In September 2016, the AASB amended AASB 4 Insurance Contracts to provide entities/insurers that meet the insurance entity (“temporary”) exemption the option to defer the effective date of AASB 9 Financial Instruments until AASB 17 Insurance Contracts applies. Our series of questions and answers provide guidance on some of the more common questions arising from the amendments of AASB 4.
In September 2016, the AASB amended AASB 4 Insurance Contracts (AASB 2016-6) to provide entities/insurers that meet the insurance entity ("temporary”) exemption the option to defer the effective date of AASB 9 Financial Instruments and continue to apply AASB 139 Financial Instruments: Recognition and Measurement until annual reporting periods beginning on or after 1 January 2021. From 1 January 2021, such entities must apply AASB 9 together with AASB 17 Insurance Contracts.
Our series of questions and answers provide guidance on some of the more common questions arising from the amendments of AASB 4.
FAQ 1: Which entities can use the “temporary exemption”?
An insurer may apply the temporary exemption from AASB 9, if and only if:
The temporary exemption is applied at the reporting entity level. [A reporting entity is an entity that is required, or chooses, to prepare financial statements.] There may be instances where a Group will be able to apply the temporary exemption and one of its subsidiaries that prepares its own set of financial statements is not able to apply the temporary exemption or vice versa. Each reporting entity will need to perform their own assessment.
For more detail on specific scenarios are included in FAQ 1 in our reporting update.
FAQ 2: Does the amendment to AASB 4 comply with IFRS?
The amendment to AASB 4 is the same as the amendment to IFRS 4 Insurance Contracts. However, not all countries have incorporated the amendment. Group entities will need to assess, for insurance subsidiaries outside of Australia, whether those countries have adopted the amendment to IFRS 4. For example, in New Zealand, life and general insurers are not allowed to use the temporary exemption.
FAQ 3: For an entity applying the temporary exemption, is it required to assess the nature of the financial assets in accordance with AASB 9 for disclosures purposes?
The amendment to AASB 4 requires entities that meet the temporary exemption to disclose what the impact would have been if they had adopted AASB 9. This is to enable users to compare entities that apply the temporary exemption with those that do not.
To disclose this information, entities are required to assess the nature of the cash flows of financial assets and its business model even if they are applying the temporary exemption.
FAQ 5: Can entities that adopt AASB 9 elect to designate financial assets as FVTPL to eliminate accounting mismatches with its insurance liabilities measured under AASB 1023 and AASB 1038?
The assessment of the financial assets’ cash flows and business models will need to be performed. However, if the financial assets are not classified as FVTPL under the classification assessment, the entity can make a policy choice to designate the financial assets at FVTPL to eliminate accounting mismatches.
FAQ 8: Are there any specific disclosures if the temporary exemption is applied?
AASB 4 requires specific information to be disclosed if an entity applies the temporary exemption. It has to provide disclosures that enable users of financial statements to:
FAQ 10 & 11: What about comparative information in its first period of adoption & interim financial statements?
Comparatives may, but are not required to be, provided in the first year of adoption. The disclosures are also not required in the interim financial statements. However, if by not including the information, the objective of AASB 134 would not be met, then the disclosures should be included.
Review extended responses and the full series of FAQs in our reporting update.
If you would like to discuss the temporary exemption contact your usual KPMG contact.