IASB Agrees Amendments To IFRS 17 For Seven Sweep Issues
May 2020InsuranceAccounting AlertIASB agreesamendments toIFRS 17 for sevensweep issuesWhat you need to knowAt its meeting on 20 May 2020, the IASB discussed seven “sweep issues” identified during the balloting process forfinalising the amendments to IFRS 17. The IASB agreed to amend IFRS 17, as follows: An entity is to include in the initial measurement ofthe contractual service margin (CSM), the effect ofthe derecognition of any asset or liability previouslyrecognised for cash flows paid or received beforethe related group was recognised, not limiting this toinsurance acquisition cash flows only. The asset for insurance acquisition cash flows that isrecognised before a group of insurance contracts hasbeen recognised should include future cash flows forwhich a liability has been recognised applying anotherIFRS standard. When an entity has a group of onerous underlyinginsurance contracts, some of which are covered byreinsurance and some not, the entity has to determinehow to calculate a loss recovery component to beincluded as part of its reinsurance held asset. TheIASB agreed to require an entity to use a systematicand rational method of allocation to do this. When an entity recognises in profit or loss, amountsrelated to income tax that are specifically chargeableto the policyholder under an insurance contract, itshould recognise insurance revenue for the relevantpart of the amount chargeable. The definitions of the liability for remaining coverageand the liability for incurred claims have beenamended to clarify that they include all obligationsarising from insurance contracts issued. The IASB agreed to amend the requirements for therisk mitigation option in the variable fee approach(VFA) to: Specify that the accounting policy choice (inparagraphs 88-89 of IFRS 17) to present partsof insurance finance income or expenses (IFIE) inother comprehensive income (OCI) and parts inprofit or loss does not apply to IFIE arising from theapplication of the risk mitigation option. Add new requirements to the risk mitigation optionto specify how to present IFIE arising from itsapplication. Clarify the wording in paragraph B96(c) of IFRS17 that sets out requirements for the effects ofinvestment components or policyholder loansunexpectedly paid or unexpectedly not paid.
OverviewAt its May 2020 Board meeting, the International AccountingStandards Board (IASB or the Board) considered severalsweep issues identified since completion in March 2020 of itsplanned re-deliberations on the proposed amendments in theExposure Draft Amendments to IFRS 17 Insurance Contracts(the ED).All 14 Board members voted in favour of the staffrecommendation, without further discussion.The story so far2. Pre-recognition insurance acquisition cash flowsThe IASB issued IFRS 17 in May 2017. Our publication,Applying IFRS 17: A closer look at the new insurancecontracts standard, provides further details on therequirements: ng-IFRS-17-Insurance-May-18/ FILE/ey-ApplyingIFRS-17-Insurance-May-18.pdfThe Board also agreed to amend the requirements forrecognition of an asset for insurance acquisition cash flows inparagraph 28B(b) of IFRS 17. This amendment will include,as an asset, insurance acquisition cash flows for which nocash flows have occurred but a liability has been recognisedapplying another IFRS standard before the related group ofinsurance contracts is recognised. Such future cash flowsshould be included in an asset for insurance acquisitioncash flows before the recognition of the group of contractsto which the cash flows relate, and subsequently, in thefulfilment cash flows of the recognised group.Having considered 25 concerns and implementationchallenges arising since IFRS 17 Insurance Contracts(IFRS 17 or the standard) was issued, the IASB issued anED in June 2019 proposing targeted amendments to thestandard to respond to some, but not all, of those concernsand challenges: -to-ifrs-17/#published-documents.For further details of the IASB’s exposure draft, and itssubsequent discussions, refer to our recent InsuranceAccounting Alerts: https://www.ey.com/gl/en/issues/ifrs.In finalising the amendments proposed in the ED, the Boardidentified a number of sweep issues which were discussed atthe May Board meeting.”1. Pre-recognition cash flows other than insuranceacquisition cash flowsThe Board agreed with the staff recommendation to amendparagraph 38 of IFRS 17 to require an entity to include, inthe initial measurement of the CSM of a group of insurancecontracts, the effect of the derecognition of any asset orliability previously recognised for cash flows related to thatgroup, not just insurance acquisition cash flows. Cash flowsrelated to the group are those that would be included in thefulfilment cash flows of the group on initial recognition if theywere paid after, rather than before initial recognition; forexample, premiums received before their due date.2This