Three new IFRIC agenda decision may affect accounting for your insurance contracts and financial instruments

IFRS Interpretations Committee (the Committee) agenda decisions are those issues the Committee decided not to take onto its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS should be aware of these decisions, as they could impact how particular transactions and balances are accounted for.

In the addendum to the update from its September 2023 meeting, the Committee issued three final agenda decisions:

Guarantee over a derivative contract

Fact pattern

A guarantee contract is written over a derivative contract between two unrelated parties.

The guarantee is that in the event of default, the guarantor would reimburse the holder of the guarantee for the actual loss incurred up to the close-out amount.

The close-out amount is determined based on a valuation of the remaining contractual cash flows of the derivative immediately prior to default.

The agenda decision addresses the question of whether the guarantee contract is accounted for as a financial guarantee or a derivative.

The Committee noted that the matter is not widespread, and when the matter does arise, the amounts involved are not material. The Committee therefore decided not to add a standard-setting project to its work plan.

Homes and home loans provided to employees

Fact Pattern 1 – Employee home ownership plans

An employer provides an employee with a house that the employer constructs and owns. The employer is selling the home to the employee, and the employee has a proportion of their base salary deducted each month until the house’s total price has been repaid.

If the employee leaves within five years, they forfeit their rights to the house, and will recover all salary deductions made to date.

If the employee leaves after five years, they have the choice to either:

  • Forfeit their rights to the house and recover all salary deductions made to date
  • Keep the house and repay the outstanding balance.

Fact Pattern 2 – Employee home plans

An employer provides an employee with a loan to buy a house. The employee chooses and purchases the house, and owns the house.

The employer provides a loan at a below-market interest rate (often interest-free).

The employee repays the loan through salary deductions.

If the employee leaves for any reason, the outstanding loan balance becomes repayable.

The submission asked how an entity accounts for these two types of transactions. Unfortunately, the agenda decision did not offer any insights and concluded that the matters described in the request do not have widespread effect. As a result, the Committee decided not to add a standard-setting project to its work plan.

Premiums receivable from an intermediary

Fact pattern

An intermediary (e.g. an insurance broker) acts as a link between an insurer and a policyholder to arrange for an insurance contract.

The policyholder pays premiums to the intermediary, but the insurer has not yet received the cash from the intermediary.

The intermediary is allowed to pay the premiums to the insurer at a later date.

The insurer is obliged to provide insurance contract services from the date that the policyholder pays the premiums to the intermediary.

If the intermediary fails to pay the premiums to the insurer, the insurer cannot:

  • Recover the premiums from the policyholder
  • Cancel the insurance contract.

The agenda decision deals with the question of whether the premiums receivable from the intermediary are:

  • Future cash flows within the boundary of an insurance contract, and included in the measurement of the group of insurance contracts applying IFRS 17 Insurance Contracts, or
  • A separate financial asset recognised under IFRS 9 Financial Instruments?

The agenda decision outlines two possible views regarding premiums receivable from the intermediary:

  • View one – They are future cash flows within the boundary of an insurance contract (IFRS 17)
  • View two – They are a separate financial asset (IFRS 9).

You can find further discussion and analysis in the agenda decision.

The Committee concluded that the insurer should develop and apply an accounting policy following the hierarchy in IAS 8 Accounting Policies, Changes in Estimates and Errors, paragraphs 10-12, and must apply related disclosures from the relevant standard applied.

What is the effective date for IFRIC agenda decisions?

IFRIC agenda decisions do not have application dates. If they are relevant, the ‘rule of thumb’ is that accounting policy changes resulting from IFRIC agenda decisions must generally be adopted in the next set of financial statements. Please consider these when preparing your 31 December 2023 half-year and annual financial statements.

Need help?

Please contact BDO’s IFRS & Corporate Reporting team if you need help implementing these IFRIC agenda decisions.