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© 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
© 2012 Deloitte LLP. Private and confidential
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
© 2012 Deloitte LLP. Private and confidential
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
3 IFRS 4 Phase II – Webcast (October 2012)
Highlights
© 2012 Deloitte LLP. Private and confidential
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
4 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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
5 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote FASB vote
Approve Staff recommendation Unanimous Unanimous
© 2012 Deloitte LLP. Private and confidential
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
6 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote FASB vote
Approve FASB Staff recommendation Majority (13:2) Majority (6:1)
© 2012 Deloitte LLP. Private and confidential
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
7 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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”
8 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote FASB vote
Approve Joint Staff recommendation
Approve FASB staff recommendation
Unanimous
n/a
Unanimous
Unanimous
© 2012 Deloitte LLP. Private and confidential
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
9 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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
10 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote FASB vote
Approve Staff recommendation Majority (13:2) Majority (5:2)
© 2012 Deloitte LLP. Private and confidential
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
11 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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
12 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote FASB vote
Approve Staff recommendation Majority (14:1) Unanimous
© 2012 Deloitte LLP. Private and confidential
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
13 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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
14 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote FASB vote
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
© 2012 Deloitte LLP. Private and confidential
Financial instruments with discretionary participating features (FI with DPF) – Paper 10A
15 IFRS 4 Phase II – Webcast (October 2012)
• 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
© 2012 Deloitte LLP. Private and confidential
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.”
16 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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
17 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB Vote
Approve Staff recommendation Unanimous
© 2012 Deloitte LLP. Private and confidential
Transition (papers 10B-10E) – Key Points
18 IFRS 4 Phase II – Webcast (October 2012)
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
© 2012 Deloitte LLP. Private and confidential
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
19 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB vote
Approve Staff recommendation Unanimous
© 2012 Deloitte LLP. Private and confidential
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’
20 IFRS 4 Phase II – Webcast (October 2012)
Decision IASB Vote
Approve Staff recommendation Unanimous
© 2012 Deloitte LLP. Private and confidential
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
21 IFRS 4 Phase II – Webcast (October 2012)
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
© 2012 Deloitte LLP. Private and confidential
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
22 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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.
23 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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
24 IFRS 4 Phase II – Webcast (October 2012)
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
© 2012 Deloitte LLP. Private and confidential
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
25 IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential
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]
26 IFRS 4 Phase II – Webcast (October 2012)
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© 2012 Deloitte LLP. Private and confidential27 IFRS 4 Phase II – Webcast (October 2012)