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IFRS 9 temporary exemption

IFRS 9 temporary exemption: aligning the scope for fair value disclosures with that for credit risk disclosures

Highlights from the IASB Meeting on 18 July 2016

At the July 2016 meeting the IASB voted on a sweep issue relating to the amendments to IFRS 4 Insurance Contracts (IFRS 4), Applying IFRS 9 Financial Instruments (IFRS 9) with IFRS 4.

All Board members voted in favour of an amendment to the previously made tentative decision about the scope of fair value disclosures when an entity applies the temporary exemption from IFRS 9. Under the revised decision, an entity would disclose the fair value at the end of the reporting period and the change in the fair value during the reporting period for the following two groups of financial assets separately:

  • Financial assets that pass the ‘solely principal and interest’ (SPPI) test, excluding those held for trading or managed on a fair value basis; and
  • any financial assets that either (1) fail SPPI test or (2) are held for trading or managed on a fair value basis.

This change aligns the required groupings for fair value disclosures with those for the credit risk disclosures under the temporary exemption.

The previous tentative decision would have required separate fair value disclosures for assets held for trading or managed on a fair value basis that meet the SPPI test from those that failed the SPPI test. The IASB members agreed to the revised simplified disclosures, observing that there is no need to look at the characteristics of cash flows when assets are managed on a fair value basis and that they are more consistent with the disclosures required by IFRS 9. Entities applying IFRS 9 are not required to separately disclose the fair value just for financial assets that have cash flows that are not SPPI. This is because an entity applying IFRS 9 is not required to perform the SPPI assessment if it first determines that the assets are held in an ‘other’ business model.

The Board expects to issue final amendments to IFRS 4 in September 2016.

IASB confirms amendments to IFRS 4

Highlights from the IASB meeting on 17 May 2016

At the May 2016 meeting the IASB unanimously agreed to grant the Staff permission to begin the balloting process for the proposed amendments to IFRS 4 Insurance Contracts (IFRS 4), Applying IFRS 9 Financial Instruments (IFRS 9) with IFRS 4. One IASB member intends to dissent from the publication of the amendments because she believes that the temporary exemption results in a significant loss of information compare to application of IFRS 9 and that the overlay approach was sufficient to address concerns raised by preparers. The Board expects to issue final amendments to IFRS 4 in September 2016.

The Board decided to require reassessment of eligibility for the temporary exemption from applying IFRS 9 if there has been a significant demonstrable change in the corporate structure that could result in a change in the predominant activities. The Board also decided to permit the reassessment if an entity was not eligible for the temporary exemption and there was a significant demonstrable change before 1 January 2018 that resulted in a change in the predominant activities.

For the temporary exemption the Board confirmed the fixed expiry date of 1 January 2021 and for the overlay approach the Board confirmed having no fixed expiry date.

The Board decided to permit first-time adopters of IFRS to apply both the temporary exemption and the overlay approach. The Board also decided to permit relief from applying consistent accounting policies in relation to the temporary exemption for investors and investees when the equity method is used.

Highlights from the IASB Meeting in April on Insurance Contracts

At the meeting on 19 April 2016 the IASB continued its deliberations of the proposed amendments to IFRS 4 Insurance Contracts (IFRS 4), Applying IFRS 9 Financial Instruments (IFRS 9) with IFRS 4.

The Board decided to revise the eligibility criteria for meeting the temporary exemption from applying IFRS 9 (‘the temporary exemption’), which is expected to expand the population of entities eligible for it. The Board also changed the assessment date for eligibility to an earlier period than the initial application date of IFRS 9.

The Board also made decisions relating to application, presentation and disclosure of the overlay approach, disclosures relating to the application of the temporary exemption, and disclosure of other information when the temporary exemption is applied.

At the IASB meeting in May the Board plans to complete its deliberations relating to the proposed amendments to IFRS 4, including the expiry date and whether first time adopters should be prohibited from applying the temporary exemption or overlay approaches. The Board expects to be in a position to issue final amendments to IFRS 4 in September 2016.

