurance contracts in May 2017 after the completion of a compressive project on the accounting for insurance contracts with the objective of developing a comprehensive standard that will address recognition, measurement, presentation and disclosure requirements.

Most editions of this publication focus on consecutive IASB meetings held and provide a summary of the discussions, including key decisions and proposals, key considerations for entities and due process steps undertaken.

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The International Accounting Standards Board (“IASB”/ “the Board”) issued a Discussion Paper, Preliminary Views on Insurance Contracts, in May 2007. In August 2010, the Board issued Exposure Draft ED/2010/8 Insurance Contracts (“the 2010 ED”).

In June 2013, the Board issued revised Exposure Draft ED/2013/7 Insurance Contracts (“the 2013 ED”) which included changes in the insurance accounting proposals in response to the concerns raised by the insurance industry and other stakeholders on the 2010 ED. The Board decided to seek comments only on the 5 targeted areas where significant changes have been made since the 2010 ED. These are:

  • unlocking the contractual service margin to reflect changes in cash flows for future coverage and/or services;
  • splitting interest expense between profit or loss another comprehensive income;
  • presenting insurance contract revenue and expenses;
  • measuring and presenting cash flows from contracts with a contractual link to underlying items (“mirroring approach”); and
  • transition provisions for the first application of the standard with a modified retrospective application of all the new requirements.

The comment period for the 2013 ED closed on 25 October 2013.

The Board also conducted extensive international fieldwork, discussions and outreach activities between June and December 2013.

In February 2016 the Board concluded that it has taken all the necessary due process steps and has granted the Staff permission to begin the balloting process. Since then the Board has sent a field testing questionnaire to a number of preparers to test the interpretation of the drafted words. The Board has considered issues arisen during the drafting process and is expecting to finish drafting and issue a standard in May 2017.

IFRS Project Insights: Insurance Contracts – March 2017

The Board met on 22 February 2017 to discuss the findings from a recent external editorial review of a draft of IFRS 17 Insurance Contracts and to vote on the last batch of sweep issues ahead of the release of the final text of IFRS 17.

The Board made tentative decisions regarding the accounting for changes to the CSM, and tentatively decided that an entity should be exempt from the requirement to divide a portfolio into group of contracts. All 12 Board members agreed with recommendations on the remaining sweep issues. Board members did not raise any other topics for consideration at a future meeting.

IFRS Project Insights: Insurance Contraacts - March 2017
IFRS Project Insights: Insurance Contracts - January 2017

The Board met on 16 November 2016 to discuss the results and feedback from external testing and issues that arose during drafting.

The Board tentatively revised its previous tentative decision on the level of aggregation, retaining the definition of portfolio but refining the definition of groups. Groups are now defined as part of a portfolio comprising up to twelve months' worth of contracts that, at initial recognition, are unlikely to become onerous or are profitable but may become onerous in the future or, if any, are onerous contracts at initial recognition.

The Board tentatively revised its earlier tentative decisions on the reporting of experience adjustments under both the general measurement and the variable fee approach, tentatively approved 21 sweep issues, and tentatively decided that if it is published during the first half of 2017, IFRS 17 will be mandatorily applicable for annual periods beginning on or after 1 January 2021. Early application will be permitted, provided entities apply IFRS 9 and IFRS 15 at the same time.

IFRS Project Insights: Insurance Contracts - January 2017

IFRS Project Insights: Insurance Contracts – October 2015

During this meeting, the IASB discussed the application to IFRS first time adopters of the amendments to IFRS 4 Insurance Contracts (IFRS) that allow companies whose business model is predominately to issue insurance contracts to have the option to defer the effective date of IFRS 9 from 1 January 2018 to the earliest of the effective date of the new insurance contracts Standard or 1 January 2021 (the deferral approach) or to use an overlay approach. The Board tentatively decided to prohibit the deferral and overlay approaches for the first time adopters. The IASB also decided the comment period for the exposure draft will be 60 days from the expected publication data in December 2015.

The Board also tentatively decided that when an entity transitions to the new insurance contracts IFRS it will be permitted to reassess the business model for financial assets designated as related to contracts within the scope of the new insurance contracts IFRS. In addition, the reassessment would be based on facts and circumstances existing on initial application of the new insurance Standard (that is the beginning of the latest period presented – not the transition date) with new classifications/designations applying retrospectively.

 

IFRS Project Insights: Insurance Contracts – October 2015

IFRS Project Insights: Insurance Contracts – September 2015

During its September meeting, the IASB further discussed the consequences of having different effective dates for IFRS 9 Financial Instruments (IFRS 9) and the new insurance contracts Standard, the mechanics of the disaggregation of changes in an insurance liability due to changes in market variables between profit or loss and other comprehensive income (OCI), and the accounting consequences of mitigating risks related to insurance contracts.

The Board tentatively decided to amend IFRS 4 Insurance Contracts (IFRS 4) to allow companies whose business model is to predominately issue insurance contracts the option to defer the effective date of IFRS 9 from 1 January 2018 to earliest of the effective date of the new insurance contracts Standard or 1 January 2021.

The Board also tentatively reached nine other decisions.

IFRS Project Insights: Insurance Contracts – September 2015

IFRS Project Insights: Insurance Contracts – August 2015

During this meeting, the IASB discussed the consequences of having different effective dates for IFRS 9 Financial Instruments (IFRS 9) and the new insurance contracts Standard. The Board tentatively decided with a unanimous vote to amend IFRS 4 Insurance Contracts (IFRS 4) to permit an entity to exclude from profit or loss and recognize in other comprehensive income (OCI) the difference between the amounts that would be recognized in profit or loss in accordance with IFRS 9 and the amounts recognized in profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement (IAS 39), subject to meeting certain criteria.

