IFRS 17, Insurance Contracts: where are we now?
This summer and early autumn we have seen multiple developments regarding IFRS 17, Insurance Contracts, which is currently scheduled to come into effect on 1 January 2021.
In July, the European Insurance CFO Forum (a discussion group for major insurance companies) sent a letter to the EFRAG President and IASB Chair recommending the re-opening of IFRS 17. The CFO Forum notes that this could delay the effective date of IFRS 17 by up to two years.
The CFO Forum has made this recommendation after identifying issues with IFRS 17, including difficulties with operational implementation. It has already reported these issues to EFRAG, supported by case studies carried out by various members of the CFO Forum. EFRAG is expected to address these findings as part of its ongoing work towards EU adoption of IFRS 17. In the letter, the CFO Forum also requests that more attention should be paid to interactions with IFRS 9 – Financial Instruments. The letter is available here: http://www.cfoforum.eu/letters/CFO-Forum-letter-to-EFRAG-and-IASB-16-July-2018.pdf.
At the beginning of September, EFRAG sent a letter to the IASB in its turn, with a view to opening discussions with the international standard-setter on the following six points (previously identified by the CFO Forum):
- acquisition costs (incurred in expectation of contract renewals);
- contractual service margin (CSM) amortization, particularly for contracts that include investment services;
- reinsurance (onerous underlying contracts that are profitable after reinsurance, contract boundary where underlying contracts are not yet issued);
- transition (extent of relief offered by the modified retrospective approach and challenges in applying the fair value approach);
- annual cohorts (cost-benefit trade-off, including for the variable fee approach (VFA) contracts);
- balance sheet presentation (cost-benefit trade-off of separate disclosure of groups in an asset position and groups in a liability position and non-separation of receivables and/or payables representing premiums already billed).
EFRAG’s letter is available here: https://www.efrag.org/News/Project-329/Letter-to-IASB-on-IFRS-17.
The fourth meeting of the IASB’s Transition Resource Group for IFRS 17, which addresses issues with transition to IFRS 17, took place at the end of September. The group discussed ten topics; a summary of the discussion is available on the IASB’s website via the following link: https://www.ifrs.org/-/media/feature/meetings/2018/september/trg-insurance/trg-for-ic-meeting-summary-september-2018.pdf.
Lastly, at the beginning of October the European Parliament adopted a resolution on IFRS 17, which can be found here: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2018-0372+0+DOC+XML+V0//EN&language=EN.
Among other things, the resolution draws attention to the fact that IFRS 17, if adopted, must meet the ‘European public good’ criterion and support long-term investment.
The final months of 2018 are likely to see further breaking news on IFRS 17, what with the IASB’s monthly discussions of the points raised in the letters mentioned above, and the fifth meeting of the TRG for IFRS 17, scheduled for the start of December. Meanwhile, EFRAG, which had initially expected to publish its IFRS 17 endorsement advice in the fourth quarter of 2018, has now removed any mention of an expected publication date from its website.
IAS 23: IFRS IC publishes two agenda decisions
At the end of its September meeting, the IFRS IC decided to publish two agenda decisions relating to IAS 23, Borrowing Costs.
The first decision relates to the amount of borrowing costs eligible for capitalization when an entity that initially has no borrowings is constructing a qualified asset, and borrows funds generally part-way through construction. The question was whether the entity should include expenditures for the asset before it obtained the general borrowings when determining the amount of borrowing costs eligible for capitalization.
In accordance with paragraph 17 of IAS 23, which stipulates when an entity should begin capitalizing borrowing costs, the Committee concluded that the entity would not begin capitalizing borrowing costs until it has obtained the general borrowings, but once it has obtained it, the entity does not disregard expenditures on the qualifying asset incurred before it obtains the general borrowings when determining the expenditures eligible for capitalization.
The second decision relates to the point at which an entity ceases capitalizing borrowing costs on land, when the land has been acquired in order to construct a building on it. The question was whether the entity should cease capitalizing borrowing costs incurred in respect of land expenditures once it starts construction of the building, or whether it should continue to capitalize them during construction.
The Committee concluded that if the land is not capable of being used for its intended purpose during the construction phase, the land and building should be considered together when determining when to cease capitalizing borrowing costs on land expenditures.
European Commission to discuss the future of corporate reporting
Following its ‘Fitness check’ consultation last March (see Beyond the GAAP no. 120, March 2018), the European Commission has announced that it will be hosting a conference on the future of corporate reporting in a digital and sustainable economy. The conference will take place on Friday 30 November 2018 in Brussels and will provide an opportunity to consider participants’ responses to the consultation and to have face-to-face discussions between different types of stakeholders (regulators, preparers and users of financial statements, civil society, etc.).
Details of the conference can be found here: https://ec.europa.eu/info/events/finance-181130-companies-public-reporting_en