amendments to ifrs 17 - deloitte united states...5 discount rates and ra 19 interim reporting...

Amendments to IFRS 17

The process and the amendments

Thomas Ringsted, 21 August 2019

2© Deloitte 2019

Agenda

• Background

• The amendments

• The process

• Deloitte products

3© Deloitte 2019

Background

Why change the standard

4© Deloitte 2019

IFRS 17 Topics

Issues raised based on stakeholder engagement

1Scope

Credit cards

15Asset Liability

position separately

8Limited risk mitigation

22Effective date

Deferral ofIFRS 9

2Level of

aggregation

9PAA premiums

received

16Presentationof premiumsreceivable

3Measurement Acquisition

CFs

17PresentationOCI option

10Business

combinationsClassification

23Transitionoptionality

4Locked-in

discount rates

11Business

combinationssettlement

period

18Scope of VFAtoo narrow

5Discount rates

and RA

19Interim

reportingaccounting estimates

12R/I held

initial recognition

24Transition

MRA

6RA at group

level

13R/I held

eligibility ofVFA

20Effective date

1.1.2022

7CSM coverage units in BBA

21Effective datecomparatives

14R/I held

CFs of future contracts

25Transition

FVAOCI

5© Deloitte 2019

IFRS 17 Topics


Scope

Measurement

Presentation

Transition

Other

1Scope

Credit cards

15Asset Liability

position separately


22Effective date

Deferral ofIFRS 9

2Level of

aggregation

9PAA premiums

received



CFs


10Business



4Locked-in

discount rates

11Business


period


5Discount rates

and RA

19Interim


12R/I held

initial recognition

24Transition

MRA

6RA at group

level

13R/I held

eligibility ofVFA

20Effective date

1.1.2022



14R/I held


25Transition

FVAOCI

6© Deloitte 2019

IFRS 17 Topics


CFO Forum

EFRAG

CFO Forum & EFRAG

Other

1Scope

Credit cards

15Asset Liability

position separately


22Effective date

Deferral ofIFRS 9

2Level of

aggregation

9PAA premiums

received



CFs


10Business



4Locked-in

discount rates

11Business


period


5Discount rates

and RA

19Interim


12R/I held

initial recognition

24Transition

MRA

6RA at group

level

13R/I held

eligibility ofVFA

20Effective date

1.1.2022



14R/I held


25Transition

FVAOCI

7© Deloitte 2019

IFRS 17 Topics


IASB criteria for amending the standard

The Board has defined three fundamental criteria to guide its decision on which of the proposed changes raised by the stakeholders will be included in the exposure draft. The 16 issues raised that were not included in the exposure draft did not fulfil one or more of them.

No fundamental

change of principles

No significant loss

of information

Undue disruption to

implementation

• Any amendments to the existing standard must not change any fundamental principles of the standard. For instance, excluding cash flows of reinsurance contracts held relating to underlying direct contracts not yet issued would go against the fundamental principle of including all cash flows in the measurements.

• They must not result in any significant losses of information to the users of the financial reports. For example, changing the level of aggregation could result in critical information about trends in the entity’s profitability and delayed recognition of losses on onerous contracts.

• They must not significantly disrupt any implementation work already performed. Requiring, rather than merely permitting insurance finance income and expenses to be presented either entirely in P/L or partly OCI, for the purpose of improving comparability, would likely require considerable rework by future preparers.

