IFRS Project Insights: Insurance Contracts
The IASB is undertaking a comprehensive 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 newsletter focus on an IASB meeting and provide a summary of the discussions, including current status, schedule, key decisions and proposals, key considerations for entities, and forthcoming deadlines or due process steps to be undertaken.
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.
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.
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.
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”
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
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