IASB discussions on IFRS 17 during board meeting on 11 December.
The IASB board met on 11 December to start the process of re-deliberating the proposed amendments as per the June 2019 Exposure Draft (ED). This was as per the plan set out in November which detailed how the board was going to approach feedback received on the ED. There are another two meetings expected in January and February at which the remaining topics will be discussed. Any discussion on effective date has been held back until February so as to be one of the last items to be discussed after all the more complex amendments have been discussed and decided on.
At this meeting eight topics were discussed and six amendments finalised.
The following six amendments were finalised without significant deliberation, this was as expected per the notes of the November meeting;
- Scope exclusions for loans as per the ED
- Contract Service Margin (CSM) attributable to investment services – coverage units for contracts with direct participation features
- Presentation of contract assets and liabilities at a portfolio level instead of at a group level
- Application of risk mitigation option for reinsurance contracts held
- Transition relief for contracts acquired in a business combination (pre IFRS 17 transition)
- Transition relief for the risk mitigation option – application from date of transition and option to apply FV approach
- Expected recovery of insurance acquisition cash flows
- The board confirmed the proposed amendments contained in the ED;
- Acquisition costs cash flows that are directly attributable to a group of contracts should be systematically and rationally allocated to that group and future groups of contracts (that include renewals of those contracts ). This would be in line with economics of such transactions keeping in view expected future renewals. No further guidance was provided on what would be a systematic and rational basis as this would be judgemental and expected to be entity specific.
- Confirmed the requirements of the impairment test where circumstances indicated that asset may be impaired. This would be a dual test; at a higher level for all acquisition costs against all contracts and then specifically the renewal acquisition costs against cash flows of renewal contracts.
- Reinsurance contracts held – recovery of losses
The board decided to extend its proposed amendment for recovery of losses to all reinsurance contracts held. This is a well-received change towards a more principled based approach to recognition of reinsurance contracts held and their function in mitigating risks.
The June amendment had noted that income would be recognised when an underlying group of onerous insurance resulted in a loss being recognised by the entity and that an entity would adjust the CSM for a group of reinsurance contracts held that provided proportional coverage.
The June ED had tried to address the previously raised concern of a fundamental accounting mismatch , however the feedback noted that the amendment proposed was very narrow and restricted to a range of reinsurance contracts.
The change now proposed to the June amendment means the scope has been broadened and applies to all reinsurance contracts held, hence both proportional and non-proportional would be considered when providing coverage to groups of underlying onerous contracts. This would mean day 1 losses would be offset by corresponding recovery and much more in line with expected cash flows.
- Clarified that this also applies when underlying insurance contracts are measured using the Premium Allocation Approach.
- Amended the related calculation of the income which now requires an entity to calculate it based on percentage of claims on underlying insurance contracts that are expected to be recovered from the reinsurance held.
- Confirmed that it would only apply where the reinsurance contract held has been recognised before or at same time as the loss is recognised on underlying insurance contracts.
I also take this opportunity to wish all of you a happy holiday season.