The IASB decided to allow these existing practices continue because:
• they wished to avoid insurers making systems changes for IFRS 4 that might need
to be reversed by what became IFRS 17. In the IASB’s opinion the disclosures about
the intangible asset provide transparency for users;
• IFRS 4 gives no guidance on how to determine fair values (although IFRS 13 does
not exclude insurance contracts from its scope – see 9.1.1.B below); and
• it might be difficult for insurers to integrate a fair value measurement at the date of
a business combination into subsequent insurance contract accounting without
requiring systems changes that could become obsolete as a result of IFRS 17.
[IFRS 4.BC148].
An insurer acquiring a portfolio of insurance contracts (separate from a business
combination) may also use the expanded presentation described above. [IFRS 4.32].
An illustration of how a business combination might be accounted for using the
expanded presentation is given below.
Example 51.32: Business combination under IFRS 4
Insurance entity A purchases an insurance business owned by Entity B for €10 million. Under A’s existing
accounting policies for insurance contracts the carrying value of the insurance contract liabilities held by B
is €8 million. Entity A estimates the fair value of the insurance contract liabilities to be €6 million. The fair
value of other net assets acquired, including intangible assets, after recognising any additional deferred tax,
is €13 million. The tax rate is 25%.
This gives rise to the following journal entry to record the acquisition of B in A’s consolidated financial statements:
€m €m
Cash
10.0
Present value of in-force (PVIF) business intangible (£8m less £6m)
2.0
Carrying value of insurance liabilities (A’s existing accounting policies)
8.0
Goodwill 3.5
Other net assets acquired
13.0
Deferred taxation on PVIF
0.5
The intangible asset described at (b) above is excluded from the scope of both IAS 36
and IAS 38; instead IFRS 4 requires its subsequent measurement to be consistent with
the measurement of the related insurance liabilities. [IFRS 4.33]. As a result, it is
generally amortised over the estimated life of the contracts. Some insurers use an
interest method of amortisation, which the IASB considers is appropriate for an asset
that essentially comprises the present value of a set of contractual cash flows.
However, the IASB considers it doubtful whether IAS 38 would have permitted such
a method, hence the scope exclusion from IAS 38. This intangible asset is included
within the scope of the liability adequacy test discussed at 7.2.2 above which acts as a
quasi-impairment test on its carrying amount and hence is also excluded from the
scope of IAS 36. [IFRS 4.BC149].
Insurance contracts (IFRS 4) 4347
Generali is one entity that uses the expanded presentation discussed above and its
accounting policy for acquired insurance contracts is reproduced below.
Extract 51.11: Assicurazioni Generali S.p.A. (2016)
Notes to the consolidated financial statements [extract]
Balance sheet – Assets [extract]
Contractual relations with customers – insurance contracts acquired in a business combination or portfolio transfer [extract]
In case of acquisition of life and non-life insurance contract portfolios in a business combination or portfolio transfer, the Group recognises an intangible asset, i.e. the value of the acquired contractual relationships (Value Of Business
Acquired).
The VOBA is the present value of the pre-tax future profit arising from the contracts in force at the purchase date,
taking into account the probability of renewals of the one year contracts in the non-life segment. The related deferred
taxes are accounted for as liabilities in the consolidated balance sheet.
The VOBA is amortised over the effective life of the contracts acquired, by using an amortization pattern reflecting
the expected future profit recognition. Assumptions used in the development of the VOBA amortization pattern are
consistent with the ones applied in its initial measurement. The amortization pattern is reviewed on a yearly basis to
assess its reliability and, if applicable, to verify the consistency with the assumptions used in the valuation of the
corresponding insurance provisions.
[...]
The Generali Group applies this accounting treatment to the insurance liabilities assumed in the acquisition of life
and non-life insurance portfolios.
The future VOBA recoverable amount is nonetheless tested on yearly basis.
Investment contracts within the scope of IAS 39 or IFRS 9 are required to be measured
at fair value when acquired in a business combination.
As discussed at 3.3 above, there should be no reassessment of the classification of
contracts previously classified as insurance contracts under IFRS 4 which are acquired
as a part of a business combination.
9.1.1 Practical
issues
9.1.1.A
The difference between a business combination and a portfolio transfer
When an entity acquires a portfolio of insurance contracts the main accounting
consideration is to determine whether that acquisition meets the definition of a
business. IFRS 3 defines a business as ‘an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing a return in the
form of dividends, lower costs or other economic benefits directly to investors, or other
owners, members or participants’. [IFRS 3 Appendix A]. The application guidance to IFRS 3
notes that a business consists of inputs and processes applied to those inputs that have
the ability to create outputs. Although businesses usually have outputs they do not need
to be present for an integrated set of assets and activities to be a business. [IFRS 3.B7].
