The key objectives of the the IASB’s insurance project are to:

• Introduce for the first time a single IFRS accounting model for all types of insurance contracts;
• Make the new accounting model highly transparent; and
• Align as much as possible insurance accounting with the general IFRS accounting of other industries.

The new Insurance Contracts Standard will result in major changes for the insurance industry. Insurers should prepare for the implementation work that is likely to be long and complex.

IFRS 17 and IFRS 9 Interaction

IFRS 9 for insurance undertakings

IFRS 9 Financial Instruments and the upcoming insurance contracts Standard IFRS 17 (that will replace IFRS 4 Insurance Contracts) are both expected to result in major accounting changes for most insurers and entities issuing financial instruments with discretionary participating features. The parallel application of these standards was always seen by the IASB as a desirable outcome to avoid the application of IFRS 9 classification and measurement criteria to financial assets without at the same time applying the new insurance standard to associated liabilities.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018. And as such, IFRS 17 Insurance Contacts will have a later implementation date than that of IFRS 9.

Concerns were raised in relation to the ‘gap’ in effective dates, such as:

• additional accounting mismatches; and 
• volatility in profit or loss that may arise in this ‘gap’ period.

To address preparers’ concerns, while ensuring that IFRS 9 is implemented on a timely basis, the IASB amended IFRS 4 to provide two voluntary approaches to mitigate the issues arising for insurers as a result of the effective date of IFRS 9 falling before that of the upcoming insurance contracts Standard.

The amendments introduce two approaches: an overlay approach and a deferral approach. The amended Standard:

• gives all companies that issue insurance contracts the option to recognise in other comprehensive income, rather than profit or loss, the volatility that could arise when IFRS 9 is applied before the new insurance contracts Standard is issued (the “Overlay Approach”); and
• gives companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 until 2021 (the “Deferral Approach”). The entities that defer the application of IFRS 9 will continue to apply the existing financial instruments Standard - IAS 39.

The amendments to IFRS 4 supplement existing options in the Standard that can already be used to address the temporary volatility.