Insurance

20 Pages·2016·0.6 MB·English

Issue 53, April 2016
Insurance
IFRS Newsletter
“Many entities will
welcome the broader
Revised criteria for
criteria for insurers to
defer application of
IFRS 9.” deferring IFRS 9
– oJ achim Klö schbach,
KPMGs’ global IFR S At its April meeting, the IASB responded to feedback on its
insurancel� eader exposure draft Applying IFRS 9 Financial Instruments with IFRS 4
Insurance Contracts (the ED), by broadening the qualifying
criteria for deferring IFRS 9 and introducing additional relevant
disclosures. It also made decisions on the overlay approach.
Temporary exemption – Qualifying criteria
Feedback suggested that the population of entities that would qualify for the
temporary exemption was too narrow, and recommended changes to the
predominance criterion that would increase the number of entities that would qualify.
As a consequence, it revised the qualifying criteria to include activity predominantly
‘related to insurance’, which includes issuing investment contracts that are measured
at fair value through proft or loss (FVTPL) and ‘other’ liabilities related to insurance
activity, but with an increased threshold.
Temporary exemption – Disclosures
Contents
The IASB confrmed certain disclosures and amended others to help users of
Temporary exemption – fnancial statements compare entities that do and do not use the temporary
Qualifying criteria 2 exemption without creating excessive costs for preparers. Also, an entity would
refer to any IFRS 9 information that is not provided in the consolidated fnancial
Temporary exemption – statements but is publicly available for the relevant period in the fnancial statements
Disclosures 5 of a subsidiary.
Overlay approach 9
Overlay approach
Appendix: Summary of The IASB clarifed that qualifying fnancial assets could include fnancial assets related
IASB’s redeliberations 13 to surplus assets that an entity holds for regulatory or capital requirements. It also
Project milestones and confrmed other aspects of the overlay approach proposed in the ED and amended
timeline 16 others related to the presentation of the overlay adjustment in the statement of
comprehensive income that may improve comparability between entities.
KPMG contacts 17
Keeping you informed 18 Next steps
The IASB will discuss the remaining technical issues in May. The fnal amendments to
Acknowledgements 20
IFRS 4 are currently expected to be published in September 2016.
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Temporary exemption
The IASB broadened Qualifying criteria
the criteria allowing
What’s the issue?
entities to apply the The ED proposed that a temporary exemption from applying IFRS 9 would be
temporary exemption. permitted for entities that issue contracts in the scope of IFRS 4 if this activity is
predominant for the reporting entity.1 It proposed that the assessment of whether
the insurance activities are predominant would be based on the carrying amount of
the entity’s liabilities arising from contracts that are in the scope of IFRS 4 relative
to the total carrying amount of its liabilities at the date on which it would otherwise
be required to apply IFRS 9. The ED did not propose a quantitative threshold
for assessing the predominance of insurance activities; however, it included an
example in which an entity’s insurance activities were not considered predominant
even though they made up 75 percent of its total liabilities.
Feedback from respondents showed that most believed that the population of
entities that would qualify for the temporary exemption was too narrow. The
proposed predominance test would have excluded many entities that consider
themselves ‘pure insurers’. Respondents therefore recommended changes to the
predominance criterion to increase the number of entities that would qualify.2
Some respondents noted that entities would need to assess whether they are
eligible for the temporary exemption much earlier than the proposed date of
1 January 2018 because an entity would need enough time to implement IFRS 9 if
it fnds that it does not qualify for the temporary exemption.
Consequently, the IASB decided to consider revising the ED’s proposed eligibility
and assessment criteria for the temporary exemption.
What did the staff recommend?
The staff recommended the following.