Insurance Update from the IASB Meeting on 15 March 2016

Highlights

At the March meeting the IASB discussed the proposed amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. The Staff summarised the results from its comment letter analysis and outreach, including feedback received from users of financial statements. The Board also made a number of key decisions that set the direction for its redeliberations of the proposed amendments to IFRS 4 including the following decisions to confirm that:

  • the eligibility assessment for the temporary exemption is performed at ‘the reporting entity level’ only;
  • there should be a temporary exemption and an overlay approach and that both approaches should be optional; and
  • the temporary exemption has a fixed expiry date.

At IASB meetings in April and in May the Board plans to complete its redeliberations of the proposed amendments to IFRS 4 to be in a position to issue final amendments to IFRS 4 in September 2016.

Highlights from the IASB Meeting in February on Insurance Contracts

At the meeting on 16 February 2016 the IASB unanimously agreed to grant the staff permission to begin the balloting process for the forthcoming new insurance contracts standard (the ‘Standard’). None of the IASB members intends to dissent from the publication of the Standard.

The Chairman indicated that drafting of the Standard may take nine months so the Standard is expected to be issued around the end of 2016. During the drafting of the Standard the IASB plans to issue progress reports highlighting difficult issues.
The Board also plans to issue educational materials on key issues such as the scope of the variable fee approach and use of discretion.
The IASB will consider the need for future Board discussion of issues that may arise during the drafting process. The Board is expected to decide on the mandatory effective date of the Standard when the publication date is more certain.

IASB Meeting on 19-20 January 2016 on Insurance Contracts

Highlights

The IASB met on 19 and 20 January 2016 to discuss the level of aggregation of contracts for allocation of the contractual service margin (CSM) and losses from onerous contracts. They also discussed the definition of discretion in the context of participating contracts that follow the general model.

The IASB tentatively decided to require entities to group contracts to assess onerous contracts based on cash flows responding similarly to key risk drivers and similar expected profitability. The IASB did not vote on the specific wording for grouping of contracts for CSM allocation which will be addressed in drafting. The IASB did, however, vote in favour of a principle to permit grouping of homogeneous contracts and to provide clarification in the new insurance contracts standard (the Standard) on what acceptable and unacceptable groupings could be. The IASB voted to permit no exception on the level of aggregation for situations where regulation affects the pricing of contracts.

The IASB also discussed how an insurer should distinguish changes in discretionary cash flows that adjust the CSM from changes caused by market variables for participating contracts following the general model. The IASB tentatively decided to require entities to define discretion at the inception of each contract based on the promise the entity makes to its policyholders and agreed to provide examples in the Standard of what constitutes appropriate and inappropriate definitions of discretion.

The Staff expects in February 2016 to ask the IASB to review the due process steps undertaken in developing the Standard and ask for permission to begin the balloting process for the new insurance contracts standard. The Staff has not yet developed drafting timetable but they acknowledged the size and complexity of the Standard which may require long period for drafting. The Board is expected to consider the mandatory effective date of the Standard when the publication date is more certain.

Level of aggregation

Calculation of loss from onerous contracts

All Board members voted in favour of the Staff recommendation to require entities to assess onerous contracts on a portfolio basis, where a portfolio is defined as a group of contracts that

(1) have cash flows that an entity expects will respond in similar ways to key risk drivers in terms of amount and timing and

(2) have similar expected profitability.

The allocation of a contract to a portfolio should be made at inception of each contract and should not be reassessed thereafter.

Board members supported their preference for portfolio-based calculations of loss from onerous contracts by noting that a portfolio-based approach is closer to the way insurers see their business. In addition, their outreach has revealed that an individual contract level would not be operationally feasible.

A few Board members suggested that additional guidance is required for the word ‘similar’ used in Staff recommendations because it requires significant judgement and may result in significantly different outcomes depending on how the judgement is exercised.

The Board considered and rejected the use of ‘pricing’ instead of ‘profitability’ because they found ‘profitability’ to be more relevant for testing onerous contracts.