addresses the issue that pre-recognition cash flowsfor insurance contracts were inadvertently restricted toinsurance acquisition cash flows in IFRS 17. The amendmentbroadens the definition to include other cash flows relatedto a group of insurance contracts that are paid or receivedbefore the group is recognised. Insurance Accounting Alert May 2020An example would be where an entity has been invoicedfor receiving services from a broker relating to a group ofcontracts not yet recognised, but has not yet paid the invoice.IFRS 9 Financial Instruments requires recognition of theliability for the payments due to the broker.All 14 Board members voted in favour of the staffrecommendation, without further discussion.3. Reinsurance contracts held — identifying losseson underlying contractsThe IASB agreed with the staff recommendation to addparagraph B119G to IFRS 17. This new paragraph specifieshow to determine the recovery of losses from reinsurancecontracts held for cases where an entity groups togetheronerous insurance contracts covered by a reinsurancecontract held (referred to as ‘underlying contracts’) andother onerous insurance contracts not covered by thereinsurance contract.
The amendment will require an entity to use a systematicand rational method to determine the portion of lossesrecognised for the group of contracts allocated to theunderlying insurance contracts (i.e., contract covered by thereinsurance contract). The staff paper also recommendedthat an entity would use the same systematic and rationalmethod of allocation to determine the portion of subsequentchanges in the loss component of the group relating tounderlying insurance contracts in the group.Two Board members questioned whether it was necessaryto specify the use of “a systematic and rational basis” as thismight imply that such methods could not be used to makeestimates elsewhere in the standard. The staff acknowledgedthis concern, but felt it was necessary as the requirement toestimate reinsurance recoveries from onerous contracts thatare subject to reinsurance, as introduced by the ED, impliesthat losses would need to be measured at a level lower thanthe group.This further change follows the amendment already agreedby the Board to require an entity to recognise in profit orloss the recovery from reinsurance contracts held of losseson underlying insurance contracts on initial recognition, aswell as from the requirement in the current version of IFRS17 to do so subsequently. In order to determine the amountof recovery of such losses, the entity needs to identifythe losses on underlying contracts, but is not required toidentify or track these losses at a level lower than the group.To separate the losses from underlying insurance contractsand other insurance contracts in a group for the purposeof determining the amount of recovery of losses fromreinsurance contracts held could be unduly burdensome.12 of the 14 Board members voted in favour of the staffrecommendation.Observations from the Board meetingThe staff informed the Board of feedback received on therecommendations since the papers were published. Somepreparers had informed the staff that they might havemore granular information on reinsurance recoveries whenunderlying contracts were initially recognised, althoughthese preparers mentioned they do not expect to have thislevel of detail at subsequent measurement dates. Requiringthe same method be applied at initial recognition andsubsequently could imply that insurers are prohibited fromusing the more detailed information that is available initially.The staff indicated that such a restriction was not what theyhad intended and will therefore remove the requirement inthe draft wording for the methods to be the same at initialrecognition and subsequent measurement.3 Insurance Accounting Alert May 20204. Insurance revenue — income taxThe Board proposes amending paragraph B121 of IFRS 17to include amounts related to income tax that are specificallychargeable to the policyholder in the list of items thatcomprise revenue.Paragraph B121 contains an exhaustive list of the itemscovered by consideration from a policyholder that determinesinsurance revenue. The amounts related to the provisionof service currently comprise expected insurance serviceexpense, release of the risk adjustment and the CSM. Incometax expense does not form part of insurance service expense.Consequently, the list of the components of revenue isincomplete.The intended consequence is for an entity to recogniseinsurance revenue for the consideration paid by thepolicyholder for such income tax amounts consistent with therecognition of insurance revenue for other incurred expensesapplying IFRS 17. Without this amendment, the entity wouldneed to present the amount of consideration related tothose income tax expenses as income other than insurancerevenue.All 14 Board members voted in favour of the staffrecommendation, without further discussion.