Recommendation Rationale
Qualifying criteria
The criteria under which an entity − Entities should not be permitted
should be permitted to apply the to revert back to applying IAS 39 if
temporary exemption should: they have already applied IFRS 9,
because the concerns raised by
1. retain the requirement that the stakeholders arise only when an
entity has not previously applied entity currently applies IAS 39
any version of IFRS 9 (except for and subsequently applies IFRS 9
the own credit requirements in before the forthcoming insurance
isolation); and contracts standard. If an entity has
already applied IFRS 9, then these
costs have already been incurred.
− The predominance criterion
should be quantitative rather
than qualitative, because this
would provide a more objective
assessment that can be more clearly
described, understood and applied.
1. For more information, see our eN w on the oH rioz n : Insurance amendments .
2. For more information on the feedback, see Issue 25 of our IFRS Newsletter: Insurance.
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Recommendation Rationale
2. modify the requirement that the − Using liabilities as a basis for the
entity’s activities are predominantly calculation of a ratio is better than
related to insurance so as to using amounts from the statement
comprise: of comprehensive income, which
may be more volatile.
a. issuing contracts in the scope of
IFRS 4 that give rise to liabilities − If they are issued by an insurance
whose carrying amount is company, then investment
signifcant compared with the contracts measured at FVTPL under
total carrying amount of the IAS 39 should be considered an
entity’s liabilities; and insurance activity, because they
are often sold alongside similar
b. issuing investment contracts that
products with signifcant insurance
are measured at FVTPL under
risk and are regulated as insurance
IAS 39 Financial Instruments:
contracts (i.e. they are related
Recognition and Measurement.
to insurance).
Assessing whether the entity’s activities are predominantly related to
insurance
The predominance ratio should be − Other liabilities not in the scope of
drafted as follows. IFRS 4 should also be included in
the calculation if they are related to
[Liabilities arising from
insurance activity.
activities related to
insurance] + [‘other’ liabilities
− Any adjustments to the
that are connected to those
Predominance predominance ratio for liabilities
activities]
ratio =
should be refected in the
Total carrying amount of the
numerator, so that the denominator
entity’s liabilities
refects the entity’s total liabilities,
− Liabilities arising from activities which is simple to understand and
related to insurance should be the is anchored to an amount on the
liabilities arising from the contracts balance sheet.
described in paragraphs (2)(a) and
− The threshold suggested in the ED
(b) above.
should be increased to refect the
− The IASB should provide examples revised predominance criterion.
of ‘other’ liabilities that are
− Requiring an entity to consider
connected to those activities.
additional factors when the ratio
In addition, an entity’s activities is greater than 80% and less than,
should be deemed to be or equal to, 90% could provide
predominantly related to insurance an appropriate assessment of
only if the predominance ratio is: whether the entity has at least
one non-insurance activity that is
− greater than 90%; or
considered signifcant.
− greater than 80% but less than, or
equal to, 90% and the entity can
provide evidence that it does not
have a signifcant activity that is
unrelated to insurance.
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Recommendation Rationale
Date of assessment
1. First test: An entity should − There is a trade-off between
ordinarily be required to calculate requiring an entity to use the most
the predominance ratio using the up-to-date information and reducing
carrying amounts of the liabilities the ‘waiting’ period during which
reported at the annual reporting the entity is uncertain whether
date between 1 April 2015 and it qualifes for the temporary
31 March 2016 (i.e. the date exemption.
of assessment).
− A date of assessment in 2017
2. Second test: However, if market may not signifcantly reduce the
fuctuations in the annual uncertainty about whether the
period leading up to the date of entity is required to apply IFRS 9
assessment have signifcantly in 2018.
affected an entity’s predominance
− Unusual market fuctuations in the
ratio (i.e. they have affected
period leading up to the date of
the carrying amounts of any of
assessment could affect whether
its liabilities), then the entity
an entity meets the predominance
should be required to calculate
criterion because they could affect
the predominance ratio using an
the carrying amounts of liabilities
average of the relevant carrying
that are measured using a current
amounts on its annual balance
discount rate (e.g. those liabilities
sheet for the three years before the
measured at fair value).
date referred to in the frst test.