Allocation of CSM

12 out of 14 Board members voted in favour of a principle to permit grouping of homogeneous contracts for CSM allocation, provided the Standard gives further guidance on permissible criteria for aggregation. The IASB did not conclude what words should be used to describe the principle which will be addressed in drafting.

A few Board members questioned if the Board wants to keep the objective as allocation of CSM at the individual contract level. Ultimately, the Board vote seemed to indicate support for the individual contract level or a grouping of very homogeneous contracts (with indicators or criteria to be determined in the Staff’s drafting).

A few Board members expressed a preference for consistency in the aggregation requirements for measurement of all components of insurance contracts or at least for allocation of CSM and calculation of loss from onerous contracts. They believe this may be operationally simpler, reduce opportunities for earnings management and increase consistency and be more understandable. Other Board members considered that the level of aggregation should fit the purpose of measurement, for example, measurement of expected cash flows is done at a portfolio level, the risk adjustment should consider benefits from diversification of portfolios, while calculation of losses from onerous contracts should consider profitability. Different drivers of measurement result in the need for different aggregation levels.

A few Board members considered that aggregation based on cohorts with similar end of coverage period as initially proposed by Staff was inappropriate, because in practice profitability is often interdependent between different ‘generations’ of contracts. Some Board members suggested that lapses and underwriting of new contracts change the allocation of CSM between existing and new contracts.

A few Board members suggested that having examples on the appropriate and inappropriate level of aggregation in the Standard will help to better understand the principle.

Effect of price regulation

10 out of 14 Board members voted in favour of no exception to the level of aggregation when regulation affects the pricing of contracts.

A few Board members expressed support for no exception arguing that users would need the information about different profitability and level of risk and there are no exceptions for regulated activities in other IFRS. In addition, it would be difficult to define regulation and what kind of regulation would be in scope of the exception.

A few Board members supported the exception because it is wrong to book day one loss for some contracts and recognise higher profits in later periods for others because this does not reflect the economics of the contracts. In substance regulators require insurers to disregard certain risk in making pricing decisions and insurers do not have the option to turn down contracts with unfavourable pricing. Those terms are different from voluntary pricing decisions insurers make because, in cases of unfavourable terms in unregulated environments, insurers can decide not to issue the contract.

Discretion in participating contracts under the general model

The Board decided at previous meetings that changes in estimates of cash outflows that arise as a consequence of changes in market variables (for example changes in interest rates and asset gains or losses), and the corresponding change in discount rates, would be recognised in the Statement of Comprehensive Income. In contrast, changes in estimates that arise as a result of changes in the application of discretion, such as changes in the participation percentage for policyholder crediting, affect the consideration the entity will receive from the contract and adjust the CSM. At the January meeting the Board finalised the b) discussion on how to clarify what constitutes this discretion.

At the January meeting, all Board members voted in favour of the approach that would require an entity to define discretion at (inception of a contract based on the promise it makes to policyholders, and to use it to distinguish between the effect of changes in market variables and changes in discretion throughout the life of the contract.

The Board considered an example of a participating contract with a 2% guaranteed return to policyholders, with additional return at the entity’s discretion. At inception the entity expects to generate a 5% return on assets and to retain a spread of 0.5%. The entity invests in assets that return a fixed rate of 5% for two years.

One day after inception, interest rates fall to 1%. The entity then expects to give the policyholders 4.5% for two years, and then the guaranteed return of 2% thereafter.

The Staff considered the following options to define discretion:

(a) Promise to policyholder is a 4.5% return, entity uses its discretion to reduce that return, subject to the guarantee.

(b) Promise to policyholder is the return on assets it holds, less 0.5% spread, or the guaranteed return if higher. Entity has not used its discretion to change the promise.

(c) Promise to policyholder is a return based on market conditions, less 0.5% spread, or the guaranteed return if higher. Entity uses its discretion to increase the return to policyholders to 4.5% for the first two years.

Promise to policyholder is the guaranteed return of 2%. Additional return is the effect of discretion.

