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First Impressions: Amendments to IFRS 4

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First Impressions: Amendments to IFRS 4 Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts First Impressions IFRS September 2016 kpmg.com/ifrs Contents Reducing the impact of IFRS 9 1 1 At-a-glance summary 2 1.1 Temporary exemption from IFRS 9 2 1.2 Overlay approach 3 1.3 Key considerations 3 2 Overview 4 3 Temporary exemption 5 3.1 Who can apply it? 5 3.2 Activities predominantly connected with insurance 7 3.3 Reassessing predominance 9 3.4 Relief for investors in associates and joint ventures 10 4 Overlay approach 11 4.1 How does it work? 11 4.2 Designation of financial assets 11 4.2.1 Shadow accounting 13 4.2.2 Investments in associates and JVs 14 4.3 Costs and benefits of the verlayo approach 14 5 Other options 17 6 First-time adopters of IFRS 18 7 Disclosures 19 7.1 Objective 19 7.2 Temporary exemption 19 7.2.1 Disclosures on qualifying for the temporary exemption 19 7.2.2 Disclosures to provide comparability 20 7.3 Overlay approach 21 8 Effective and expiry dates, and transition 22 8.1 Effective and expiry dates 22 8.1.1 Amendments timeline 22 8.1.2 Temporary exemption 23 8.1.3 Overlay approach 23 8.2 Transition 24 About this publication 25 Keeping you informed 26 Acknowledgements 28 Reducing the impact of IFRS 9 The IASB’s amendments to IFRS 4 reduce the impact of the differing effective dates of the forthcoming insurance contracts standard and IFRS 9. Given the importance of asset and liability management within the insurance industry, the industry and users of financial statements raised significant concerns about the differing effective dates of the two standards – 2018 for IFRS 9 and probably 2020 or 2021 for the forthcoming insurance contracts standard. These include: – having to apply the IFRS 9 classification and measurement requirements before the adoption of the forthcoming insurance contracts standard; – potential temporary increases in accounting mismatches and volatility in profit or loss and other comprehensive income (OCI) created by the change in classification of financial assets; and – having two consecutive major accounting changes in a short period of time. These consequences would have resulted in added costs and complexity for both preparers and users of insurers’ financial statements. The IASB has responded with its amendments to IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts, which provide two optional solutions. One solution is a temporary exemption from IFRS 9, effectively deferring its application for some insurers. The other is an overlay approach to presentation to alleviate the volatility that may arise when applying IFRS 9 before the forthcoming insurance contracts standard. The amendments reduce the impact, but entities need to carefully consider their IFRS 9 implementation approach to decide if and how to use them. Both solutions include various complexities – such as the eligibility criteria for the temporary exemption – that may require detailed analysis and the use of judgement on the part of management. In this publication, we will take you through the amendments, pointing out areas of judgement and providing examples, to help you assess the potential impact on your business, and make meaningful and knowledgeable decisions when choosing your IFRS 9 implementation approach. Joachim Kölschbach KPMG’s global IFRS insurance leader KPMG International Standards Group © 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | First Impressions: Amendments to IFRS 4 1 At-a-glance summary 1.1 Temporary exemption from IFRS 9 Rather than having to implement IFRS 9 in 2018, some entities will IFRS 9 be permitted to continue applying IAS 39 Financial Instruments: Recognition and Measurement. Insurance standard Eligibility criteria An entity will be permitted to apply the temporary exemption if: 2018 2021 or earlier – it has not applied IFRS 9 before; and – its activities are predominantly connected with insurance. An entity’s activities are ‘predominantly connected with insurance’ if: – its liabilities arising from contracts in the scope of IFRS 4 are significant compared with its total liabilities; and – the ratio of its liabilities connected with insurance – including investment contracts measured at fair value through profit or loss (FVTPL) – compared with its total liabilities is: - greater than 90 percent; or - greater than 80 percent but less than or equal to 90 percent, and the entity does not engage in a significant activity unconnected with insurance. Effective date An entity is permitted to apply the temporary exemption for annual reporting periods beginning before 1 January 2021. Key impacts Judgement may be needed to complete the predominance assessment. To qualify for the temporary exemption, management may have to consider both qualitative and quantitative factors in determining whether the company meets the eligibility