Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

In July 2014, the IASB issued the completed version of IFRS 9 Financial Instruments which sets out the requirements for recognising and measuring financial instruments and replaces IAS 39 Financial Instruments: Recognition and Measurement. The mandatory effective date of IFRS 9 is 1 January 2018.

While the IASB is at an advanced stage of completing its project to replace IFRS 4 Insurance Contracts, it is highly likely that the mandatory effective date of that future Standard will be later than 2018.

In order to resolve the problems related with the misalignment of the above implementation dates the IASB has tentatively decided upon two alternative solutions: the deferral and overlay approaches. In July 2015 the IASB tentatively decided to amend IFRS 4 Insurance Contracts to permit an entity to remove from profit or loss and recognise in other comprehensive income the difference between (i) the amounts that would be recognised in profit or loss in accordance with IFRS 9 Financial Instruments and (ii) the amounts recognised in profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement for specified assets (i.e. the overlay approach). In addition, the IASB discussed in September 2015 the conditions for applying a deferral of IFRS 9.

On 9 December 2015, the IASB issued the Exposure Draft 2015/11 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts with a comment period ending on 8 February 2016.

The proposals in the ED were aimed to address the concerns related to the misalignment of the effective dates of IFRS 9 and the future insurance contracts standard. The IASB proposed:

• An option that would permit entities that issue contracts within the scope of IFRS 4 to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets (the overlay approach); and
• An optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4.

EFRAG published its draft comment letter to these proposals on 24 December 2015.

In its final comment letter EFRAG confirmed its view that as level a playing field as possible in the insurance sector in applying the temporary exemption from IFRS 9 was necessary. Also EFRAG considered that the temporary exemption from applying IFRS 9 should not be extended to banking activities that are material at the reporting entity level. EFRAG further elaborated its proposals as follows:

• the issuance of a significant amount of insurance contracts within the scope of IFRS 4 to be a necessary condition to apply the temporary exemption of IFRS 9;
• entities should be allowed to apply either a widened predominant activity criterion or a regulated entity criterion to identify whether the temporary exemption from applying IFRS 9 can be applied; and
• the temporary exemption from applying IFRS 9 can be applied either at or below reporting entity level.

EFRAG published its final comment letter on 15 February 2016 and the feedback statement on 14 March 2016.

The IASB published its final standard on 12 September 2016.

In the final standard the IASB confirmed the two optional solutions to address the concerns related to the misalignment between the effective dates of IFRS 9 and the future insurance contracts standard. In addition, the IASB provided more guidance on how to determine qualification for the temporary exemption from applying IFRS 9. The IASB did not allow however to apply the temporary exemption from IFRS 9 below reporting entity level.

EFRAG published its draft endorsement advice on 15 November 2016 and its final endorsement advice on 13 January 2017. In its endorsement advice EFRAG assesses that, in the specific circumstances arising from the misalignment of effective dates between IFRS 9 and the future insurance contracts standard, the proposed Amendments meet all the technical endorsement criteria. EFRAG also assesses that the Amendments address the main concerns of entities whose activities are predominantly related to insurance. On that basis, EFRAG assesses that adopting the Amendments would be conducive to the European public good.

EFRAG further considers that the Amendments do not address the cost concerns of many entities undertaking insurance activities that are not predominant insurers. EFRAG could not exclude that the Amendments could create a competition issue, but is not in a position to conclude whether this is material from an economic perspective.

Information on IFRS 9 can be found here: Related project

The effective date for the amendments is 1 January 2018. The amendments were published in the Official Journal on 3 November 2017.