The International Accounting Standards Board (IASB) has made a series of tentative decisions to change eight areas of IFRS 17. Those amendments that are likely to be most relevant for Australian insurers are discussed below.
On 26 June 2019, the IASB issued an Exposure Draft (ED) containing its proposed amendments to IFRS 17.
Over the past months, the IASB considered 25 concerns and implementation challenges raised by stakeholders and assessed whether it should propose changes to IFRS 17. It made a series of tentative decisions to change IFRS 17 (see the Institute’s website for details). The ED captures these changes in proposed wording changes to the standard itself.
The IASB selected changes that, in its estimation:
- would ease IFRS 17 implementation, thereby reducing implementation costs and making it easier for companies to explain the results of applying IFRS 17 to investors and others; and
- yet would not lead to a significant loss of useful information for investors, nor unduly disrupt implementation processes underway, nor risk further undue delays in the effective date of IFRS 17.
The IASB proposes amendments to IFRS 17 that meet these criteria and asks stakeholders whether they agree with the proposed amendments. The IASB proposes eight areas for amendments – the remainder requiring no change in their view. The areas of IFRS 17 subject to proposed changes are:
- Effective date (to be deferred by one year to 1 January 2022)
- Scope of IFRS 17 (exclusions of certain loan and credit card contracts)
- Acquisition costs (allowance for expected recovery from expected contract renewals outside the contract boundary)
- Release of contractual service margin (allowance for investment services)
- Applicability of risk mitigation option for contracts with direct participation features
- Reinsurance recoveries (allowance for gains on proportionate reinsurance held to offset losses when recognised on underlying contracts)
- Presentation of insurance contracts in statement of financial position
- Transition requirements (modification to classification for contracts acquired in a past business combinations)
The ED also includes several minor amendments to IFRS 17.
For Australian insurers
The five amendments that are likely to be most relevant for Australian insurers are discussed below.
Effective date deferral to 1 January 2022.
The deferral of the effective date of IFRS 17 is expected to be welcomed by Australian insurers.
Allowance for recovery of acquisition costs from expected contract renewals beyond the contract boundary.
Constituents expressed concern that recognition of losses from onerous contracts caused by immediately expensing acquisition costs related to expected renewals in future years (which are outside the initially written contracts’ boundary) would not reflect the economic substance of the contract. To address this concern, the IASB proposes that an entity allocates, on a systematic and rational basis, insurance acquisition cash flows that are directly attributable to a group of newly issued contracts to any groups that are expected to arise in future from renewals of those contracts. Note, this still allows the option of immediately expensing all acquisition costs for contracts of no more than one-year duration.
This proposed change is likely to have implications for any life, general insurance and health insurance contracts for which directly attributable acquisition costs are incurred (for example commissions payable to a third party upon sale of the contract) and where future contract renewals are expected.
Allowance for proportionate reinsurance recoveries when losses are recognised on underlying contracts.
The ED proposes that an entity recognises offsetting profit on reinsurance contracts that provide proportionate coverage (i.e. a proportion of all claims for the underlying group of insurance contracts) when the entity recognises a loss at initial recognition due to onerous underlying contracts. This amendment is required to avoid a mismatch in the timing of recognising an onerous contract loss and corresponding reinsurance offset.
This proposed change is likely to particularly benefit insurers and reinsurers holding outward reinsurance. As currently proposed, the amendment would exclude non-proportionate reinsurance such as excess of loss and surplus reinsurance.
Presentation of insurance contracts in statement of financial position.
The IASB proposes an amendment to require an entity to present separately in the statement of financial position, the carrying amounts of portfolios of insurance contracts issued (and reinsurance contracts held) that are assets and those that are liabilities. Previously, this was to have been done at the lower level of groups of insurance contracts.
This amendment is likely to be welcomed by reducing operational complexity. It will be easier for insurers to associate premium debtors and outstanding claims to portfolios of contracts than to groups.
Additional Transition Reliefs
This includes an amendment to the changes to IFRS 3 Business Combinations. This means that the classification of contracts under business combinations that fall within the scope of IFRS 3 prior to transition to IFRS 17 are assessed based on facts and circumstances at date issued rather than date acquired. This may be relevant for any insurer that has entered into a business combination or portfolio transfer prior to transition to IFRS 17.
Submissions on the ED are to be provided to the IASB by 25 September 2019. The IASB staff have indicated that they plan to finalise and issue the amended standard in Q2 2020.
The Actuaries Institute AASB 17 Taskforce intends to review and comment on the ED in due course. Members are invited to send in comments on the Exposure Draft using the process set out on the website.
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