Interaction between IFRS 4 Phase II and IFRS 9

in Financial Services, 21.09.2015

It has been a bit quite with the  International Financial Reporting Standards (IFRS) 4 Phase II since the beginning of the year, or even since the International Accounting Standards Board’s (IASB) educational session about the model for participating contracts introduced by the CFO Forum last November. However, the IASB has returned in recent months with some interesting, tentative, decisions on IFRS 9 implementation issues.

The IASB is addressing the consequences of different effective dates for two major standards for an insurance company

The IASB has been considering intensively the impact of two material standards, IFRS 9 and IFRS 4 Phase II, for insurance companies becoming effective on different dates. Finally, during the July meeting the IASB reached an important decision on the interaction between those two standards.

Thus, insurers will be able to defer the impact on profit or loss from the FVPL (fair value through profit and loss) classification under IFRS 9 for assets that were previously classified as amortized or available for sale under the International Accounting Standards (IAS) 39 (i.e. funds or bonds linked to an underlying price index). This will only be an option for insurers that issue contracts which are accounted for under IFRS 4. Those entities will be able to take this option when implementing IFRS 9 in order to reduce the volatility in profit or loss. However, this approach requires the insurers to perform a parallel run of IFRS 9 and IAS 39 during the period between the effective dates of IFRS 9 and IFRS 4 to identify the financial instruments which meet the aforementioned criteria and the amount that will be shifted from profit or loss to OCI (Other Comprehensive Income). This represents a long needed relief for insurers albeit with parallel running the entities will have additional administrational effects to consider.

There is also scope for more options than this one, as was recognized in the July meeting and the IASB will continue analysing accounting consequences.

EFRAG has completed its due process regarding IFRS 9 Financial Instruments and has submitted its Endorsement Advice Letter to the European Commission

This September, EFRAG (European Financial Reporting Advisory Group) submitted its Endorsement Advice relating to IFRS 9. In this endorsement, it recommends that all businesses carrying out insurance activities are permitted to apply IFRS 9 as of 1 January 2018 whereas all other businesses are required to do so. Swiss insurers are not affected by the EU endorsement, however some might wish that the SIX Exchange takes notice of the advice and considers a similar solution for Swiss insurance companies.

Progress made on participating contracts

Since its June 2015 meeting the IASB has been focusing on adopting the general model for insurance contract accounting to accommodate participating features. The IASB is considering the proposals of the CFO Forum for its discussions.

Although the decision process is moving again, a final standard for insurance contracts cannot be expected in 2015. The IASB wants to keep the effective date open until more decisions are made on other topics. Considering the IASB offered an implementation period of three years the earliest effective date will be 1 January 2020 if a final standard will be issued in 2016.



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