5. Definitions of the liability for remaining coverage(LFRC) and the liability for incurred claims (LFIC)The IASB agreed with the staff recommendation to amend thedefinitions of LFRC and the LFIC in Appendix A to IFRS 17 toinclude all obligations arising from insurance contracts issuedby an entity.The carrying amount of a group of insurance contractsshould reflect all of an entity’s obligations arising from thegroup of insurance contracts. However, the definitions ofLFRC and LFIC, as proposed in the ED, currently do notprovide a complete list of all obligations giving rise to cashflows included in the measurement of the insurance contractliability. For example, other obligations relating to theprovision of insurance contract services could include refundsof premiums to the policyholder or expenses payable to thirdparties. Obligations not related to the provision of insurancecontract services could also include some types of investmentcomponents.All 14 Board members voted in favour of the staffrecommendation, without further discussion.6. Variable fee approach — applying the OCI optionand the risk mitigation option togetherThe IASB agreed with the staff recommendation to amend therequirements for the OCI option and risk mitigation option inthe variable fee approach (VFA). The risk mitigation optionallows an entity to recognise the effect of changes in financialrisk on the measurement of fulfilment cash flows of VFAcontracts in the statement of profit or loss and OCI insteadof adjusting the CSM if certain conditions are met. The IASBagreed to: Specify that the accounting policy choice (in paragraphs88-89 of IFRS 17) to present parts of IFIE in OCI and partsin profit or loss does not apply to IFIE arising from theapplication of the risk mitigation option Add new requirements to the risk mitigation option tospecify how to present IFIE arising from its application. Thisrequires an entity to present IFIE in a way that best matchesthe changes in the mitigating instrument, i.e., the entitywould present: Changes in the insurance contract liability that aremitigated using financial assets measured at fair valuethrough profit or loss in profit or loss Changes in the insurance contract liability that aremitigated using reinsurance contracts held applying thesame accounting policy for the presentation of IFIE (OCIversus profit or loss) that the entity has chosen for themitigating reinsurance contracts heldThe risk mitigation option allows an entity, provided thatcertain conditions are met, to recognise the effect of changesin financial risk on the measurement of fulfilment cashflows of VFA contracts in the statement of profit or loss andOCI instead of adjusting the CSM. The question arises as towhether such IFIE items should be recognised in OCI if theentity applies the OCI option permitted by paragraphs 88 and89 of IFRS 17.The proposed amendment would prevent the mismatchesthat can arise from applying the risk mitigation option andthe OCI option together by specifying that the IFIE amountsfrom risk mitigation are treated consistently with the riskmitigating items.This sweep issue was also discussed by the IASB in April 2019,when the Board decided not to take any action. However, thestaff now accepts it is an unintended restriction for an entitynot to be able to avoid such a mismatch.Observations from the Board meeting:One Board member commented that, even though she waswilling to accept the amendment at this stage of the insurancecontracts project, providing options in accounting standardscan give rise to various difficulties.All 14 Board members voted in favour of the staffrecommendation.4 Insurance Accounting Alert May 2020