Based on this example presented at a prior Board meeting, Board members previously supported either option (b) or (c), but neither was viewed as ideal. At the January meeting, the new decision to require an entity to define discretion at inception of a contract based on the promise it makes to policyholders was viewed as a combination of both options (b) and (c) above. A few Board members noted that an entity’s promise to policyholders should determine how the discretion is defined. Depending on how the promise is defined the following definitions of the discretion at the inception of a contract can be acceptable (ignoring the effect of the guarantee):

  • Adjustments to the return from the underlying assets less a spread; or
  • Adjustments to the returns based on market conditions less a spread.

One Board member also suggested to include examples in the Standard, which would demonstrate acceptable and unacceptable definitions of discretion.

IASB issues Exposure Draft to amend IFRS 4: Insurance Contracts

In December 2015 the IASB issued an Exposure Draft (ED/2015/11) to amend IFRS 4: Insurance Contracts (IFRS 4) to address the accounting consequences arising from the application of IFRS 9 Financial Instruments (IFRS 9) prior to the application of the new insurance contracts Standard. The IASB has proposed two potential solutions to address the financial and operational concerns of the affected entities: a temporary exemption from applying IFRS 9 and the Overlay Approach.

Temporary exemption from applying IFRS 9

The ED will defer the mandatory adoption of IFRS 9 for eligible insurers until the effective date for the new insurance contracts standard or 1 January 2021, whichever is the earliest. The temporary exemption will be at the reporting entity level for entities that issue contracts within the scope of IFRS 4 if insurance is the predominant activity for the reporting entity. An eligible reporting entity would apply either IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) or IFRS 9 to all its financial instruments.

Whether insurance is predominant is based on the proportion of liabilities from contracts in the scope of IFRS 4 relative to the entity’s total liabilities at the date when the entity would otherwise be required to initially apply IFRS 9. The ED does not set a quantitative threshold for the assessment of predominance. However, the Basis for Conclusions indicates that 75% of liabilities in scope of IFRS 4 would not be sufficient to meet the predominance eligibility criterion.

Entities applying the temporary exemption will be required to make disclosures, some of which will require elements of IFRS 9 classification and measurement assessment.

The Overlay Approach

The ED will permit entities that issue contracts within the scope of IFRS 4 to remove from profit or loss, and recognise in other comprehensive income (OCI), the additional volatility that could arise when IFRS 9 is applied before the new insurance contracts standard. The adjustment would be applied to financial assets that are designated as relating to insurance activities, and that are measured at FVPL under IFRS 9 and were measured at cost, amortised cost or fair value through OCI under IAS 39. As a result of the adjustment, overall profit or loss would reflect the result that would have been recognised if these assets would have been accounted for under IAS 39.

If the overlay approach is used, entities designate financial assets that relate to contracts within the scope of IFRS 4. Entities would not be able to include assets clearly held in respect of activities other than contracts within the scope of IFRS 4, for example, financial assets of a group held for banking or asset management activities. Re-designation of financial assets may be appropriate if there is a change in the relationship between the assets and the contracts within the scope of IFRS 4.

The overlay approach should be applied retrospectively to eligible financial assets on transition to IFRS 9 recognising as an adjustment to the opening balance of OCI an amount equal to the difference between the fair value of financial assets and their carrying amount determined in accordance with IAS 39 immediately prior to transition to IFRS 9. When an entity stops applying the overlay approach it should reclassify any balance of the prior periods’ overlay adjustments accumulated in OCI to retained earnings as of the beginning of the earliest reporting period presented.

The temporary exemption and the overlay approach are both optional and eligible entities can still adopt IFRS 9 in full.  However, both alternatives are prohibited for first time adopters of IFRS.  Both approaches have additional disclosure requirements.

Insurance Update November 2015 – jetzt in Englisch

Um Ihnen die wichtigsten Ergebnisse der IASB Sitzungen so zeitnah wie möglich präsentieren zu können, werden wir Ihnen die Insurance Updates zukünftig in englischer Sprache zur Verfügung stellen.

