February 2019 International Accounting Standards Board meeting
February 2019 International Accounting Standards Board meeting
November 2018 International Accounting Standards Board meeting
February 2018 TRG meeting
What's the issue?
Under IFRS 17, liabilities relating to claims settlement are treated differently depending on whether the insurance contracts were issued by an insurer or acquired in a business combination or portfolio transfer, as shown below.
Click to enlarge diagram (JPG, 151 KB)
A challenge arises on transition with respect to the requirement to account for acquired claims liabilities as a liability for remaining coverage, because some insurers use a single system to manage all claims liabilities. As a result, it may be difficult to obtain the required data to separate and measure claims liabilities in two different ways.
What did the Board decide?
The Board proposes that a specified modification be added to the modified retrospective approach to transition for the treatment of claims liabilities acquired by an insurer in a business combination or portfolio transfer. Under the amendment, these liabilities would be accounted for as a liability for incurred claims.
An insurer would be permitted to use the specified modification only to the extent that it does not have reasonable and supportable information to apply a retrospective approach – i.e. to identify the acquired claims liabilities and account for them separately as a liability for remaining coverage.
The Board has also proposed an amendment to the fair value approach to transition so that an insurer applying this approach could also classify acquired claims liabilities as a liability for incurred claims.
What’s the impact?
This amendment will provide a meaningful practical solution when insurers do not have the necessary information to identify acquired claims liabilities on transition and classify them appropriately. In these cases, all claims liabilities on the date of transition would be classified as a liability for incurred claims.
The accounting for a liability for incurred claims uses a less complex measurement approach compared with a liability for remaining coverage. There would be no need to determine a contractual service margin at transition for acquired claims liabilities, meaning that no insurance service revenue would subsequently be recognised in the statement of profit or loss.
This amendment would only apply to contracts acquired before the date of transition to IFRS 17 – any contracts acquired after the date of transition would need to be treated as if the acquirer had issued them on the date of acquisition. This means that any acquired claims liabilities going forward would be classified as a liability for remaining coverage.
What’s the issue?
Stakeholders’ expressed various other concerns about transition requirements– mostly about comparability, optionality and providing useful information to users of financial statements. The Board discussed eight of these topics but proposed no amendments in these areas, noting that it believes they do not meet the criteria set by the Board at their October 2018 meeting.
The Board reminded stakeholders that the disclosure requirements on transition should help reduce some of these concerns. The Board also indicated that they would like to explore other ways to address insurers’ concerns about the transition requirements.
What can insurers learn from the Board discussion?
Applying the risk mitigation exception
The risk mitigation exception is prohibited from being applied retrospectively on transition to IFRS 17 because it could involve the use of hindsight.
If risk mitigation activities were in place before the date of initial application of IFRS 17, then – according to some stakeholders – this prohibition may result in distorted:
This results from differences in accounting treatment between insurance contract measurement and the risk mitigation activities upon transition to IFRS 17.
While the Board voted to retain the requirements in IFRS 17 to prohibit retrospective application of the risk mitigation exception, it agreed to discuss other potential solutions to this issue at a future Board meeting.
In any event, preparers should consider what options they have under IFRS 17 and IFRS 9 to reduce the impact of these differences on their financial statements, including providing additional disclosures.
Using the modified retrospective approach
The Board considered several stakeholder concerns about the complexity and challenges of the modified retrospective approach, proposing only one amendment They provided some clarity around the use of estimates, reminding insurers that they are permitted to make estimates when retrospectively applying an accounting policy as described in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This principle equally applies to specified modifications in the modified retrospective approach.
Given that only one amendment has been in this area, some insurers may wish to reconsider whether the fair value approach to transition would be simpler.
Restating comparative information
Under IFRS 17, insurers are required to restate comparative information about insurance contracts for the annual reporting period immediately preceding the date of initial application. However, IFRS 9 does not require financial assets to be restated for that same period.
Some stakeholders expressed concern that some insurers would restate comparative information about insurance contracts but not about financial assets, and that this could distort users’ understanding of those insurers’ performance.
Preparers will need to balance managing the costs and resources of restating their financial assets’ accounting with users’ needs.
Identifying cash flows that are known to have occurred
Stakeholders have expressed concerns about identifying actual cash flows that are known to have occurred when estimating future cash flows at the date of initial recognition on transition. The Board clarified that if data is not available about the actual cash flows that occurred, then insurers are required to use reasonable and supportable information to estimate those amounts.
Using reasonable and supportable information
The Board reminded stakeholders that determining whether information is reasonable and supportable when transitioning to IFRS 17 may require assessment and careful consideration, and that practice would need to develop in this area.
Proposed one-year deferral to 2022
The IASB has voted to propose a one-year deferral of the effective date of IFRS 17, and the fixed expiry date of the optional temporary exemption from applying IFRS 9 Financial Instruments granted to insurers meeting certain criteria.
The Board's tentative decision means that all companies preparing financial statements under IFRS would be required to apply both IFRS 9 and IFRS 17 for annual periods beginning on or after 1 January 2022.
Read our web article to find out more.
What's the issue?
Insurance acquisition cash flows are generally included in the measurement of the CSM, and a portion of the insurance revenue and expense recognised in a period includes amounts related to them.
When applying the fair value approach to transition, an insurer determines the CSM for a group of contracts at the date of transition based on the difference between the fair value of the group and the fulfilment cash flows of the group at that date.
A question has arisen over whether insurance acquisition cash flows that occurred before the date of transition are required to be identified and recognised as revenue and expense in reporting periods after the date of transition.
What did the TRG discuss?
TRG members appeared to agree that when applying the fair value approach on transition to IFRS 17, the measurement of the CSM does not include insurance acquisition cash flows that occurred before the date of transition. Therefore, these cash flows are not included in insurance revenue and expenses in reporting periods after the date of transition.
What's the impact?
This discussion should alleviate any concerns that an insurer would be required to identify insurance acquisition cash flows that occurred before the date of transition when applying the fair value approach.
This topic page is part of our Insurance – Transition to IFRS 17 series, which covers the discussions of the International Accounting Standards Board and its Transition Resource Group (TRG) regarding the new insurance contracts standard.
You can also find more insight and analysis on the new insurance contracts standard at home.kpmg/ifrs17.
Other topics in this series