EFRAG TEG discussing additional chapters for the draft endorsement advice for IFRS 17

The EFRAG TEG members continue discussion on the content to be included in its draft endorsement advice for IFRS 17. The April meeting focused on the topics Risk mitigation and Interaction between IFRS 17 and IFRS 9 included as Appendix 2 and 3 of the draft endorsement advice (DEA).

  • IFRS 17 DEA issues for discussion (Link to Agenda paper 09-02)

The EFRAG Secretariat updated Appendix 2 of the IFRS 17 draft endorsement advice and the paper on the interaction between IFRS 17 and IFRS 9 based on EFRAG TEG comments that were sent in writing. However, as some of the changes are not merely wording but would change the current analysis shared by TEG in previous meetings, they were discussed during the meeting.

Risk mitigation (Appendix 2 of the IFRS 17 DEA)

In the Appendix 2 of the IFRS 17 draft endorsement advice it is written that for contracts accounted on the general model the hedge accounting can be used for these contracts in order to address accounting mismatches. As part of the comments that were sent in writing, the EFRAG TEG members disagreed on that as the hedge accounting is not helping on the CSM impact of these contracts.

EFRAG TEG members were asked once again if they would like to change the argumentation used in the current version or make it more specific.

The members agreed to emphasize in the text that the risk mitigation is only available for VFA and not for the general approach, even if there is a grey area for some products.

Interaction between IFRS 17 and IFRS 9 (Appendix 3 of the IFRS 17 DEA)

The purpose of this Appendix is to explain what insurer’s accounts will look like when the two standards are applied together. Focus is made on the treatment of credit spreads which lead to economical mismatches.

For the members that disagreed with the current text it was unclear how credit risk could be matched between financial instruments and insurance liabilities and why the accounting treatment under the VFA approach matters when discussing an economic mismatch supposedly uncorrelated with accounting.

However, after the discussion EFRAG TEG members concluded that if the different credit risk spreads exist on the asset side, it is an economic mismatch and not the accounting mismatch. The section in the Appendix 3 will be kept.

The EFRAG TEG members pointed out that the implementation of IFRS 9 and IFRS 17 will increase the volatility in profit or loss and the main reason for this is that IFRS 17 measures the insurance liability independently from the assets on the balance sheet. The different approaches of the standards are just making the volatility more visible. The section in the Appendix will be kept to inform about the volatility caused by the standards although this is the same under all GAAP.   

There was disagreement on the extract of the EFRAG Board decision on equity instruments that says that asset allocation decisions are driven by a plurality of factors: accounting requirements, expectation of future returns or assets, regulations, taxes and prudential requirements is difficult.

The EFRAG TEG members who disagreed with the statement, think that the sentence suggests that whatever the quality of the information, accounting is only a second order factor.

EFRAG TEG members agreed to refer to the EFRAG Board decisions in the equity instruments project where it is stated that investment decisions are made by insurers based on the various reasons and not solely because of the accounting.

  • Extension of temporary exemption expiry date (Link to Agenda paper 09-06)

The amendments to IFRS 4 are expected until the end of June. This agenda paper is to be incorporated into a draft endorsement advice on the temporary exemption from applying IFRS 9 (Amendments to IFRS 4) and contains:

  1. Appendix 1: Understanding the changes brought by temporary exemption from applying IFRS 9 (Amendments to IFRS 4)
  2. Appendix 2: EFRAG’s technical assessment on Temporary exemption from applying IFRS 9 (Amendments to IFRS 4); and
  3. Appendix 3: Assessing whether the Amendments are conducive to the European public good.

The EFRAG TEG members were asked if they agree with the marked-up version of the paper. Discussion was not finalized and will be continued.

The paper was submitted to the IASB and will be further discussed by the IASB on the 21st April 2020.

The Agenda papers that were not discussed during the meeting are as follows:

  • Mutual wording for DEA (Link to Agenda paper 09-03)
  • Contracts that change nature over time (Link to Agenda paper 09-04)
  • Economic study (Link to Agenda paper 09-05)

Next steps:

Discussion on the draft endorsement advice by the EFRAG TEG members will be continued as of 6th and 7th of May, when the next EFRAG TEG meeting is scheduled.

 

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