© 2012 deloitte llp. private and confidential 1 st of january 2017 (or 2018?) ifrs 4 phase ii...

© 2012 Deloitte LLP. Private and confidential

1st of January 2017 (or 2018?)IFRS 4 Phase II Update

IASB and FASB joint meetings – October 2012

Francesco Nagari

Deloitte Global IFRS Insurance Lead Partner

24 October 2012


Highlights of decisions and education sessions from this month joint meetings

Detailed analysis of the Staff recommendations and Board discussions

Update on timetable and next steps

2 IFRS 4 Phase II – Webcast (October 2012)

Agenda


Joint IASB/FASB decisions – 15 and 17 October Agreement to use “Earned premium” presentation in the Income Statement Agreement to use discount rate at contract inception under the PAA Agreement the “mirroring approach” presentation for participating insurance contracts

FASB only decisions – 15 and 17 October Acquisition costs should not be presented as an asset – alignment with IASB Insurance liability to be shown in two lines on financial statements: best estimate and

margin

IASB only decisions – 17 and 19 October Confirmed the contract boundary for financial instruments with discretionary participating

features Final standard expected in 2014, with mandatory effective date about 3 years from then,

around 2017-2018 - Deloitte Global Insurance Survey cited Option to early adopt with requirement to restate comparatives in all cases Specific guidance for reclassification (with limited exceptions) of financial assets under

IFRS 9 on transition to IFRS 4 Require ‘hindsight’ to restate residual margin on transition


Highlights


Discount rate in the Premium Allocation Approach – paper 2D/90D

IASB and FASB Staff recommendation – Discount rate for remaining coverage period

When the liability for remaining coverage is accreted or discounted, the rate that shall be required for its measurement is the discount rate at the inception of the contract.

Staff recommendation – Discount rate for incurred claims

IASB Staff - Discount rate at the date the claim is incurred and which is subsequently locked in

FASB Staff –Discount rate at the inception of the contract and which is subsequently locked in



Discount rate in the Premium Allocation Approach – paper 2D/90D (cont.)

Discussion-Discount rate for remaining coverage period

Both the IASB and FASB supported the staff recommendations of using the discount rate at the inception of the contract and it was consistent with its previous decisions


Decision IASB vote FASB vote

Approve Staff recommendation Unanimous Unanimous


Discount rate in the Premium Allocation Approach – paper 2D/90D (cont.)

Discussion-Discount rate incurred claims A discount rate determined at the date the claim is incurred supported initially by the

majority of IASB members since it results in more useful information than the rate at the inception of the contract and this rate reflects the market conditions at the time the claim was incurred

The rate at inception of contract supported by majority of FASB members since it less complex than using the rate at the date the claim was incurred

In the interest of convergence IASB chairman asked for another vote on the matter



Approve FASB Staff recommendation Majority (13:2) Majority (6:1)


Participating Insurance Contracts “Mirroring Approach”– paper 2F/90F

Staff recommendation – Presentation of changes in insurance liability including changes in discount rates when the “mirroring approach” is applicable

In order to avoid accounting mismatches when using the mirroring approach for participating insurance contracts insurers should measure and present that part of the obligation that relates to the underlying items on the same basis as it measures and presents the underlying items

FASB staff recommended that in cases when “mirroring approach” is not applicable changes in discount rates should be presented in profit and loss if the underlying items on which participation is based are recorded at fair value through profit and loss

This is not an IASB issue as there are no instances when “mirroring approach” not applicable in IFRS



Participating Insurance Contracts “Mirroring Approach” – paper 2F/90F (cont.)

Discussion

Brief discussion Unanimous agreement with staff proposals Members noted that the drafting of the text in the standard needs to be specific to note

that the “mirroring approach” will take precedence over all other approaches including the “OCI solution”



Approve Joint Staff recommendation

Approve FASB staff recommendation

Unanimous

n/a

Unanimous

Unanimous


Presentation in Income Statement – paper 2A/90A

IASB Staff recommendation – measure of premiums and claims

Earned premium presentation, whereby premiums are allocated to periods in proportion to the value of coverage that the insurer has provided in the period, and claims are presented when incurred

FASB Staff recommendation – measure of premiums and claims

Premium due presentation, whereby premiums are presented when due and an expense representing the claims, benefits and margins associated with these premiums is presented at the same time



Presentation in Income Statement – paper 2A/90A (cont.)