What did the IASB discuss?
oB ard members suggested minor claric� ations to the meaning o f activities r‘ elated
to insurance ’ and o‘ ther ’ liabilities, hw ich the sta f f iw ll consider during the dratf ing
process. hT ey also asek d the sta f f to consider eax mples to be included in the n� al
amendments of r other liabilities that ow uld be considered in the predominance test
and maek sure that they are not too ecx lusive.
oS me members suggested that the ow rding in the n� al amendments should maek
it clear that hw en an entitys’ predominance ratio is 08 09– percent, then the entity
should assess hw ether the remainder i( .e. 102– 0 percent o f noni- nsurance liabilities )
includes at least one signic� ant activity not related to its insurance activities.
hT e oB ard members also suggested that the predominance assessment should
be done only at the annual reporting date betew en 1 April 201 5 and 13 March 2016
i( .e.t� he r� st test,) iw thout the availability o f the second test.
What did the IASB decide?
hT e IA BS agreed iw th the sta f f recommendations on uq aliyf ing criteria and
assessing hw ether the entitys’ activities are predominantly related to insurance.
hT ey also agreed only to allo w a date o f assessment of r computation o f the
predominance ratio at the annual reporting date betew en 1 April 201 5 and 13 March
2016 i( .e. the r� st test.)
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Additional disclosures Disclosures
would be made for all
What’s the issue?
fnancial assets held
As part of the feedback received via outreach, users of fnancial statements
by an entity. expressed concerns that the temporary exemption would result in a lack of
comparability both within the insurance industry and with other industries. To
address this concern, the IASB proposed disclosure requirements to help users
make comparisons between entities that do and do not apply the temporary
exemption without creating excessive costs for preparers. The proposed
requirements are similar to some of the disclosures required under IFRS 9.
However, they focus on the assessment of the contractual terms of fnancial assets,
which reduces an entity’s need to assess its business model before applying the
forthcoming insurance contracts standard. These proposed disclosures include:
− for fnancial assets that would be measured at FVTPL under IFRS 9 because they
do not meet the ‘solely payments of principal and interest test’ (SPPI test): the fair
value at the reporting date and the fair value change during the reporting period;
− credit risk information about fnancial assets that would meet the SPPI test
under IFRS 9 and are not held for trading or managed on a fair value basis; and
− how an entity concluded that it is eligible for the temporary exemption.
Preparers responding to the ED considered the proposed disclosure requirements
to be overly burdensome – e.g. disclosures that would require the entity to run
IFRS 9 and IAS 39 systems in parallel should be avoided. Conversely, users
supported the disclosures and believed that they would achieve the objectives
expressed by the IASB. However, the users also stated that the IASB should
require additional disclosures of IFRS 9 information, including more disclosures
about expected credit losses, including quantitative information.
What did the staff recommend?
Based on the feedback received, the staff recommended the following.
Recommendation Rationale
Fair value for fnancial assets that fail the SPPI test
Amend the disclosure proposed in − The recommended amendments
paragraph 37A(c) of the ED to require to the proposed disclosure
an entity to disclose the fair value at requirements would provide more
the reporting date and the fair value useful information to users of
change during the reporting period fnancial statements.
separately for:
− To provide context for users of
− fnancial assets that do not meet fnancial statements to understand
the SPPI test; and the magnitude of an entity’s assets
that fail the SPPI test (a proposed
− all other fnancial assets.
disclosure in the ED), an entity
If the carrying amount under IAS 39 should also disclose the fair value
is a reasonable approximation of the of fnancial assets that meet the
fair value, then an entity should not SPPI test.
be required to disclose the fair value
in accordance with paragraph 29(a)
of IFRS 7 Financial Instruments:
Disclosures.
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Recommendation Rationale
− Given that entities are already
required to provide fair value
information under IFRS 7, the staff
did not believe that this additional
disclosure would be overly
burdensome to preparers.
