CIA (e)Bulletin/(e)Bulletin de l'ICA
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May 2014
 
 

IFRS Update

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By Denise Lang, FCIA

In the November 2013 (e)Bulletin, Mike Hale discussed the comments submitted by the CIA on the exposure draft (ED) on accounting for insurance contracts (International Financial Reporting Standard 4, or IFRS4). As Mike steps down as chair of the CIA Subcommittee on International Accounting and Actuarial Standards, and I take his place, we felt it was a good time to provide an update on IFRS developments.

The subcommittee has commented on two papers since providing comments on the ED in October. In January, we provided a response on the Conceptual Framework for Financial Reporting. The framework is not a standard but articulates concepts that assist in developing and revising the standards as well as in understanding and interpreting them. In February, we provided comments to the International Actuarial Association (IAA) on its draft statement of intent to issue an International Standard of Actuarial Practice – Actuarial Services in relation to IFRS4 Insurance Contracts (ISAP 4). The CIA subcommittee is very supportive of the IAA’s plan to issue a principle-based standard, which will focus on considerations rather than being prescriptive. Our comments on the IFRS4 ED and these additional papers can be found on the CIA website on the Committee on International Relations page.

The International Accounting Standards Board (IASB) has continued to meet every month. It is deliberating several standards in addition to IFRS4, which lengthens the time required to resolve issues. The IASB received comments on IFRS4 from many organizations. It has been reviewing the comments and discussing whether changes will be made to the ED. As a reminder, the main points emphasized in the CIA response to the IFRS4 ED are:

  • The use of Other Comprehensive Income (OCI) for insurance contracts should be optional;
  • For companies opting to use OCI, a simpler approach should be available for setting opening values for OCI and the Contractual Service Margin (CSM);
  • The mirroring concept should be made more broadly available;
  • Changes in risk adjustments should go through the CSM rather than through profit and loss; and
  • The additional complexity and system requirements arising from the standard make it imperative that there be sufficient lead time for implementation, and careful monitoring of progress in the interim.

Progress has been made in a few of the above areas; some are positive for Canadian insurers and some are not. The most significant positive change is that the IASB has tentatively decided to allow companies to choose whether to present the effect of changes in discount rates in profit and loss or in other comprehensive income (i.e., OCI is expected to be optional). However, for companies that choose to use OCI, the IASB is still expecting to require the use of discount rates that applied at the date the contract was initially recognized to determine the interest expense in profit and loss. Most Canadian insurance companies have traded large amounts of assets as interest rates have declined in recent years. As a result, in most cases, the asset rates at the time of purchase will be lower than liability rates at initial recognition since on average the liabilities are older than the assets. This would result in negative interest spreads through the income statement using OCI from initial recognition. It is possible that this will change as transition rules are developed but if not, it is expected that many companies will opt out of OCI accounting.

The IASB has tentatively decided on changes to the CSM to address the comments received. Changes in risk adjustments that relate to future coverage or other services will be offset in the CSM rather than going through profit and loss, subject to the condition that the CSM should not be negative. Changes in the risk adjustment related to coverage or other services provided in current and past periods should be recognized immediately. Also, favourable changes in estimates that arise on a portfolio that has previously had losses related to future coverage or services will be recognized in income to the extent that they reverse these past losses.

The IASB has tentatively decided to confirm the IFRS4 ED proposals related to insurance contract revenue and expense accounting. This is unfortunate since the proposals will increase complexity and will require substantial effort including major systems changes. The different presentation will create confusion relative to previous reporting and education will need to be provided to the financial statement users and analysts. Also, disclosure of the confidence level for the risk adjustment liability has been tentatively reaffirmed.

Although the IASB has continued to meet with the Financial Accounting Standards Board (FASB), they are not converging. In fact, the FASB is planning to enhance the U.S. Generally Accepted Accounting Principles rules rather than trying to converge with the IFRS. This is very disappointing and is a significant concern for companies selling business in the U.S.

The IASB expects to make changes to the mirroring and transition rules but has not yet addressed these areas. In April, it listed seven more topics that it will review before the issue of a final standard; these included "Discount rate for long-term contracts and unobservable market data", "Portfolio definition and unit of account", and "Asymmetrical treatment of reinsurance contracts". This effectively ring-fences the topics for future review with the expectation that everything else will be unchanged from the 2013 ED.

The IASB still plans to issue a final standard in 2015 and it has not changed the January 1, 2018, effective date. From a practical perspective, we feel that there should be more field testing than originally planned and the effective date will hopefully be deferred to allow sufficient testing as well as enough lead time for companies to prepare for implementation.

Denise Lang, FCIA, is Chair of the Subcommittee on International Accounting and Actuarial Standards.
 

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