8© Deloitte 2019

IFRS 17 Topics


1Scope

Credit cards

15Asset Liability

position separately


22Effective date

Deferral ofIFRS 9

2Level of

aggregation

9PAA premiums

received



CFs


10Business



4Locked-in

discount rates

11Business


period


5Discount rates

and RA

19Interim


12R/I held

initial recognition

24Transition

MRA

6RA at group

level

13R/I held

eligibility ofVFA

20Effective date

1.1.2022



14R/I held


25Transition

FVAOCI

Amended

Partly considered in the ED

Unchanged

9© Deloitte 2019

IFRS 17 timeline

2007Discussion paper Preliminary views on Insurance Contracts

2013Exposure DraftInsurance Contracts

1997IASC starts project on insurance contracts

2022IFRS 17 RevisedBecomes effective

2010Exposure DraftInsurance Contracts

2017-2021Preparation for the new standard

2004IFRS 4 Insurance Contracts‘Phase I’ Interim standard issued

2017IFRS 17PublicationMay

2016IFRS 4 Insurance Contracts amendmentApplying IFRS 9 with IFRS 4 Insurance Contracts

Phase I Phase II EffectiveImplementation

Source: IFRS Insurance Contracts Standard - The need for change and the history of the project

2018-2019TRG4 meetings

2020EU endorsementDraft

1H 2020IFRS 17 and IFRS 4 Insurance Contracts amendments

2H 2020EU endorsementEFRAG and ARC

2021Transition date

2019Exposure draftInsurance Contracts

10© Deloitte 2019

The amendments

The suggested changes to the standard

11© Deloitte 2019

Top four amendments

Deferral to 2022One-year deferral of the effective date of IFRS 17 from 1 January 2021 to 1 January 2022

1Acquisition costs for renewalsPart of acquisition cash flows can now be allocated to expected contract renewals by recognising a pre-coverage asset

2

CSM allocation relating to investment servicesInvestment services must be considered when determining coverage units

3 Reinsurance gain for day 1 onerous groupsGains from proportionate reinsurance contracts held must be taken to P&L when initially recognizing a group of onerous contracts

4

12© Deloitte 2019

1: Deferral to 2022

Issue and Amendment

Issue

IFRS 17 represents a significant change in accounting.

The entities have experienced both that the implementation was more time consuming than expected combined with more limited availability than expected of internal or third party experts, particularly actuaries and IT systems providers.

The IASB granted the extension because of their decision to amend IFRS 17. The new date is calibrated on the IASB process not the need of implementation programmes.

C1, D

IFRS 4.20A-20B

Amendment

• The effective date of IFRS 17 is moved from 1 January 2021 to 1 January 2022.

➢ There must be 2021 restated comparative information.

• The expiry date of the temporary exemption in IFRS 4 from applying IFRS 9 is extended by a year for consistency.

➢ Had the temporary exemption not been extended in parallel, some entities would have to implement IFRS 9 with changes to classification and measurements of financial assets and be able or required to do it again the following year with the application of IFRS 17.

January 1, 2020

January 1, 2021

January 1, 2022

Transition date IFRS 17 Effective date

IFRS 9Expiry date of exemption

13© Deloitte 2019

2: Acquisition costs for renewals (1/5)

Issue and amendment

Issue

TRG discussion highlighted the original IFRS 17 treatment of acquisition costs would not allow the recognition of a pre-coverage asset if the cost was entirely attributable to a group of contracts (e.g. a commission payment).

When these commissions were paid in anticipation of future renewals the first group of contracts would be onerous.

28A-28.D, 105A-105C

B35A-B35C, B65(e)

Amendment

28A … the entity shall allocate insurance acquisition cash flows to a group of insurance contracts on a systematic and rational basis applying paragraph B35A.

B35A … an entity allocates insurance acquisition cash flows that are directly attributable to a group of insurance contracts:

a) to that group; and

b) to groups that include insurance contracts that are expected to arise from renewal of the insurance contracts in that group.

Observation

From the amendment follows that pre-coverage assets can now include all types of acquisition cash flows, even if they are determined with reference to a single contract.

The amended pre-coverage asset include all of the acquisition cash flows that at the reporting date have not yet been attributed to a group of contracts. This asset is subject to an assessment and possible impairment test. An impairment loss (or its reversal) must be recognized in the P&L and the carrying amount adjusted accordingly (B35B-C).