− To maintain consistency with
IFRS 7, the staff suggested allowing
entities to use the carrying amount
under IAS 39 when it reasonably
approximates fair value.
Add to the disclosure proposed in − An entity that applies this approach
paragraph 37A(c) to require an entity should apply the level of granularity
to present this information with in this disclosure that is expected
enough granularity to enable users of to be presented by entities applying
fnancial statements to understand IFRS 9.
the nature and characteristics of the
fnancial assets.
Credit risk exposure for fnancial assets that meet the SPPI test
Add to the disclosure proposed in − The staff agreed with the
paragraph 37A(d) to require that, for feedback from some users that
fnancial assets in the scope of this entities should provide additional
disclosure that do not have low credit information only for certain fnancial
risk at the reporting date, an entity assets that do not have low credit
would disclose the fair value and the risk because the differences in the
gross carrying amount measured impairment amounts calculated
under IAS 39. applying IFRS 9 and IAS 39 could
be signifcant.
− Because most insurers tend to hold
high-quality fnancial assets and
this requirement would apply only
to certain fnancial assets, the staff
believed that this should not be
overly burdensome.
− Entities should only be required to
disclose the fair value and gross
carrying amounts to balance
the needs of users and limit the
additional costs to preparers.
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Recommendation Rationale
Eligibility for the temporary exemption
Retain the requirement that an entity − Respondents did not express any
disclose the fact that it is applying concerns about these proposed
the temporary exemption and how disclosures.
it concluded that it is eligible for the
− As a result of the staff’s
temporary exemption.
recommendations on the
In addition, an entity should disclose: predominance criterion and the
predominance ratio, additional
− any liabilities, other than those
disclosures should be required to
arising from contracts in the scope
explain how entities conclude that
of IFRS 4, that are included in the
they are eligible for the temporary
numerator of the predominance
exemption.
ratio; and
− the information used to determine
that the entity’s activities are
predominantly related to insurance
if the predominance ratio is greater
than 80% but less than, or equal
to, 90%.
Other disclosures
Add a disclosure to require an entity − This additional disclosure should:
to refer to any IFRS 9 information that
- not impose an additional burden
is not provided in the consolidated
on preparers because it would
fnancial statements but is publicly
only refer to another source of
available for the relevant period in the
information; and
individual fnancial statements.
- provide a link to additional
information if an entity applies
the temporary exemption at one
level within the entity but reports
under IFRS 9 at another level.
What did the IASB discuss?
Responding to a uq estion rf om one oB ard member, the sta f f said that the term
c‘ redit ris ’k of r the purposes o f the recommended disclosure ow uld be den� ed
consistently iw th the den� ition in IFR S 9 and this ow uld be made clear in the
dratf ing o f the n� al amendments. Another oB ard member suggested that the sta f f
maek it clear that the disclosures about changes in af ir value ow uld be reuq ired
atf er the r� st year o f adoption o f the temporary eex mption.
What did the IASB decide?
hT e IA BS agreed iw th the sta f f recommendations, but agreed to clariyf the
recommendation on eligibility disclosures : an entity ow uld disclose any liabilities,
other than those arising rf om contracts in the scope o f IFR S ,4 that are included
in the numerator o f the predominance ratio only i f the ratio is not greater than
09 p� ercent.
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KPMG insight
Comparability
Under the broader qualifying criteria, more entities that are considered to be
insurers by users of fnancial statements are likely to qualify for the temporary
exemption. However, entities with any signifcant activities that are unrelated
to insurance (e.g. banking activities) would still not qualify.
Because the revised (and more tailored) predominance ratio would result in
more insurers being able to apply the temporary exemption, it would result
in increased comparability between entities considered to be insurers.
However, it may also result in an additional lack of comparability for users when
comparing entities within the insurance industry with other industries.