Discussion Approach was noted as complex but consistent with commonly understood

presentation thus beneficial to users Good indicator of performance FASB agreed with IASB on several points Premium earned emerged as a better answer to the request for volume information Supporters of the summarised margin accepted that it cannot answer the volume

information request



Approve Staff recommendation Majority (13:2) Majority (5:2)


Presentation in Income Statement – paper 2B/90B

Staff recommendation – non-claims fulfilment costsIn an earned premium presentation: Non-claims fulfillment costs are defined as additional costs that an insurer expects to

incur in fulfilling a portfolio of insurance contracts. The amounts presented as expenses should be the actual costs incurred or added to

the liability for incurred claims in the period. A portion of the premium should be allocated to cover non-claims fulfillment costs; The premium allocated to cover these costs is proposed to be included in insurance

contract revenue in the periods in which the costs are expected to be released from the liability of remaining coverage;

Accompanying application guidance: Staff proposed that the guidance acknowledges that simpler procedures may produce

results that are not materially different in some circumstances and allows them



Presentation in Income Statement – paper 2B/90B (cont.)

Discussion Brief discussion followed All generally agreed with Staff proposals The Boards voted not to answer to the second question on application guidance



Approve Staff recommendation Majority (14:1) Unanimous


Presentation in Income Statement – paper 2C/90C

IASB Staff recommendation – acquisition costs (AC) Cash flows relating to AC should be recognised over the coverage period

FASB Staff recommendation – acquisition costs (AC) AC should be treated as part of the insurance liability, and deducted from the margin,

and They should be either separately presented on the statement of financial position or

included in the roll forward as part of the disclosures

Joint Staff recommendation – acquisition costs (AC) AC should be recognised in a way that is consistent with the proposed allocation of the

residual / single margin



Presentation in Income Statement – paper 2C/90C (cont.)

Discussion The IASB reconfirmed agreement with Staff The FASB agreed that AC should not be recognised as an asset and moved on the

IASB position where they are treated as a reduction of the margin The FASB would like to see the insurance liability in two lines:

Best estimate cash flows Margin net of AC



IASB Staff recommendation Majority (14:1) n/a

FASB Staff recommendation AC part of liability Margin separately presented

n/aUnanimousMajority (5:2)

Joint Staff recommendation Unanimous Unanimous


Financial instruments with discretionary participating features (FI with DPF) – Paper 10A


• Share features with insurance

• In scope of IFRS 4 if issued by an insurer

FI with DPF

• Insurance contract boundary

• Allocation of residual margin

• Unbundling

Changes since ED

impacting on FI with DPF


Financial instruments with discretionary participating features (FI with DPF) – Paper 10A (cont.)

Insurance contract boundary• “the point at which the contract no longer confers substantive

rights on the policyholder”

Proposed contract boundary for FI with DPFs• “…the point at which the contract no longer confers substantive

rights on the contract holder. • This occurs when the contract holder no longer has a

contractual right to receive benefits arising from the discretionary participating feature in that contract, or the premiums charged confer upon the contract holder substantially the same benefits as those that are available, on the same terms, to those that are not yet contract holders.”



Financial instruments with discretionary participating features (FI with DPF) – Paper 10A (cont.)

Initial recognition of FI with DPFs Insurer should recognise FI with DPFs ‘when, and only when the entity becomes

party to the contractual provisions of the instrument’ (based on IFRS 9: 3.1.1) Consistent with recognition of insurance contract at beginning of coverage

Propose no more adaptations, especially for unbundling and residual margin release

Residual margin current tentative decision – proposal to apply equally to FI with DPF Release residual margin to profit or loss in a way that best reflects the pattern of

services provided

Proposal to apply unbundling decisions equally to FI with DPF Unbundle distinct investment components and account under IFRS 9 Disaggregate non-distinct investment components for presentation purposes


Decision IASB Vote

Approve Staff recommendation Unanimous


Transition (papers 10B-10E) – Key Points


Staff expects to publish final IFRS

in 2014

Expect IFRS 9 mandatory effective date to remain for periods beginning

on or after 1/1/2015

Transitional issues and interaction

between IFRS 9 and IFRS 4


Paper 10C – Redesignation and Reclassification of Financial AssetsStaff recommendation With the expectation that IFRS 9 is adopted before IFRS 4 the latter should

require an insurer on adoption of IFRS 4 to follow reclassification guidance in IFRS 9, except:

(a) to allow designation of eligible financial assets as FVTPL to eliminate or significantly reduce new accounting mismatches created by applying IFRS 4;

(b) to require revoking of previous FVTPL designations (moving assets to FVOCI and AC) where as a result of IFRS 4 there is no longer accounting mismatch; and

(c) following earlier application of IFRS 9, to permit the use of FVOCI for some or all equity instruments that are not held for trading, or revoke a previous election.