7. Investment components unexpectedly paid ornot paidNext steps:Paragraph B96(c), as drafted in the ED, required thatdifferences between any investment component or loan toa policyholder expected to become payable, or repayable, inthe period and the actual investment component or loan to apolicyholder that becomes payable, or repayable, in the periodadjusts the CSM, except those described in paragraph B97(a),i.e., differences due to the effect of the time value of moneyand changes in the time value of money and the effect offinancial risk and changes in financial risk.The staff will continue with the balloting processfor the amendments to IFRS 17. We expect thatthe amendments will be issued towards the end ofJune 2020.The IASB staff were concerned that the existing drafting isunclear as to how an entity should consider the effect offinancial risks when comparing actual and expected amountsof investment components that become due for repaymentin a period. The IASB agreed with the staff proposal to clarifythat differences between actual and expected (re)paymentsare determined by comparing:Whilst most of the sweep issues reflect relatively simpleclarifications, a few of the issues represent moreimportant changes, particularly the change regardingapplying the OCI option and the risk mitigation optiontogether under the VFA approach and the changeregarding the identification of losses on underlyingcontracts for reinsurance held. The former change takesaway an unintended barrier for using the OCI approachwhen the entity also plans to use the risk mitigationapproach. The latter change deals with an importantaspect of the recovery of losses through reinsuranceheld that is fairly common in practice.(i) the actual investment component or loan to a policyholderthat becomes payable or repayable in a period with (ii) the(re)payment in the period that was expected at the start ofthe period plus any IFIE related to that expected payment orrepayment before it becomes payable or repayable.All 14 Board members voted in favour of the staffrecommendation, without further discussion.5 Insurance Accounting Alert May 2020How we see it:
Area IFRS ContactsGlobalKevin Griffith 44 20 7951 0905kgriffith@uk.ey.comMartina Neary 44 20 7951 0710mneary@uk.ey.comMartin Bradley 44 20 7951 8815mbradley@uk.ey.comConor Geraghty 44 20 7951 1683cgeraghty@uk.ey.comHans van der Veen 31 88 40 70800hans.van.der.veen@nl.ey.comPhilip Vermeulen 41 58 286 3297phil.vermeulen@ch.ey.comThomas Kagermeier 49 89 14331 25162thomas.kagermeier@de.ey.comBelgiumKatrien De Cauwer 32 2 774 91 91katrien.de.cauwer@be.ey.comBelgiumPeter Telders 32 470 45 28 87peter.telders@be.ey.comCzech RepublicKarel Svoboda 420225335648karel.svoboda@cz.ey.comFranceFrederic Pierchon 33 1 46 93 42 16frederic.pierchon@fr.ey.comFrancePatrick Menard 33 6 62 92 30 99patrick.menard@fr.ey.comFranceJean-Michel Pinton 33 6 84 80 34 79jean.michel.pinton@fr.ey.comGermanyMarkus Horstkötter 49 221 2779 25 587markus.horstkoetter@de.ey.comGermanyRobert Bahnsen 49 711 9881 10354robert.bahnsen@de.ey.comGreeceKonstantinos Nikolopoulos 30 Rohan Sachdev 91 226 192 0470rohan.sachdev@in.ey.comIrelandJames Maher 353 1 221 2117james.maher@ie.ey.comIrelandCiara McKenna 353 1 221 2683ciara.mckenna@ie.ey.comItalyMatteo Brusatori 39 02722 12348matteo.brusatori@it.ey.comIsraelEmanuel Berzack 972 3 568 0903emanuel.berzack@il.ey.comLuxembourgJean-Michel Pacaud 352 42 124 d Elgersma 31 88 40 72581hildegard.elgersma@nl.ey.comNetherlandsBouke