criteria. Applying the temporary exemption for companies within a group structure could result in companies preparing financial information under both IAS 39 and IFRS 9. If applicable, management will have to consider the costs and complexities of these situations at the group and stand-alone reporting levels. © 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. First Impressions: Amendments to IFRS 4 3 1 At-a-glance summary 1.2 Overlay approach FVTPL under IFRS 9 When applying IFRS 9, an entity will be permitted to reclassify between profit or loss and OCI the difference between the Impact of changes to amounts recognised in profit or loss under IFRS 9 and those that FVTPL under IFRS 9 would have been reported under IAS 39, for designated financial assets. An entity can designate eligible financial assets on an Adjusted P&L instrument-by-instrument basis. Eligibility criteria A financial asset is eligible for designation if: – it is not held for an activity that is unconnected with contracts in the scope of IFRS 4; and – it is measured at FVTPL under IFRS 9 but would not have been under IAS 39. Effective date An entity is generally permitted to start applying the overlay approach only when it first applies IFRS 9, including after previously applying the temporary exemption. Key impact Entities applying the overlay approach will have to produce and track IAS 39 and IFRS 9 values in parallel for designated financial assets. Entities will have to change their systems and processes to do this. 1.3 Key considerations The amendments will help entities manage accounting change. Entities can use the amendments to help them avoid some of the added costs and complexities that may result from the differing effective dates of IFRS 9 and the forthcoming insurance contracts standard. However, the amendments may also add other costs and complexities. The amendments can help reduce volatility in profit or loss and OCI. Entities that apply the amendments may be able to reduce the temporary increases in accounting mismatches and volatility that would arise in the statement of profit or loss and OCI if IFRS 9 were applied in 2018 without the amendments. Comprehensive management analysis will be needed to decide how to best use the amendments. Entities will have to consider the costs and benefits of the two optional solutions, and how effective each solution would be in mitigating any costs arising from the differing effective dates. They will also need to consider whether and how their peers will use the amendments, and the expectations and reactions of investors and other users of their financial statements. © 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | First Impressions: Amendments to IFRS 4 2 Overview The following diagram gives an overview of the key topics covered in the amendments. Amendments to 4IFRS Temporary exemption (3) Overlay approach (4) Who can apply it? (3.1) How does it work? (4.1) When and how to assess What financial instruments eligibility? (3.2–3) are eligible? (4.2) How is it applied for equity- What are the costs and accounted investments? (3.4) benefits? (4.3) What needs to be disclosed? (7.2) What needs to be disclosed? (7.3) Other options available to insurers (5) First-time adopters of (6)IFRS Effective and expiry dates, and transition (8) The diagram illustrates how key elements of the amendments are explained throughout this publication. The corresponding section numbers are in brackets. © 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. First Impressions: Amendments to IFRS 4 5 3 Temporary exemption 3 Temporary exemption 3.1 Who can apply it? IFRS 4.20B(b), 35A The IASB has allowed certain entities1 a temporary exemption from IFRS 9. It applies for those reporting entities whose activities are predominantly connected with insurance. IFRS 4.BC252, 260–263 The temporary exemption is applied at the reporting entity level – i.e. it applies to all financial assets and financial liabilities held by the reporting entity. Example – Applying the temporary exemption within a group Group Z includes three wholly owned subsidiaries and carries out activities both connected and not connected with insurance. Neither the group nor the subsidiaries have previously applied IFRS 9. At the group level, the group’s activities are considered predominantly connected with insurance. The details of the subsidiaries are as follows. Activities Issues stand- predominantly alone financial connected with Subsidiary statements? insurance? S Ye s Ye s T Ye s No U No No Group Z Group report– permitted to apply the temporary exemption Subsidiary S SubsidiaryT Subsidiary U Stand-alone report– Stand-alone report– No stand-alone permitted to apply has to apply IFRS 9 report– the temporary provides information exemption to Z consistent with Z’s accounting policies 1. The amendments are also available to issuers of financial instruments that contain a discretionary participation feature.
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