14© Deloitte 2019


Example - Setup

Year 2020 2021 2022 2023

Premium 100 100 100 100

Claims 78 78 78 78

Expenses 8 8 8 8

Acquisition expenses 8 4 4 4

Risk Adjustment 8 8 8 8

1. Consider a group of contracts first signed on 12 December 2019 and paid on 1 January 2020.

2. Contract duration is one year.

3. We expect both some renewals as well as new contracts to be issued during the subsequent years. This explains the development of acquisition expenses.

4. We will give two examples: a) One where the costs are recognized as they are paid on 12 December 2019b) Implementing the amendment and deferring acquisition costs related to renewal.

1

2

Year 2020 2021 2022 2023

Acquisition expenses paid 8 4 4 4

Acquisition expenses deferred 5 5 5 5

a

b

15© Deloitte 2019


Example a - The first year

Ex. a: PAID

Year 2019 2020

Quarter 4Q 1Q 2Q 3Q 4Q

Insurance revenue 25,0 25,0 25,0 25,0

Incurred expenses -2,0 -2,0 -2,0 -2,0

New claims, best estimate -19,5 -19,5 -19,5 -19,5

New claims, risk adjustment

Incurred claims and expenses -21,5 -21,5 -21,5 -21,5

New onerous business -2,0 0,0

Reversal of loss component 0,5 0,5 0,5 0,5

Onerous contracts -2,0 0,5 0,5 0,5 0,5

Acquisition expenses -2,0 -2,0 -2,0 -2,0

Insurance service expenses -2,0 -23,0 -23,0 -23,0 -23,0

INSURANCE SERVICE RESULT -2,0 2,0 2,0 2,0 2,0

ASSET

Pre-coverage asset 0,0 6,0 4,0 2,0 0,0

1. In Ex. a we recognize a loss the first year.

2. As we do not consider the acquisition cash flows to be a pre-coverage asset no cost is deferred to the following year.

3. The group of contracts from 2020 will not be onerous, and thus we do not need to take a loss on initial recognition. There is no new onerous business.

2

1 3

16© Deloitte 2019


Example b - The first year

Ex. a: PAID Ex. b: DEFERRED

Year 2019 2020 2019 2020

Quarter 4Q 1Q 2Q 3Q 4Q 4Q 1Q 2Q 3Q 4Q

Insurance revenue 25,0 25,0 25,0 25,0 25,0 25,0 25,0 25,0

Incurred expenses -2,0 -2,0 -2,0 -2,0 -2,0 -2,0 -2,0 -2,0

New claims, best estimate -19,5 -19,5 -19,5 -19,5 -19,5 -19,5 -19,5 -19,5

New claims, risk adjustment

Incurred claims and expenses -21,5 -21,5 -21,5 -21,5 -21,5 -21,5 -21,5 -21,5

New onerous business -2,0 0,0 0,0 0,0

Reversal of loss component 0,5 0,5 0,5 0,5 0,0 0,0 0,0 0,0

Onerous contracts -2,0 0,5 0,5 0,5 0,5 0,0 0,0 0,0 0,0 0,0

Acquisition expenses -2,0 -2,0 -2,0 -2,0 -1,3 -1,3 -1,3 -1,3

Insurance service expenses -2,0 -23,0 -23,0 -23,0 -23,0 0,0 -22,8 -22,8 -22,8 -22,8

INSURANCE SERVICE RESULT -2,0 2,0 2,0 2,0 2,0 0,0 2,3 2,3 2,3 2,3

ASSET

Pre-coverage asset 0,0 6,0 4,0 2,0 0,0 0,0 6,8 5,5 4,3 3,0

1. The release of acquisition expenses is different from the first example as 5 are recognized during 2020

2. As the expenses are evenly split, the groups are no longer onerous and no loss is recognized

3. The asset is also larger than in Ex. a, as part of the acquisition costs are pushed to the following years

22

1

3

Note: Recognition of acquisition cash

flows as expenses is an accounting

choice when applying PAA for contracts

no longer than one year.

