close
Share with your friends
Cogs

Transitioning to IFRS 17

Transitioning to IFRS 17

More in this series

Key development

Map and compass

The exposure draft of the amendments to IFRS 17 has been published. It proposes a one-year deferral of IFRS 17’s effective date to 2022 and amendments in seven important areas of the standard.

Exposure draft of amendments to IFRS 17

International Accounting Standards Board, June 2019

 

Transition requirements – Applying the risk mitigation option

March and February 2019 International Accounting Standards Board meetings

 

Transition requirements – Additional practical relief for acquired claims liabilities

February 2019 International Accounting Standards Board meeting

 

Transition requirements – Further Board discussions

February 2019 International Accounting Standards Board meeting

 

Effective date of IFRS 17

November 2018 International Accounting Standards Board meeting

 

Identifying insurance acquisition cash flows when applying the fair value transition approach

February 2018 TRG meeting

 

Other topics in this series

 
 
 
 

Exposure draft of amendments to IFRS 17

International Accounting Standards Board, June 2019

With the Board having published its exposure draft of the amendments to IFRS 17, you can find our latest insight and analysis at home.kpmg/ifrs17amendments.

 

Transition requirements – Applying the risk mitigation option

March and February 2019 International Accounting Standards Board meetings

What’s the issue?

The risk mitigation option permits insurers to recognise the effect of some changes in financial risk for direct participating contracts in profit or loss rather than by adjusting the CSM – subject to certain criteria.

The option is prohibited from being applied for periods before the date of initial application of IFRS 17 (i.e. the beginning of the annual reporting period in which the insurer first applies 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 distort revenue recognised for groups of contracts in future periods and equity on transition.

This results from differences in accounting treatment between insurance contracts and related risk mitigation activities upon transition to IFRS 17.

At the February 2019 meeting, the Board voted to retain the requirements in IFRS 17 to prohibit retrospective application of the risk mitigation option. However, it agreed to discuss other potential solutions to this issue at a future Board meeting.

 

What did the Board decide?

At its March 2019 meeting, the Board tentatively decided to amend IFRS 17’s transition requirements in two ways.

 

Applying the risk mitigation option prospectively

The Board tentatively decided to permit an insurer to apply the risk mitigation option prospectively from the date of transition to IFRS 17 – i.e.:

  • the beginning of the annual reporting period immediately before the date of initial application; or
  • if adjusted comparative information is presented for any earlier periods, the beginning of the earliest such period.

This is permitted provided that the insurer designates the risk mitigation relationships to which it will apply the risk mitigation option no later than the date of transition to IFRS 17.

 

Using the fair value approach to transition

The Board also tentatively decided to permit an insurer to use the fair value approach to transition for a group of direct participating insurance contracts (even if it can apply a full retrospective approach), if certain conditions are met.

This is because an insurer can apply the risk mitigation option whenever the relevant criteria are met, as long as it:

  • can apply IFRS 17 retrospectively to that group of contracts;
  • applies the option as described above; and
  • has also used derivatives or reinsurance to mitigate financial risk before the date of transition.

If an insurer uses the fair value transition option in this way, then it would measure groups of insurance contracts using current estimates of financial assumptions. Any derivatives1 would be measured at fair value, meaning that equity on transition will reflect both:

  • previous changes in fulfilment cash flows due to changes in financial assumptions; and
  • changes in the fair value of the derivatives providing risk mitigation.
 

What’s the impact?

In order to apply the risk mitigation option prospectively from the date of transition to IFRS 17, insurers will need to plan ahead. Relevant decisions and next steps include designating, implementing and appropriately documenting the risk mitigation relationships to which they wish to apply this amendment.

The availability of the fair value transition approach in these circumstances addresses some preparer concerns but will not address changes in non-financial assumptions – e.g. changes in demographic assumptions – which will be reflected in the CSM. The effect of this may need to be explained to users of the financial statements.

Insurers should carefully consider these proposed amendments to transition requirements – assessing which approach would be best suited to their business and provide users with the most useful information.

 

Back to top  |  Other topics in this series

 
 

1. In January 2019, the Board proposed amending IFRS 17 to expand the scope of the risk mitigation option to apply when an entity uses reinsurance to mitigate financial risk. Because reinsurance contracts held are not eligible to apply the variable fee approach, changes related to financial risks are recognised in profit or loss similar to derivatives (or in other comprehensive income if an entity makes this election).

 

Transition requirements – Additional practical relief for acquired claims liabilities

February 2019 International Accounting Standards Board 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.

 
Diagram: Accounting for claims settlement liabilities under IFRS 17, as currently drafted (February 2019) | Under IFRS 17, claims settlement liabilities for issued contracts are accounted for as a liability for incurred claims, as are acquired contracts with claims occurring after the date of acquisition. Acquired contracts with claims occurring before the date of acquisition are accounted for as a liability for remaining coverage.

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.

 

Back to top  |  Other topics in this series

 

Transition requirements – Further Board discussions

February 2019 International Accounting Standards Board meeting

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?

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.

 

Back to top  |  Other topics in this series

 
 

Effective date of IFRS 17

International Accounting Standards Board: November 2018 meeting

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.

 

Update, April 2019: The Board has reiterated its tentative decisions to defer the effective date of IFRS 17 and extend the temporary exemption from applying IFRS 9 to 1 January 2022.

 

Back to top  |  Other topics in this series

Identifying insurance acquisition cash flows when applying the fair value transition approach

February 2018 TRG meeting

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.

 

Back to top  |  Other topics in this series

About this page

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 IFRS – Insurance.

 

Other topics in this series

Related content