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Proposal to narrowly amend insurance contracts rules coming in July, IASB says

The IASB on June 22, 2021, voted to issue a proposal that would narrowly amend insurance contracts rules to fix a technical issue that would make companies’ reports appear mismatched.

The proposal will amend IFRS 17, Insurance Contracts, to address one-time classification differences that may arise in the comparative information that insurers present when they initially apply both that standard and IFRS 9, Financial Instruments, according to the discussions.

It will be issued in July with a 60-day comment period.

“I would normally never be pro or in support of changing a standard this close to the implementation date – to me it does create challenges,” IASB member Bruce Mackenzie said. “But I think this is one of those very unique situations where I think we are faced with a mismatch and we need to put something out there to help preparers get to the right answer,” he said.

The proposal would permit companies to apply a classification overlay in the comparative periods presented on initial application of IFRS 17 and IFRS 9. The board agreed that the optional classification overlay would:

  • apply to financial assets that are related to insurance contract liabilities and to which IFRS 9 has not been applied in the comparative periods;
  • allow a company to classify these financial assets in the comparative periods based on a reasonable expectation of how these assets would be classified on initial application of IFRS 9;
  • apply to comparative periods that have been restated for IFRS 17 (that is, from the transition date to the date of initial application of IFRS 17); and
  • apply on an instrument-by-instrument basis.

The issue arises because many insurers will first apply the insurance and financial instruments standards at the same time on or after Jan. 1, 2023, according to an IASB meeting paper.

The transition requirements in the two standards apply at different dates for many insurers, specifically: for IFRS 9 on Jan. 1, 2023; and, for IFRS 17 on Jan. 1, 2022 “or earlier if the entity voluntarily restates more than one year of comparative information.”

This difference in the transition requirements will cause classification differences, resulting in “significant accounting mismatches between insurance contract liabilities measured at current value and some related financial assets measured at amortized cost.” If the company chooses to restate comparative information for IFRS 9, there will also be “classification differences between financial assets derecognized in 2022 (to which IFRS 9 will not apply) and other financial assets (to which IFRS 9 will apply),” the paper explains.

Moreover, insurers highlighted operational challenges if a company chooses to restate comparative information for IFRS 9. Those challenges will arise because the company will not know which financial assets IFRS 9 does and does not apply to in the comparative information until the end of 2022.

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