17© Deloitte 2019


Example - Development of service result over four years

• The main difference is the initial recognition in 2019 Q4. Ex. 1 is onerous and Ex. 2 is not.

• The total Insurance Service Result after the 4 years is the same for the two examples.

• In example 2 the deferred acquisition costs will be recognized as an asset until contract renewals are recognized

Observation

It would appear that pre-coverage assets are required in all cases and the PAA policy choice applies to the amount allocated to the group of contracts when it comes in existence (i.e. choice between the amortization or the recognition as an expense to P&L as it is allocated).

The amendment leaves open the measurement of time value of money for the expected profits from future groups of contracts that would have to be considered if the facts and circumstances indicate that the pre-coverage asset may be impaired.

18© Deloitte 2019

3: CSM allocation relating to investment services (1/3)

Issue and amendment

Issue

The share of the CSM recognized in the P&L corresponds to the share of coverage units allocated in the period.

Coverage units are determined by assessing:

1. Quantity of benefits provided

2. Expected duration of the benefits

This method does not take into account that for some contracts the insurance coverage period is shorter than the period in which the policyholder gets an investment return on his benefits (benefits are asset-dependent).

Insurance coverage

Investment related services/Investment return service

Contract A

1 January Year 1

1 January Year 2

Period with CSM release before amendment

Period with CSM release after amendment

Amendment

• For direct participating contracts the coverage period and coverage units now take into account the quantified benefits and expected periods in which the entity provides investment related services.

• For other contracts one must now consider both insurance coverage as well as investment-return services when determining the coverage units.

44-45

B119(a)-(c) , B119A-B119B

Note: Costs the entity will incur in providing an investment-

return service or investment-related service is now included

in B65 among cash flows within the boundary of an

insurance contract.

19© Deloitte 2019


Example - Setup

1. We assume a negative interest rate of -1%, and an expected investment return of 0%.

2. First premium payment and start of coverage period is 1 January 2020.

3. In the case that insured dies before retirement, the insurance company pays the premium for the following years (Waiver of Premium).

4. At the time of retirement the savings are transformed to an annuity, whether or not insured is alive. From then on, there is no insurance coverage in the contract, and the beneficiary is entitled to withdraw the money.

Year 2020

Age 60

Retirement Age 65

Expenses 10

2

Economics

Interest rate -1%

Expected investment return 0%

Annual premium until retirement 2500

Annual Fee 50

1

Contract

Insurance coverage

Investment return service

1 January 2020 Age 60



20© Deloitte 2019


Example - Setup

1. For the release of CSM under the original standard, the coverage units are determined from the cumulative expected payment resulting from the Waiver of Premium

2. In the amended release we use both the above, as well as the positive investment return as coverage units, i.e. 1% (difference between 0% and -1%) of the savings.

1

Initial recognition of CSM: 402,5

21© Deloitte 2019

4: Reinsurance gain for onerous groups (1/3)

Issue and amendment

Issue

When recognizing a loss from a group of onerous contracts at initial recognition, a possible gain from reinsurance contracts is not recognized.

The gains from reinsurance contracts are recognized over the coverage period.

This can lead to an accounting mismatch

Amendment

• A gain (or loss) from a reinsurance contract shall be recognized in the P&L on initial recognition if:

i. the group of underlying contracts are onerous on initial recognition

ii. the coverage is proportionate

iii. the reinsurance contracts are entered into before the underlying contracts are issued

62-66B

B119C-B119F

22© Deloitte 2019


Example - setup

1. A reinsurance contract is held with 100% proportionate coverage for both premium and claims

2. In December 2019 we sign a group of contracts with a two year coverage period beginning from January 1, 2020 with premium payments beginning of year

