As it prepares to issue the final version of IFRS 17 Insurance Contracts, the International Accounting Standards Board (the Board) discussed six sweep issues at its May meeting. The Board papers addressed the risk mitigation issue in depth, but the other five items were limited to fine-tuning the wording in the revised IFRS 17.
The IASB is ironing out the last few issues and is expecting to issue a revised version of IFRS 17 by the end of June. Insurers should fine-tune their assessment of the impact of the proposed amendments to IFRS 17 on their business and their readiness for implementation in 2023.
VFA – Applying the OCI option and the risk mitigation option together
For a group of insurance contracts measured using the VFA, if the company holds the underlying items and applies the option to disaggregate insurance finance income and expense (IFIE) between profit or loss and other comprehensive income (OCI), and also decides to apply the risk mitigation option, an accounting mismatch may arise. This is because both options specify the amount of IFIE that should be recognised in profit or loss in a different way, and when applied together at least one option will not achieve its intended objective to reduce an accounting mismatch.
To avoid this accounting mismatch, IFRS 17 will be amended so that the current requirements to split IFIE between profit or loss and OCI for insurance contracts measured under the VFA do not apply to IFIE arising from the application of the risk mitigation option. Instead, there will be new requirements specifying how to present IFIE when applying the risk mitigation option:
- changes in the insurance liability that are mitigated by financial instruments held at fair value through profit or loss would be presented in profit or loss; and
- changes in the insurance liability that are mitigated by reinsurance contracts held would be presented by applying the same OCI option choice that the company has chosen for the reinsurance contracts held.
Reinsurance – Recovery of losses on onerous underlying contracts
IFRS 17 will be amended to require companies to recognise recoveries from reinsurance contracts held for losses on initial recognition of onerous underlying contracts. In some cases, these reinsurance contracts may cover losses on some, but not all, of the onerous contracts in a group of insurance contracts. Given the group is the unit of account, IFRS 17 does not require the initial losses and subsequent measurement of the onerous contracts to be tracked at a contract level. IFRS 17 will be amended to require a company to use a systematic and rational method of allocation to determine the portion of losses recognised that relate to the reinsured insurance contracts in the group.
Insurance revenue – Income tax
IFRS 17 will be further amended to require a company to recognise insurance revenue for consideration paid by the policyholder related to income tax amounts that are specifically chargeable to the policyholder under the terms of an insurance contract. This reflects another amendment which will state that the related tax amounts should be included in the fulfilment cash flows.
Definitions of liability for remaining coverage and liability for incurred claims
The definitions of the liability for remaining coverage and the liability for incurred claims will be amended to make clear that they include all obligations arising from insurance contracts issued by a company.
Assets and liabilities recognised before a group is recognised
Currently, IFRS 17 includes specific requirements relating to insurance acquisition cash flows that are paid before a group of insurance contracts is recognised in order to ensure that they are considered in the contractual service margin (CSM) at initial recognition of the group. IFRS 17 does not include specific requirements for other types of cash flow – e.g. premiums paid before a group is recognised – nor does it encompass assets and liabilities previously recognised under another IFRS standard even if no cash flows have occurred – e.g. a liability recognised on receiving an invoice from a broker.
IFRS 17 will be amended to require a company to:
- include in the initial measurement of the CSM of a group the effect of the derecognition of any asset or liability previously recognised for cash flows related to that group which were paid or received before the group is recognised; and
- recognise not only insurance acquisition cash flows actually paid or received, but also those insurance acquisition cash flows for which a liability has been recognised by applying another IFRS standard before the related group of insurance contracts is recognised as an asset, such as a financial liability to pay for insurance acquisition cash flows incurred under IFRS 9 Financial Instruments.
Treatment of unexpected payment or non-payment of investment components
The Board believes that its proposed amendment related to the treatment of unexpected payment or non-payment of investment components was not entirely clear, based on feedback received from respondents.
The originally proposed amendment intended to address that the investment component will be affected by the time value of money, and may be affected by financial risk and changes in the time value of money and financial risk between the beginning of the period and the unexpected payment or non-payment of the investment component. The Board has now clarified that intention with a minor amendment to IFRS 17. This adjustment to the CSM will not include the amount of any insurance finance income or expenses related to the expected payment.
The Board is still on track to issue a final standard in mid-2020. Insurers should continue assessing the proposed amendments and understand the impact of the amended standard on their business and their plans for implementation in 2023.
You can read our summaries of the Board’s proposed amendments and the Transition Resource Group (TRG) for Insurance Contracts discussions in our online magazine Insurance – Transition to IFRS 17.
Please watch this space for further updates and speak to your usual KPMG contact to find out more about the Board’s deliberations.
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