IASB agrees amendments to IFRS 17 for seven sweep issues

At its meeting on 20 May 2020, the IASB discussed seven “sweep issues” identified during the balloting process for finalising the amendments to IFRS 17. The IASB agreed to amend IFRS 17 as follows:

1. An entity is to include in the initial measurement of the contractual service margin (CSM), the effect of the derecognition of any asset or liability previously recognised for cash flows paid or received before the related group was recognised. (This is no longer limited to insurance acquisition cash flows, and now includes, for example, premiums received before their due date).
2. The asset for insurance acquisition cash flows that is recognised before a group of insurance contracts has been recognised should include future cash flows for which a liability has been recognised applying another IFRS standard (e.g., where an entity has been invoiced for services received from a broker and set up a liability to pay the invoice under IFRS 9).
3. When an entity has a group of onerous underlying insurance contracts, some of which are covered by reinsurance and some not, the entity has to determine how to calculate a loss recovery component to include as part of its reinsurance held asset. The IASB agreed to require an entity to use a systematic and rational method of allocation to do this.
4. When an entity recognises in profit or loss amounts related to income tax that are specifically chargeable to the policyholder under an insurance contract, it should recognise insurance revenue for the relevant part of the amount chargeable.
5. The definitions of the liability for remaining coverage and the liability for incurred claims have been amended to clarify that they include all obligations arising from insurance contracts issued. 
6. The IASB agreed to amend the requirements for the risk mitigation option in the Variable Fee Approach (VFA). The risk mitigation option allows an entity to recognise the effect of changes in financial risk on the measurement of fulfilment cash flows of VFA contracts in the statement of profit or loss and other comprehensive income (OCI) instead of adjusting the CSM if certain conditions are met. The IASB agreed to:

• specify that the accounting policy choice (in para 88-89 of IFRS 17) to present parts of insurance finance income or expenses (IFIE) in OCI and parts in P&L does not apply to IFIE arising from the application of the risk mitigation option;
• and add new requirements to the risk mitigation option to specify how to present IFIE arising from its application. This requires an entity to present IFIE in a way that best matches the changes in the mitigating instrument, i.e., the entity would present:

- changes in the insurance contract liability that are mitigated using financial assets measured at fair value through profit or loss in profit or loss;

- and changes in the insurance contract liability that are mitigated using reinsurance contracts held applying the same OCI/P&L accounting policy the entity has chosen for the mitigating reinsurance contracts held.

1. Clarify the wording in paragraph B96(c) that explains how the CSM is adjusted for the differences between any investment component or policyholder loan expected to become payable in the period, and the actual amount that becomes payable. The IASB clarified that differences between actual and expected payments are determined by comparing:

• the actual investment component or policyholder loan that becomes payable in a period with
• the payment expected at the start of the period plus any IFIE related to that expected payment before it became payable.

Next steps:

The staff will continue with the balloting process for the amendments to IFRS 17. We expect the amendments will be issued towards the end of June 2020. 

How we see it: 

Whilst most of the sweep issues reflect relatively simple clarifications, a few of the issues represent more important changes, particularly the change regarding applying the OCI option and the risk mitigation option together under the VFA approach and the change regarding the identification of losses on underlying contracts for reinsurance held. The former change takes away an unintended barrier for using the OCI approach when the entity also plans to use the risk mitigation approach. The latter change deals with an important aspect of the recovery of losses through reinsurance held that is fairly common in practice.

Look out for our May 2020 Insurance Accounting Alert publication for further details of the insurance contracts discussions at the May IASB meeting.