IFRS 17 – THE LATEST DEVELOPMENT AND SELECTED TECHNICAL ASPECTS

Petr Sotona

EY

+420 731 627 083, Petr.Sotona@cz.ey.com

Opatija, 9th November 2018

16 July CFO Forum submitted first letter to IASB and EFRAG

3 September EFRAG sent a letter to IASB

26/27 September Third Technical TRG meeting

03 October European Parliament adopted a Draft Motion to resolve IFRS 17 issues

16 October Various associations submitted a letter to IASB

17 October CFO Forum sent second letter to IASB and EFRAG

18 October Joint letter from EU regulators to the president of EFRAG

18 October EIOPA’s analysis of IFRS 17 Insurance Contracts

24 October IASB Board meeting discussing IFRS 17

26 October EFRAG’s response on the joint letter from EU regulators

1 November IASB moved next TRG meeting from 4 December 2018 to 4 April 2019

Recent IFRS 17 timeline and development

16 July CFO Forum submitted a letter to IASB

• Available here

• Asking to reopen the Standard to resolve issues and reduce its complexity

• Estimating 2 years delay

CFO Forum attacks

3 September EFRAG sent a letter to IASB

• Available here

• Pointing at number of concerns:

– Acquisition costs

– CSM amortization

– Reinsurance

– Transition

– Annual cohorts

– Balance sheet presentation

• Asking to further consider revision in these areas

EFRAG asks IASB for further considerations

26/27 September Third Technical TRG meeting

• Materials available here

• EY summary available here

• Discussed 10 questions

• Further 17 issues also answered

• Several questions related to the mechanics of applying IFRS 17, rather than the interpretation of the words in the standard

TRG discusses another issues

26/27 September Third Technical TRG meeting

Insurance risk consequent to an incurred claim

AP1

Determining discount rates using a top-down approach

AP2

Commissions and reinstatement premiums in reinsurance contracts issued

AP3

Premium experience adjustments related to current or past service

AP4

Cash flows outside the contract boundary at initial recognition

AP5

Recovery of insurance acquisition cash flows

AP6

Premium waivers

AP7

Group insurance policies

AP8

Industry pools managed by an association

AP9

Annual cohorts for contracts that share in the return of a specific pool of underlying items

AP10

TRG discuses another issues

03 October European Parliament adopted a Draft Motion to resolve IFRS 17 issues

• The Draft Motion was initially prepared by the Committee on Economic and Monetary Affairs and first released on 27 April 2018.

• It was subsequently amended (see Paragraph G and 5 in the text) to include issues raised by EFRAG in its letter to the IASB Chairman from 03 September.

• Full text available here

• This text basically represents an instruction from the European Parliament to the European Commission and to its various bodies (especially to EFRAG) to take into account certain aspects (or concerns) during the EU endorsement process of IFRS 17.

EU asks to address existing issues

16 October Various associations submitted a letter to IASB

• Letter available here

• Various associations jointly submitted a letter to the IIASB asking for a two years deferral of the effective date of IFRS 17:

– to allow for the necessary improvements to the standard;

– to allow adequate time for the wide range of companies required to apply the standard and meet its significant implementation challenges.

• No expectation that a delay will result in insurers stopping or slowing their implementation project.

Joint request asking for deferral

17 October CFO Forum sent second letter to IASB and EFRAG

• Letter not available online

• The issues being addressed in this letter are:

1. Acquisition cash flows

2. CSM amortization

3. Discount rates

4. Multi-component contracts

5. Reinsurance

6. Scope of hedging adjustment

7. Transition

8. Business combinations

9. Level of aggregation

10. Presentation issues

• Potential solutions for 10 issues identified during the previous testing and presented to EFRAG and IASB in July 2018.

• The presentation format:– Topic name

– Description of issue

– Implications of issue

– Explanation of the proposed solution

– Proposed amendments to IFRS 17 text to resolve issue

CFO Forum addressing issues

18 October EIOPA’s analysis of IFRS 17 Insurance Contracts

• Analysis available here

• Overall, the implementation of IFRS 17 as beneficial for the European public good.

• In other areas, EIOPA found that the solutions provided by IFRS 17 may not be perfectly designed to capture the economics of certain aspects of insurance and reinsurance contracts held and therefore may lead to further complexity of the financial statements.

• Certain issues may require further consideration in the IFRS 17 implementation.

EIOPA’s analysis of IFRS 17 (1/5)

18 October EIOPA’s analysis of IFRS 17 Insurance Contracts

EIOPA’s analysis of IFRS 17 (2/5)

18 October EIOPA’s analysis of IFRS 17 Insurance Contracts

EIOPA’s analysis of IFRS 17 (3/5)

18 October EIOPA’s analysis of IFRS 17 Insurance Contracts

Discount rate

• SII’s techniques and approaches for the volatility adjustment (VA) and matching adjustment (MA) may be used, taking into consideration IFRS 17-specific assumptions.