Discussion Definition of ‘insurer’. Staff will change to ‘entity applying insurance standard’ Clarification that change in business model post adoption of IFRS 9 is treated

prospectively


Decision IASB vote



Paper 10D Transition – Ancillary Issues

Treatment of changes in estimates of cash flows before the date of transition

Current tentative decisions: Prospective unlocking of residual margin for changes in estimates Experience adjustments in Profit and loss Release residual margin based on pattern of service provided

Staff recommendation – to require ‘hindsight’ in order to reduce complexity Insurers shall estimate residual margin ‘assuming that all changes in estimates of

cash flows between initial recognition and the beginning of the earliest period presented were already known at initial recognition’


Decision IASB Vote



Paper 10D Transition – Ancillary Issues (cont.)

First time adoption of IFRS 4 Staff recommend same transitional requirement on first adoption as for those

already applying IFRS

Redesignation of investment property and PPE assets under IAS 40 and IAS 16 IAS 40 and IAS 16 contain options to designate at FV or cost Both standards allow to switch between cost and FV via IAS 8 Staff recommend no additional explicit guidance


Decision IASB Vote

Approve Staff recommendation for first time adopters Unanimous

Approve Staff recommendation to not include guidance for redesignation of IP and PPE under IAS 40 and IAS 16

Unanimous


Paper 10E Transition – Effective date, comparative financial statements and early application

Staff expect to publish final IFRS in 2014

ED Respondents asked for period between publication of final IFRS and mandatory effective date to be: 2-3 years (Asia-Oceania, Europe, two thirds of North American insurers); >3 years (especially entities in jurisdictions applying IFRS for the first time)

Deloitte Global IFRS Insurance Survey (conducted by Economist Intelligence Unit) cited by the Staff

Of 200 senior finance executives of insurers around the world: Most believe it would take several years to implement 49% expect 3 years, 21% expect 4 years



Paper 10E Transition – Effective date, comparative financial statements and early application – (cont.)

Summary of Staff recommendation

1. Minimum of 3 full years between publication of final IFRS and mandatory effective date

2. Restatement of comparative on transition3. Option to early adopt4. Option to not restate comparatives on early adoption was deleted by the Staff

Staff expect the final standard to be mandatory effective by 2018, based on their recommendation.



Paper 10E Transition – Effective date, comparative financial statements and early application – (cont.)Discussion• Lack of alignment with IFRS 9 was a common negative observation• One member proposed to prohibit early adoption to avoid non-comparability and

uncertainty around the reasons for early or late adoption• Many, including the IASB Chairman want IFRS available as soon as possible• Chairman remarked on market pressure to early adopt, must allow even if it

reduces comparability. Although the current lack of international comparability now mitigates the relative damage

• IASB requested to remove ‘minimum of 3 full years’ and give indication instead that they would ‘allow for substantial period of time of approximately 3 years’ and aim for a target 1/1/2017 effective date


Decision IASB Vote

Agree with the Staff recommendation (including change of words indicating period of time approximately 3 years and requirement to restate comparatives on early adoption)

12:2


Next steps and timetable

Next joint meeting expected in the week commencing on 19 November Major topics that remain to be deliberated:

- Unlocking of the residual margin

- Mechanics of the OCI solution The decisions of the IASB confirm Deloitte’s expectations of a

Mandatory effective date of the new IFRS of 2017 The risk for a slippage of the completion timetable makes 2018 as the

second most likely scenario for adoption



Contact details

Francesco NagariDeloitte Global IFRS Insurance Leader+44 20 7303 [email protected]

Link to Deloitte IFRS Insurance materials:https://www.iasplus.com/en/projects/project47

Insurance Centre of Excellence:[email protected]


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https://www.iasplus.com/en/projects/project47

https://www.iasplus.com/en/projects/project47

mailto:[email protected]

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© 2012 Deloitte LLP. Private and confidential27 IFRS 4 Phase II – Webcast (October 2012)

© 2012 deloitte llp. private and confidential 1 st of january 2017 (or 2018?) ifrs 4 phase ii...

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