IASB backs down with changes to IFRS 4 insurance contracts standard

9 Dec 2015

Following a raft of criticism of plans to roll out a revised IFRS for insurance contracts before the full implementation of the new financial instruments standard, IFRS 9, the International Accounting Standards Board (IASB) has published a consultation on proposals to amend the existing insurance contracts standard, IFRS 4 to provide temporary relief for company reporters with major insurance contract exposure

This is to address the temporary consequences of the different effective dates of IFRS 9, Financial Instruments, and the insurance contracts standard.

Both IFRS 9 (which was issued in July 2014 and has an effective date of 1 January 2018) and the new insurance contracts standard (which will replace IFRS 4 and have a later effective date) are relevant to companies that issue insurance contracts.

Company reporters have major concerns about the original proposals, which would mean that listed companies would have to apply IFRS 9 from 2018, but the new IFRS 4 is not due to be even issued until towards the end of 2016.

So for a few years, applying the new classification and measurement requirements of IFRS 9 would cause some insurers to suffer a mismatch in their treatment of assets and liabilities, and increased volatility in their profit and loss (P&L) account.

Many insurers have expressed concerns about the need to implement two significant changes in accounting on different dates. They have also highlighted that potential increased accounting volatility could arise in profit or loss if the new requirements for financial instruments were to be applied before the new requirements for insurance contracts.

As expected, a number of amendments have now been added to IFRS 4, very much in keeping with the recommendations from EFRAG when it recommended IFRS 9 to the European Commission for approval earlier this summer.

In order to balance the needs of stakeholders with the users of financial statements, the IASB has proposed the following amendments to IFRS 4.

These proposals supplement existing options within IFRS 4 that could be used to address any accounting volatility that may arise:

the overlay approach: an option for a company that issues insurance contracts to remove from profit or loss the incremental volatility in profit or loss caused by changes in the measurement of financial assets upon application of IFRS 9. This approach would be in place until the new Insurance Contracts Standard comes into force; and

the deferral approach: an optional temporary exemption from applying IFRS 9 that would be available to companies whose predominant activity is to issue insurance contracts. Such a deferral would be available until the new Insurance Contracts Standard comes into effect (but it could not be used after 1 January 2021).

The IASB has produced a snapshot explaining the two proposed amendments in more detail, available here.

The deadline for comments is 8 February 2016.

The Insurance Contracts: Exposure Draft is available here