• The SII extrapolation method may need to be adjusted for IFRS 17, if relevant market inputs were found to make a significant difference.

Initial recognition

• The point in time at which insurance obligations are recognised under both frameworks is conceptually similar. practical impact of such differences is not expected to be significant.

Cash flows

• Cash flows and expenses included in the valuation of SII technical provisions are expected to be consistent with IFRS 17 in most cases.

EIOPA’s analysis of IFRS 17 (4/5)

18 October EIOPA’s analysis of IFRS 17 Insurance Contracts

Reinsurance

• Different approach: S2 takes a net view, whereas IFRS 17 presents ceded reinsurance as a separate reinsurance asset.

• The concept of reinsurance contracts‘ contract boundaries are different and the application of the different concepts may lead to differences in the valuation of reinsurance held between the two frameworks.

Risk adjustment

• S2 is conceptually different

• Nevertheless, for the practical implementation of IFRS 17, S2 principles, inputs and processes may be considered

• S2 risk margin can be considered for the purposes of IFRS 17 (it reflects the actual capital for regulatory purposes and entity’s own view on its exposures)

• Of course, IFRS 17 also allows for very different approaches.

EIOPA’s analysis of IFRS 17 (5/5)

18 October Joint letter from EU regulators to the president of EFRAG

• Three European Supervisory Authorities (ESA) “would have expected a more transparent decision-making process around the recent EFRAG Board letter to the IASB, which urges the IASB to change key building blocks of IFRS 17, and a more in-depth discussion of the technical analysis of EFRAG’s Technical Expert Group.”

• Letter available here

ESA’s asking for transparent process

26 October EFRAG’s response on the joint letter from EU regulators

• EFRAG clarifies its letter from September and based on IASB response decides further steps:

• If standard is not being changed, EFRAG will continue with DEA with some delay

• If the IASB re-opens the standard, the EFRAG will stop the endorsement process and will try to influence the potential changes of IFRS 17.

• If the new standard will be issued EOY 2019 / BOY 2020, the endorsement advice of the EFRAG is expected EOY 2020 (as the endorsement process will take another 12 months).

• Letter available here

EFRAG clarification

24 October IASB Board meeting discussing IFRS 17

• Materials available here

• EY summary available here

• Defined criteria for assessment of issues

• 25 topics discussed

Cover note

AP2

Summary of the TRG for IFRS 17 Insurance Contracts meeting held on 26–27 September 2018

AP2A

TRG for IFRS 17 Insurance Contracts Submissions Log

AP2B

Criteria for evaluating possible amendments to IFRS 17

AP2C

Concerns and implementation challenges

AP2D

IASB is open for IFRS 17 deferral / amendments

24 October IASB Board meeting discussing IFRS 17

IASB is open for IFRS 17 deferral / amendments

Suggested changes Preliminary reaction

1. Scope Potential

2. Level of aggregation Does not meet criteria

3. Acquisition cost deferral Potential

4. CSM discount rate Does not meet criteria

5. Subjectivity regarding risk adjustment and discount rate

Does not meet criteria

6. Risk adjustment in a consolidated group Does not meet criteria

7. CSM coverage period in general model Potential

8. Variable fee approach CSM Does not meet criteria

9. (PAA) Premiums Receivable Does not meet criteria

10. Business combinations Does not meet criteria

11. Business Combinations: contracts acquired during the settlement period

Does not meet criteria

12. Reinsurance contracts held Potential

13. Reinsurance contracts held and VFA Does not meet criteria

Suggested changes Preliminary reaction

14. Contract boundary of reinsurance contracts held

Does not meet criteria

15. Presentation in the statement of financial position

Potential

16. Presentation in the statement of financial position

Does not meet criteria*

17. Presentation in the statement of financial performance — use of OCI

Does not meet criteria

18. Scope of the variable fee approach Does not meet criteria

19. Interim financial statements Does not meet criteria

20. Effective date Potential

21. Comparative information Does not meet criteria

22. Effective date of IFRS 9 Unclear

23. Transition Does not meet criteria

24. Modified retrospective approach Potential

25. Transition: fair value transition approach with use of OCI option

Does not meet criteria*(could be mitigated through addressing issue 15)

14 November IASB Board meeting discussing IFRS 17

• Materials available here

• 2 questions for Board:

1. Given the Board plans to consider whether to explore amendments to IFRS 17, and in the light of the criteria for assessing any such potential amendment, whether the mandatory effective date of IFRS 17 should be deferred by one year, so that entities will be required to apply IFRS 17 for annual periods beginning on or after 1 January 2022.

2. If the Board were to defer the mandatory effective date of IFRS 17 by one year, whether the fixed expiry date for the temporary exemption to IFRS 9 in IFRS 4 should be amended so that all entities must apply IFRS 9 for annual periods beginning on or after 1 January 2022

Upcoming IASB meeting

Implications of exploring amendments to IFRS 17 for effective dates

AP2

Thank you for your attention!