IASB addresses five proposed amendments to IFRS 17

The IASB is redeliberating some of the matters raised by stakeholders in response to the Exposure Draft Amendments to IFRS 17 (the ‘ED’) issued in June 2019.

At its meeting on 30 January 2020, the IASB agreed to:

1.    Amend the requirements related to interim financial statements in paragraph B137 of   IFRS 17 to require an entity to:

• Make an accounting policy choice on whether to change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements or annual reporting
• Apply this policy choice at reporting entity level.

2.    Retain the existing IFRS 17 requirements for insurance contracts acquired in their settlement period in a portfolio transfer or business combination in the scope of IFRS 3.

3.    Retain the prohibition from applying the risk mitigation option retrospectively at transition.

4.    Amend:

a.     IFRS 17 to clarify that an asset for insurance acquisition cash flows relating to contracts not yet issued should be recognised at the transition date, and to specify requirements under the modified retrospective and fair value approaches.

b.    IFRS 3 and IFRS 17 to require recognition of a separate asset for insurance acquisition cashflows relating to contracts not yet issued measured at fair value at acquisition date for contracts acquired in a portfolio transfer or business combination.

5.    Confirm the proposed scope exclusion from IFRS 17 for certain credit card contracts and to introduce the following changes to the amendments proposed:

• Require an entity that provides insurance coverage as part of the contractual terms of the credit card contract to:

i.    Separate the insurance coverage component and apply IFRS 17 to it;

ii.    Apply other applicable standards (such as IFRS 9) to the other components.

• Extend this amendment to other contracts that provide credit or payment arrangements similar to credit card contracts. 

Next steps

The IASB is due to redeliberate a further ten topics that were raised by stakeholders.  The IASB staff indicated that most of these will be considered in the February meeting. The Board will take stock of the whole package of amendments and consider the effective date during the March meeting. The staff expects the timetable will allow sufficient time for the Board to consider the remaining topics and finalise any resulting amendments in mid-2020.

How we see it

• Allowing insurers an accounting policy choice on whether to ‘lock in’ accounting estimates made in previous interim financial statements allows them to determine how to best address the effort and complexity of maintaining multiple CSMs. However, it might still be necessary to have separate CSMs for the purposes of group and solo reporting because of other factors, for example, intercompany charges that are fulfilment cash flows in insurance contracts eliminated in consolidated financial statements. Furthermore, given the decision to ‘lock in’ accounting estimates is an accounting policy choice, preparers’ system designs may have to allow for both approaches.
• Some insurers that acquire insurance contracts in their settlement period, particularly those that would not otherwise need to apply the general model to the insurance contracts they issue, will be disappointed by the IASB's decision not to change the IFRS 17 requirements for these contracts.
• Insurers that lack the necessary reasonable and supportable information to apply the modified retrospective approach to measuring insurance acquisition cash flow assets at transition are not forced to apply the fair value approach but can instead record the insurance acquisition cash flow asset at nil. Such a treatment would have a favourable impact on the transition CSM under the modified retrospective approach.
• Banks and other financial institutions will welcome the proposal to separate insurance coverage from the other components of credit card and similar contracts, thereby increasing the likelihood that components subject to IFRS 9 will meet the SPPI test.

Look out for EY's January 2020 Insurance Accounting Alert for further details of the insurance contracts discussions at the January IASB meeting.