The next Board meeting will be held on 21-25 September 2015. The Board will continue to discuss the scope of amendments to IFRS 4 and whether the effective date of IFRS 9 should be deferred for the insurance industry rather than adopting the amendment of IFRS 4 decided during its July 2015 meeting. Once issues relating to participating contracts have been addressed, the IASB Staff will consider whether the tentative decisions reached for non-participating contracts will need to be revisited.

IFRS Project Insights: Insurance Contracts – August 2015

IFRS Project Insights: Insurance Contracts – January 2015

During the 22 January 2015 meeting of the IASB, the Board tentatively confirmed the transition reliefs provided in the 2013 Exposure Draft that permit an insurer to redesignate, under specified circumstances, its financial assets upon initial application of the Insurance Contracts standard and require revoking a previous designation if the new Standard on insurance contracts eliminates the accounting mismatch that led to the designation.

The Board also tentatively decided to consider providing additional transition relief to permit or require an insurer to reassess the business model for financial assets at the date of the initial application of the new insurance contracts standard.

IFRS Project Insights: Insurance Contracts - January 2015

IFRS Insurance Insights: Insurance Sector – November 2014

At the IASB meetingmeeting on 19 November, representatives of the European CFO Forum presented in an educational session the alternative proposal for accounting for contracts with participating features (“participating contracts”). No decisions were required from the Board during this meeting.

The alternative accounting model for participating contracts was developed by the European CFO Forum in response to the concerns insurers have on the 2013 ED proposals on the accounting for participating contracts. These proposals in the 2013 ED were known as the ‘mirroring’ approach. The proposed alternative accounting model builds on the IASB’s framework of current fulfilment value measurement for insurance liabilities and it is intended to be in line with the general building block model as proposed by the IASB. Consequently, the European CFO Forum argues that there will be a single measurement basis for all insurance contracts.

The Board will meet again on 15-17 December. The only remaining topic to be redeliberated by the Board is the accounting for participating contracts, including the transition requirements for these contracts..

IFRS Industry Insights: Insurance Sector - November 2014

IFRS Insurance Insights: Insurance Sector – October 2014

In 20 June 2013, the Board issued revised Exposure Draft ED/2013/7 Insurance Contracts (“the 2013 ED”) which included changes in the insurance accounting proposals in response to the concerns raised by the insurance industry and other stakeholders on the 2010 ED. The Board decided to seek comments only on the 5 targeted areas where significant changes have been made since the 2010 ED. These are:

  • Unlocking the contractual service margin to reflect changes in cash flows for future coverage and/or services;
  • Splitting interest expense between profit or loss and other comprehensive income;
  • Presenting insurance contract revenue and expenses;
  • Measuring and presenting cash flows from contracts with a contractual link to underlying items; and
  • Transition provisions for the first application of the standard with a modified retrospective application of all the new requirements.

The comment period for the 2013 ED closed on 25 October 2013.

The Board also conducted extensive international fieldwork, discussions and outreach activities between June and December 2013.

In February 2016, the Board concluded that it had taken all the necessary due process steps and granted the Staff permission to begin the balloting process. Since then, the Board has sent a field-testing questionnaire to a number of preparers to test the interpretation of the drafted words.

IFRS Industry Insights: Insurance Sector - October 2014

IFRS Insurance Insights: Insurance Sector – August 2014

The IASB has issued the final version of IFRS 9 Financial Instruments incorporating amendments to the classification and measurement model for financial assets and a new expected loss impairment model. Highlights of this version include:

  • IFRS 9 replaces the IAS 39 classification system with a new one based on the instrument’s cash flow characteristics and the business model utilised to manage the assets.
  • For insurers the financial assets at fair value through other comprehensive income (FVTOCI) is particularly relevant as it applies to debt instruments.
  • Fair value through profit or loss (FVTPL) becomes the residual category of the new classification system with a fair value option limited to overcoming accounting mismatches.
  • A new impairment loss model is introduced based on expected credit losses rather than incurred credit losses.
  • Impairment losses will be recognised sooner than under IAS 39.
  • Provision for loan losses will be recognised on initial recognition of loan assets and other receivables leading to a day-one” provision.
IFRS Industry Insights: Insurance Sector - August 2014

Topics discussed at the IASB meeting on 22 July 2014

  • The leases project, the disclosure initiative, insurance contracts
  • Annual improvements (2012-2014 cycle)
  • Issues from the IFRS Interpretations Committee, the conceptual framework, the research programme, and rate-regulated activities.
July 2014 IASB meeting

Topics discussed at the IASB meeting on 17 June 2014

  • Non-targeted areas: Determining discount rates where there is lack of observable data; Asymmetrical treatment of gains from reinsurance contracts; Level of aggregation to use when measuring an insurance contract and in respect to the definition of a portfolio
  • Participating contracts: Adjusting the contractual service margin for the insurer’s share of the underlying issues; Application of the “book yield approach”
June 2014 IASB meeting

Topics discussed at the IASB meeting on 25 April 2014

  • Insurance contract revenue: Should an entity present insurance contract revenue consistently for all insurance contracts  Is the cost of providing insurance contract revenue justified for all insurance contracts
  • Non-targeted issues: The project plan for issues raised in the comment letters that were outside the five targeted area
April 2014 IASB meeting

Topics discussed at the IASB meeting on 18 March 2014

  • Unlocking of the contractual service margin: The treatment of previously recognized losses for portfolios which had become onerous and whether to unlock contractual service margin for changes in risk adjustment
  • Use of other comprehensive income to present changes in discount rates: The introduction of an accounting policy option for presenting the effect of changes in discount rates and related disclosures
March 2014 IASB meeting
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