Highlights – IASB meeting on 18 November 2015

The IASB met on 18 November 2015 to compare the general model and the variable fee approach and decided to keep the differences in the models requiring recognition of changes in financial guarantees in the contractual service margin (CSM) under the variable fee approach and in the statement of comprehensive income (SCI) under the general model. In addition, accretion of interest on the CSM would use current rates under the variable fee approach and locked-in rates under the general model.

The IASB also voted to permit the valuation of certain assets underlying contracts with direct participation features at fair value, and to apply simplified transition rules for measuring the CSM for contracts following the variable fee approach. The Board also decided that the option to recognise changes in the value of a hedged guarantee embedded in an insurance contract in profit or loss under the variable fee approach should be applied prospectively from the date of application of the new insurance contracts standard (the ‘Standard’).

The Staff expect to ask the IASB to review the due process steps undertaken in developing the Standard at its January 2016 meeting. The Board is expected to consider the mandatory effective date of the Standard when the publication date is more certain.

Disclaimer: Since a variety of viewpoints are discussed at IASB meetings, and it is often difficult to characterise the IASB’s tentative conclusions, these summaries may differ in some respects from the actions published in the IASB Observer notes. In addition, tentative conclusions may be changed or modified at future IASB meetings. Decisions of the IASB become final only after completion of a formal ballot to issue a final standard.

 

Update zu „Insurance Contracts“ aus dem IASB Meeting im Oktober 2015

Am 21. Oktober 2015 wurde im IASB Meeting wieder zu IFRS 9 für Versicherungen und zum neuen Standard „Insurance Contracts“ beraten. Die zentralen Themen waren dabei:

  • Überlegungen zu den Konsequenzen aus den verschiedenen Erstanwendungszeitpunkten der Standards IFRS 4 Phase II und IFRS 9
  • Klassifizierung und Bewertung von Finanzinstrumenten in der Übergangszeit
  • Anpassung der Vergleichsinformationen bei erstmaliger Anwendung des IFRS 4
  • Ablehnung mirroring approach
  • Ausweis und Anhangangaben für Versicherer

Überlegungen zu den Auswirkungen, die sich aus den unterschiedlichen Anwendungszeitpunkten von IFRS 4 und IFRS 9 ergeben

Zur Klarstellung offener Fragen rund um die verschiedenen Erstanwendungszeitpunkte von IFRS 4 und IFRS 9 hat das IASB im Rahmen seiner Sitzung im September die Veröffentlichung eines Exposure Drafts zu IFRS 4 beschlossen.

Das Beispiel in diesem Exposure Draft zur Wesentlichkeit der Versicherungsaktivitäten (predominance of insurance activities) als zentrale Voraussetzung der Anwendbarkeit der deferral-Option könnte voraussichtlich einen Schwellenwert von größer 75 % induzieren.

Das Board hat die 60-Tagesfrist zur Kommentierung des ED trotz anderslautenden Vorschlags des Staff und des Zeitdrucks beibehalten.

Und das Board hat ein Verbot zur Anwendung der deferral- bzw. overlay-Option für diejenigen Versicherer beschlossen, die IFRS erstmalig für Perioden anwenden, die nach dem 1. Januar 2018 enden.

Klassifizierung und Bewertung von Finanzinstrumenten in der Übergangszeit

Das Board hat beschlossen, dass diejenigen Unternehmen, die IFRS 9 vor IFRS 4 anwenden, ihr IFRS-9-Geschäftsmodell im Rahmen der IFRS 4 Transition bei Erfüllung der Anwendungsvoraussetzungen neu einzuschätzen können. Die daraus resultierenden Auswirkungen werden kumulativ und retrospektiv in der Eröffnungsbilanz als Bestandteile der Gewinnrücklagen (retained earnings) oder des OCI erfasst. In den Anwendungsbereich fallen jedoch grundsätzlich nur diese Kapitalanlagen, die zur Bedeckung versicherungstechnischer Verpflichtungen vorgehalten werden. Kapitalanlagen, die beispielsweise zur Bedeckung von Investmentverträgen vorgehalten werden, fallen nicht in diese Erleichterungsvorschrift.