3. The loss component of the group is 20

4. Calculation of the Reinsurance CSM represents the difference from the original IFRS 17

5. The gain from reinsurance recognized in P&L is the proportionate coverage times the loss recognized: 100%*20

Year 2020 2021

Premium 100 100

Claims 110 110

2

Reinsurance

Proportiante coverage 100%

1

Initial recognition

Premiums 200

Claims -220

Loss component -20

3Reinsurance CSM IFRS 17

IFRS 17 –with

amendments

RI premiums -200 -200

RI recovered claims 220 220

CSM adjustment - -20

CSM 20 0

4

5

23© Deloitte 2019


Example – Result

1. In the original IFRS 17 the CSM of 20 is evenly spread over the coverage period

2. Same is true for the amended IFRS 17, but the CSM is now 0

3. The adjustment is recognized as we recognise the underlying group of onerous contracts

IFRS 17 IFRS 17- with amendments

Year 2019 2020 2021 2019 2020 2021

4Q EoY EoY 4Q EoY EoY

Insurance revenue 100 100 100 100

Incurred claims and expenses -120 -120 -120 -120

Onerous contracts -20 20 20 -20 20 20

Insurance service expenses

Insurance contracts results -20 0 0 -20 0 0

Expected reinsurance recovery -110 -110 -110 -110

CSM adjustment and release 10 10 20 0 0

Reinsurance premium -100 -100 20 -110 -110

Recovered from reinsurance 110 110 110 110

Net expenses from reinsurance contracts

0 10 10 20 0 0

INSURANCE SERVICE RESULT -20 10 10 0 0 0

1 23

Observation

The amendment evens out the loss, as this is covered by reinsurance

24© Deloitte 2019

Other amendments of a more marginal nature

1

2

3

4

Optional scope exclusion for loan contracts that transfer significant insurance riskLoan contracts that transfer significant insurance risk is defined as an insurance contract under IFRS 17 that includes both a loan and a insurance component. Preparers would be allowed to apply either IFRS 9 or IFRS 17 to the entire contract, at a portfolio level.

Optional scope exclusion for credit card contracts that provide insurance coverageSome credit cards provide insurance cover for a fixed fee. Preparers that apply IFRS 9 to these contracts would have to account for the under IFRS 17 when it becomes effective. The proposed amendment would mean that the fee income would be recognised under other relevant standards.

Extension of the risk mitigation option to include reinsurance contracts heldEntities that recognise losses on onerous insurance contracts at initial recognition would also recognise a gain on reinsurance contracts held, to the extent they cover losses on a proportional basis and are entered into before the underlying onerous contracts are issued.

Simplified presentation of insurance contracts in the statement of financial positionThe future preparers would be allowed to present insurance contract assets separately from insurance contract liabilities after having aggregated the contracts at a portfolio level, rather than at a group level.

5Transition relief for business combinationsThe proposed change clarifies that entities are expected to prepare accounting estimates when determining the business combination amounts at transition to IFRS 17. Also, all liabilities for claims settlement acquired in a BusCom accounted for as a LIC, if required info is not available.

6Transition relief for the date of application of the risk mitigation option and the use of the fair value transition approachThe so called risk-mitigation option is available from the transition date (i.e. 1 Jan 2021), rather than from date of initial application (1 Jan 2022), if risk-mitigation relationship is designated then.

Note that some reliefs, options, exemptions and exceptions require that certain preconditions and criteria are fulfilled.

26© Deloitte 2019

IASB – What’s next

Timeline

IFRS 17 issued

Exposure Draft of

proposed

amendments to

IFRS 17

Deadline for

comments on

proposed

amendments to

IFRS 17

Expected

finalisation of

amendments to

IFRS 17

Effective date

(IFRS 17

including

proposed

amendments)

18 May 2017 26 June 2019 25 September 2019 Mid-2020 January 2022

IASB – International Accounting Standards Board

The Board only accepts

comments on the matters

adressed in the Exposure draftAll comments will be considered

and the Board’s responses to

them will be discussed in public

TODAYEFRAG endorsement advice

See next slide

Source: “Snapshot: Amendments to IFRS 17”, June 2019, IFRS Standards

27© Deloitte 2019

European Union endorsement of IFRS 17

EFRAG provides endorsement advice

Commission asks EFRAG for

endorsement advice

October 2017

EFRAG draft endorsement advice

1Q 2020

EFRAG endorsement advice

2Q 2020

Accounting Regulation Committee

votes on adoption

European Union adopts IFRS Standard

• IFRS 17 is currently being discussed in European Financial Reporting Advisory Group (EFRAG)