Evers 31 88 407 3141bouke.evers@nl.ey.comPortugalAna Salcedas 351 21 791 2122ana.salcedas@pt.ey.comPolandMarcin Sadek 48225578779marcin.sadek@pl.ey.comPolandRadoslaw Bogucki 48225578780radoslaw.bogucki@pl.ey.comSouth AfricaJaco Louw 27 21 443 0659jaco.louw@za.ey.comSpainAna Belen Hernandez-Martinez 34 915 andRoger Spichiger 41 58 286 3794roger.spichiger@ch.ey.comSwitzerlandPhilip Vermeulen 41 58 286 3297phil.vermeulen@ch.ey.comTurkeyDamla Harman 90 212 408 5751damla.harman@tr.ey.comTurkeySeda Akkus 90 212 408 5252seda.akkus@tr.ey.comUAESanjay Jain 971 4312 9291sanjay.jain@ae.ey.comUKBrian Edey 44 20 7951 1692bedey@uk.ey.comUKNick Walker 44 20 7951 0335nwalker1@uk.ey.comUKShannon Ramnarine 44 20 7951 3222sramnarine@uk.ey.comUKAlex Lee 44 20 7951 1047alee6@uk.ey.comEurope, Middle East, India and Africa6 Insurance Accounting Alert May 2020
AmericasArgentinaAlejandro de Navarette 54 11 4515 2655alejandro.de-navarrete@ar.ey.comBrazilEduardo Wellichen 55 11 2573 3293eduardo.wellichen@br.ey.comBrazilNuno Vieira 55 11 2573 3098nuno.vieira@br.ey.comCanadaJanice Deganis 1 5195713329janice.c.deganis@ca.ey.comMexicoTarsicio Guevara Paulin 52 555 2838687tarsicio.guevara@mx.ey.comUSAEvan Bogardus 1 212 773 1428evan.bogardus@ey.comUSAKay Zhytko 1 617 375 2432kay.zhytko@ey.comUSATara Hansen 1 212 773 2329tara.hansen@ey.comUSARobert Frasca 1 617 585 0799rob.frasca@ey.comUSARajni Ramani 1 201 551 5039rajni.k.ramani@ey.comUSAPeter Corbett 1 404 290 7517peter.corbett@ey.comGrant Peters 61 2 9248 4491grant.peters@au.ey.comMartyn van Wensveen 852 3189 4429martyn.van.wensveen@hk.ey.comAustraliaKieren Cummings 61 2 9248 4215kieren.cummings@au.ey.comAustraliaBrendan Counsell 61 2 9276 9040brendan.counsell@au.ey.comChina (mainland)Andy Ng 86 10 5815 2870andy.ng@cn.ey.comChina (mainland)Bonny Fu 86 135 0128 6019bonny.fu@cn.ey.comHong KongDoru Pantea 852 2629 3168doru.pantea@hk.ey.comHong KongTze Ping Chng 852 2849 9200tze-ping.chng@hk.ey.comHong KongSteve Cheung 852 2846 9049steve.cheung@hk.ey.comHong KongMartyn van Wensveen 852 318 94429martyn.van.wensveen@hk.ey.comTaiwanAngelo Wang 886 9056 78990angelo.wang@tw.ey.comKoreaKeum Cheol Shin 82 2 3787 6372keum-cheol.shin@kr.ey.comKoreaSuk Hun Kang 82 2 3787 6600suk-hun.kang@kr.ey.comMalaysiaJeremy Lin 60 3 238 89036jeremy-j.lim@my.ey.comPhilippinesCharisse Rossielin Y Cruz 63 2 eVanessa Lou 65 6309 6759vanessa.lou@sg.ey.comHiroshi Yamano 81 33 503 1100hirishi.yamano@jp.ey.comNorio Hashiba 81 33 503 1100norio.hashiba@jp.ey.comToshihiko Kawasaki 81 80 5984 4399toshihiko.kawasaki@jp.ey.comAsia PacificJapan7 Insurance Accounting Alert May
May 20, 2020 · 6. Variable fee approach — applying the OCI option and the risk mitigation option together The IASB agreed with the staff recommendation to amend the requirements for the OCI option and risk mitigation option in the variable fee approach (VFA). The risk mitigation option allows
(a) IFRS 9 Financial Instruments (Part A); and (b) IFRS 15 Revenue from Contracts with Customers (Part B). Introduction 2 IFRS 17 is effective from 1 January 2021. An insurer can choose to apply IFRS 17 before that date but only if it also applies IFRS 9. 3 The paper considers components of IFRS 9 and IFRS 15 that are relevant to the
The International Accounting Standards Board is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRS Standards. For more information visit www.ifrs.org. Page 1 of 17 Agenda ref 2 STAFF PAPER May 2020 IASB meeting Project Amendments to IFRS 17 Paper topic Sweep issues
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