IASB issues amending Standard on transition to IFRS 17 Insurance Contracts
IASB issues amending Standard on transition to IFRS 17 Insurance Contracts
In December last year, the IASB issued a narrow-scope amendment to the transition requirements in IFRS 17 Insurance Contracts. These are contained in Initial Application of IFRS 17 and IFRS 9 – Comparative Information. The aim of the amendment is to improve the usefulness of information provided to investors by entities when they transition to the new accounting requirements for insurance contracts. IFRS 17 is effective for reporting periods beginning on or after 1 January 2023.
To date, many entities with significant insurance contract balances have applied the temporary exemption from applying IFRS 9 Financial Instruments: Recognition and Measurement available in IFRS 4 Insurance Contracts. This temporary exemption permits an insurer:
- That meets the criteria in paragraph 20B of IFRS 4 (including having activities that are predominantly connected to insurance) to apply IAS 39 Financial Instruments: Recognition and Measurement instead of IFRS 9
- To apply any ‘overlay approach’, whereby the insurer would reclassify between profit or loss and other comprehensive income an amount equal to the difference between the amount reported in profit or loss for designated financial assets applying IFRS 9 and the amount that would have been reported in profit or loss for those assets if the insurer had applied IAS 39.
This temporary exemption had been adopted to address concerns raised by constituents regarding the implications of insurers applying IFRS 9 before the new insurance contracts standard was in place, including:
- The accounting mismatches and temporary volatility that was likely to arise in profit or loss
- Preparers having to apply the classification and measurement requirements in IFRS 9 before the effects of the then (yet to be completed) insurance standard could be fully evaluated
- The costs imposed on insurers/users of having to implement/evaluate two sets of major accounting changes at the one time.
More recently, the IASB received feedback from constituents that for some insurers, the differing transition requirements in IFRS 17 and IFRS 9 may result in significant accounting mismatches only in the comparative information presented in the first financial statements prepared under IFRS 17.
In light of these concerns, the IASB reviewed the potential impacts of insurers applying IFRS 9 in the comparative period on the first-time application of IFRS 17 and decided to amend the transition requirements in IFRS 17 to apply a classification overlay for the purpose of presenting comparative information about financial assets.
Under the recent amendments to IFRS 17, an insurer can apply a classification overlay to comparative information on a financial-asset-by-financial-asset basis, provided that the information for the financial asset in question has not been restated for IFRS 9, in which case either:
- The insurer had chosen not to restate its comparative information for initial application of IFRS 9 (consistent with the applicable transition requirements in IFRS 9), or
- If the insurer had chosen to restate its comparative information for initial application of IFRS 9, the financial asset subject to the classification overlay had been derecognised during the prior period.
In applying the classification overlay, the amendments to IFRS 17 confirm that:
- The overlay is not permitted to be applied to a financial asset held in respect of an activity that is unconnected with contracts within the scope of IFRS 17
- The impairment requirements in IFRS 9 need not be applied
- Any difference between the previous carrying amount of a financial asset and the carrying amount at the transition date that results from applying the overlay is recognised in opening retained earnings (or another component of equity, as appropriate) at the transition date.
It is anticipated the Australian Accounting Standards Board (AASB) will shortly issue the IASB’s amending standard.