• EFRAG provides endorsement advice on IFRS 17

• The endorsement will then be voted on

Thomas Ringsted is a member of EFRAG IAWG

Andrew Spooner is a member of EFRAG TEG

Laurence Rivat is a member of EFRAG Board

Criteria for endorsement

• Give a true and fair view of assets, liabilities, financial position and profit or loss

• Conducive to the European public good

• Meet criteria of understandability, relevance, reliability and comparability

Endorsement advice includes an impact analysis, cost-benefit analysis and analysis of broader economic impact

A case study is being prepared to assess the impact of adopting IFRS 17 for the European insurance companies

28© Deloitte 2019

CFO Forum – 3 key issues

Not accepted by the IASB in the ED

1. Level of aggregation

Remove requirement of grouping by annual

cohorts for

• for mutualised business

• and at transition

2. Transition

• Further relief to MRA

• Extend OCI to General model

• Relief for acquired portfolios

• Allow to apply ”risk mitigation option”

retrospectively

3. Presentation

• Eliminate differences between interim group

and solo reporting

• No comparitive information for IFRS 17 in the

first financial statements

BC173-BC179

The board specifically focuses on the

consequence this would have for CSM.

CSM would for example be split over several

generations ”..., resulting in the loss of useful

information about trends in profitability.”

BC125, BC137-BC146, BC162

• Partially met

• Not met (BC137-BC138). The Board notes

among other things reduced comparability and

potential subjectivity

• Partially met (BC162)

• Not met (BC125), as doing so would ”…give

rise to the risk of the use of hindsight.”

BC214-BC216 & BC117

• This would ”…add complexity for both

preparers and users .. and .. reduce

comparability among entities”

• The Board views “…comparative information ..

as necessary to allow users of financial

statements to assess the effects of applying

IFRS 17 for the first time”

Sources: “Basis for Conclusions on Exposure Draft Amendments to IFRS 17”, June 2019, IASB“IFRS 17 Priorities”, June 2019, CFO Forum

30© Deloitte 2019

Deloitte products

Planning1 TrainingBusiness Impact Assessment Tool (BIAT)

2 3Financial Impact Assessment Tool (FIAT)

4

We have extensive knowledge of the impact on systems, data and processes and can assist you in designing a proper project organisation to engage the activities in a timely manner.

We can help you mobilise, secure funding, plan and PMO.

We can help you with both initial training and specialist questions on IFRS 17 and interactions with current GAAP, Solvency II and your business model.

Our two-day boot camp is an effective way to bring common understanding and insights to different business units in your organisation

We have captured the IFRS 17 technical requirements against the operating model dimensions of insurers, in our proprietary Business Impact Assessment Tool (BIAT).

It which contains several structured and interdependent questionnaires and checklists. The BIAT contains over 500 questions where all dimensions are tested.

FIAT is an Excel-based cash flow model which generates outputs that will help you to:

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31© Deloitte 2019

Contact details

Thomas Ringsted

Deloitte Nordic IFRS Insurance Lead Partner

+45 27 14 20 44

[email protected]

Deloitte Insights into IFRS Insurance (i2ii)

www.deloitte.com/i2ii

Insurance Centre of Excellence:

[email protected]

https://www.iasplus.com/en/publications/global/ifrs-in-focus/2019/iasb-ifrs-17-ed

mailto:[email protected]

https://www2.deloitte.com/global/en/pages/financial-services/topics/insurance-ifrs.html

http://www.deloitte.com/i2ii

mailto:[email protected]

32© Deloitte 2019

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