Complexity
The calculation of the predominance ratio would be more complex than that
proposed in the ED, because additional liabilities would be included in the
numerator. This added complexity should not typically outweigh the benefts of
a broader approach.
Costs
As entities determine whether to apply the temporary exemption, they should
also consider the additional costs related to the disclosures proposed in the ED
and those agreed by the Board this month. Although some of this information
may already be available to insurers (e.g. fair value information is currently
required under IFRS 7), costs to implement new processes and controls could
result in added costs that would not be incurred if an entity chose to implement
IFRS 9 instead.
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Overlay approach
The IASB amended the What’s the issue?
overlay approach to Respondents to the ED broadly agreed with the proposed requirements of the
enhance comparability overlay approach. However, some were concerned that the approach would not
be applied consistently due to the proposed criteria for qualifying assets and
between entities. on how to present the effects of the overlay adjustment in the statement of
comprehensive income.
aB sed on the ef edbac,k the IA BS considered hw ether any aspect o f the overlay
approach should be amended.
What did the staff recommend?
Based on feedback received through previous outreach conducted and responses
received on the ED, the staff recommended the following.
Recommendation Rationale
Qualifying fnancial assets for the overlay approach and related disclosure
Confrm the ED proposals on: − It was necessary to weigh the
benefts of providing more guidance
− the qualifying criteria for the on how entities should identify
approach (paragraph 35B of the ED); fnancial assets that relate to
− the designation requirements of contracts in the scope of IFRS 4
previously recognised fnancial against the risk of unintended
assets (paragraphs 35E(a)–(c)); and restrictions on the fnancial
assets that can be eligible for the
− certain disclosures (paragraphs 37C overlay approach.
and 37D(a)–(d))3.
− Prohibiting entities from applying
The staff also recommended that the overlay approach to fnancial
the Board: assets held in legal entities that do
− clarify that qualifying fnancial not issue contracts in the scope
assets could include surplus assets of IFRS 4 would be inappropriate
that an entity holds for the purposes because insurers may reasonably
of regulatory, credit rating or organise their assets in different
internal capital requirements; and ways – e.g. an entity that issues
contracts in the scope of IFRS 4
− require an entity to disclose the may have a subsidiary that holds
basis for determining the fnancial and manages fnancial instruments
assets to which the overlay that relate to the entity’s IFRS 4
approach is applied, when the contracts.
designated fnancial assets are held
by one legal entity as relating to
contracts in the scope of IFRS 4 but
the insurance contracts are issued
by a different legal entity within the
same reporting entity.
3. To read the specifc wording recommended for confrmation by the staff, see 2/DE 011/5 1
Applying IFRS 9 with IFRS 4.
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Recommendation Rationale
− The staff noted that the term
‘fnancial assets relating to
contracts within the scope of
IFRS 4’ should include fnancial
assets that an entity holds to fund
the settlement of liabilities arising
from expected levels of claims and
expenses; and additional/surplus
assets that an entity holds to meet
regulatory, credit rating or its own
(internal) capital requirements.
Presentation of the overlay approach
Amend paragraphs 35C and 37D(e) of − The presentation in proft or loss
the ED concerning the presentation of should refect the application of
gains and losses for fnancial assets to IFRS 9, with an additional overlay
which the overlay approach is applied, adjustment, because this would
to require an entity: enhance comparability with
entities that apply IFRS 9 without
− to present:
the overlay approach and avoid
possible confusion.
- in proft or loss, information that
refects the application of IFRS 9,
− This requirement is important for
with a single, separate line item
fnancial conglomerates that have
for the overlay adjustment; and
fnancial assets to which the overlay
approach is applied and fnancial
- in OCI, the overlay adjustment
assets to which IFRS 9 without the
separately from other
overlay approach is applied.
components of OCI consistently
with IAS 1 Presentation of
Financial Statements; and
− to disclose the effect of the
overlay approach on individual line
items in the notes to the fnancial
statements.
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