Financial Services Ireland

IASB agrees amendments to IFRS 17 for seven sweep issues

At its May 2020 Board meeting, the IASB discussed seven “sweep issues” identified during the balloting process for finalising the amendments to IFRS 17, and agreed to certain amendments to IFRS 17, as follows:

An entity is to include in the initial measurement of the contractual service margin (CSM), the effect of the derecognition of any asset or liability previously recognised for cash flows paid or received before the related group was recognised, not limiting this to insurance acquisition cash flows only.
The asset for insurance acquisition cash flows that is recognised before a group of insurance contracts has been recognised should include future cash flows for which a liability has been recognised applying another IFRS standard.
When an entity has a group of onerous underlying insurance contracts, some of which are covered by reinsurance and some not, the entity has to determine how to calculate a loss recovery component to be included as part of its reinsurance held asset. The IASB agreed to require an entity to use a systematic and rational method of allocation to do this.
When an entity recognises in profit or loss, amounts related to income tax that are specifically chargeable to the policyholder under an insurance contract, it should recognise insurance revenue for the relevant part of the amount chargeable.
The definitions of the liability for remaining coverage and the liability for incurred claims have been amended to clarify that they include all obligations arising from insurance contracts issued.
The IASB agreed to amend the requirements for the risk mitigation option in the variable fee approach (VFA) to:
1. Specify that the accounting policy choice (in paragraphs 88-89 of IFRS 17) to present parts of insurance finance income or expenses (IFIE) in other comprehensive income (OCI) and parts in profit or loss does not apply to IFIE arising from the application of the risk mitigation option.
2. Add new requirements to the risk mitigation option to specify how to present IFIE arising from its application.
Clarify the wording in paragraph B96(c) of IFRS 17 that sets out requirements for the effects of investment components or policyholder loans unexpectedly paid or unexpectedly not paid.

How we see it

Whilst most of the sweep issues reflect relatively simple clarifications, a few of the issues represent more important changes, particularly the change regarding applying the OCI option and the risk mitigation option together under the VFA approach and the change regarding the identification of losses on underlying contracts for reinsurance held. The former change takes away an unintended barrier for using the OCI approach when the entity also plans to use the risk mitigation approach. The latter change deals with an important aspect of the recovery of losses through reinsurance held that is fairly common in practice.

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Thought Leaders

Ciara McKenna

FS Partner, Assurance, Insurance

James Maher

Insurance, Sector Leader

Growth

Insurance Accounting Alert - May 2020

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