Die Designationsgrundsätze, Kategorien und Buchwerte der Kapitalanlagen sind im Anhang anzugeben.

Anpassung der Vergleichsinformationen bei erstmaliger Anwendung des IFRS 4

Alle anwesenden Mitglieder haben für eine Anpassung der Vergleichsinformationen im Rahmen der Erstanwendung von IFRS 4 gestimmt. Für Finanzinstrumente sollen die Regelungen des IFRS 9 gelten.

Ablehnung mirroring approach

Das Board hat den mirroring approach einstimmig abgelehnt (not be permitted or required).

Ausweis und Anhangangaben

Das Board hat die Vorschläge des ED 2013/7 zu den Ausweisanforderungen bestätigt.

Außerdem müssen die Unternehmen, die den variable fee approach anwenden und Wertänderungen von Garantien in der P&L erfassen, den Wert der contractual service margin (CSM) sowie die in der P&L erfassten Wertänderungen der Garantien im Anhang ausweisen.

Weitere Entscheidungen betreffend der Anhangangaben waren:

  • Erläuterung der Methode zur Aufteilung der Zinsaufwendungen auf P&L und OCI erforderlich;
  • Anhangangaben zu Finanzinstrumenten, bei denen im Rahmen der Übergangsbilanzierung ein vereinfachter Bewertungsansatz angewendet wurde, erforderlich;
  • Streichung bestimmter Anforderungen im ED 2013/7, wie z.B. Überleitung Umsatzerlöse zu erhaltenen Prämien;
  • Anhangangabe zu „unlocking“ der Servicemarge (Änderung der Erfüllungszahlungsströme, die zu einer Anpassung der Servicemarge führen) erforderlich;
  • Qualitative oder quantitative Erläuterung des Unternehmens zur erwarteten Vereinnahmung der verbleibenden Servicemarge erforderlich;
  • Anhangangaben zu Bilanzwerten, bei denen im Rahmen der Übergangsbilanzierung sowie in nachfolgenden Perioden ein vereinfachter Ansatz angewendet wurde erforderlich;
  • Angabe der verwendeten Hilfsmittel erforderlich.

 

Hedging für Versicherungsverträge

Im IASB Meeting im September 2015 wurde auch die Vermeidung eines Accounting Mismatch aus der Nutzung des „variable fee“-Approach in Kombination mit Hedging-Aktivitäten diskutiert.

Ein Accounting Mismatch tritt auf, wenn ein Versicherer ein zum Fair Value bewertetes Derivat nutzt, um das Marktrisiko aus einer eingebetteten Garantie zu reduzieren. Der Mismatch resultiert aus der Erfassung der Fair Value-Änderung des Derivats in der GuV, während die Wertänderung der (eingebetteten) Garantien als Anpassung der CSM über die Vertragslaufzeit verteilt wird.

Folgende drei Ansätze wurden vom Board diskutiert:

  1. Approach:
    Für Verträge mit direkter Partizipation darf – anstelle des „variable fee“-Approach – das allgemeine Modell zur Bilanzierung von Versicherungsverträgen angewendet werden;
  2. Approach:
    Es wird gestattet, Fair Value-Änderungen der (eingebetteten) Garantie in der GuV zu erfassen, ermittelt unter Verwendung von Erfüllungsbeträgen (fulfilment cash flows)
  3. Approach:
    Es wird gestattet, Fair Value-Änderungen der (eingebetteten) Garantie in der GuV zu erfassen.

Nach der Angemessenheitsbeurteilung soll Approach 2 angewendet werden können, wenn

(a) das Hedging konsistent mit der Risikomanagementstrategie ist,

(b) ein ökonomischer Ausgleich zwischen Garantie und Derivate besteht, ohne die bilanziellen Bewertungsunterschiede zu berücksichtigen und

(c) das Kreditrisiko diesen Ausgleich nicht dominiert.

Dies würde entsprechende Dokumentationsanforderungen nach sich ziehen.

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