Where it is considered that a business is acquired, goodwill may need to be recognised
as may deferred tax liabilities in respect of any acquired intangibles. For an isolated
portfolio transfer, neither goodwill nor deferred tax should be recognised.
The determination of whether a portfolio of contracts or a business has been acquired
will be a matter of judgement based on the facts and circumstances. Acquisitions of
4348 Chapter 51
contracts that also include the acquisition of underwriting systems and/or the related
organised workforce are more likely to meet the definition of a business than merely
the acquisition of individual or multiple contracts.
Rights to issue or renew contracts in the future (as opposed to existing insurance
contracts) are separate intangible assets and the accounting for the acquisition of such
rights is discussed at 9.2 below.
9.1.1.B
Fair value of an insurer’s liabilities
IFRS 4 does not prescribe a method for determining the fair value of insurance
liabilities. However, the definition of fair value in IFRS 4 is the same as that in IFRS 13
and insurance contracts are not excluded from the scope of IFRS 13. Therefore, any
calculation of fair value must be consistent with IFRS 13’s valuation principles.
Deferred acquisition costs (DA
C) are generally considered to have no value in a business
combination and are usually subsumed into the PVIF intangible. The fair value of any
unearned premium reserve will include any unearned profit element as well as the present
value of the claims obligation in respect of the unexpired policy period at the acquisition
date which is likely to be different from the value under existing accounting policies.
9.1.1.C Deferred
taxation
IAS 12 requires deferred tax to be recognised in respect of temporary differences arising
in business combinations, for example if the tax base of the asset or liability remains at
cost when the carrying amount is fair value. IFRS 4 contains no exemption from these
requirements. Therefore, deferred tax will often arise on temporary differences created
by the recognition of insurance liabilities at their fair value or on the related intangible
asset. The deferred tax adjusts the amount of goodwill recognised as illustrated in
Example 51.32 at 9.1 above. [IAS 12.19].
9.1.1.D
Negative intangible assets
There are situations where the presentation described at 9.1 above will result in the
creation of a negative intangible asset. This could arise, for example, where the
acquirer’s existing accounting policies are such that the contractual liabilities acquired
are measured at an amount less than their fair value although this is likely to raise
questions about whether the carrying value of the liabilities are adequate (see 7.2.2
above). IFRS 4 is silent on the subject of negative intangible assets but there is no
prohibition on their recognition.
9.2
Customer lists and relationships not connected to contractual
insurance rights and obligations
The requirements discussed at 9.1 above apply only to contractual insurance rights and
obligations that existed at the date of a business combination or portfolio transfer.
Therefore, they do not apply to customer lists and customer relationships reflecting the
expectation of future contracts that are not part of the contractual insurance rights and
contractual insurance obligations existing at the date of the transaction. [IFRS 4.33]. IAS 36
and IAS 38 apply to such transactions as they apply to other intangible assets.
Insurance contracts (IFRS 4) 4349
The following example deals with customer relationships acquired together with a
portfolio of one-year motor insurance contracts.
Example 51.33: Purchase of portfolio of one-year motor insurance contracts
Background
Parent A obtained control of insurer B in a business combination on 31 December 2018. B has a portfolio of
one-year motor insurance contracts that are cancellable by policyholders.
Analysis
Because B establishes its relationships with policyholders through insurance contracts, the customer
relationship with the policyholders meets the contractual-legal criterion for recognition as an intangible asset.
IAS 36 and IAS 38 apply to the customer relationship intangible asset. [IFRS 3.IE30(d)].
10
APPLYING IFRS 9 WITH IFRS 4
Even before IFRS 17 was published, it had become clear that its effective date would be
three years after the effective date of IFRS 9. Consequently, the IASB was asked to
address concerns expressed by various parties that additional accounting mismatches
and profit or loss volatility could result if IFRS 9 was applied before IFRS 17. The IASB
agreed that these concerns should be addressed. [IFRS 4.BC229].
Consequently, in September 2016, the IASB issued Applying IFRS 9 Financial
Instruments with IFRS 4 Insurance Contracts that addresses these concerns by
amending IFRS 4 to introduce:
• an optional temporary exemption from IFRS 9 for insurers whose activities are
predominantly connected with insurance. The temporary exemption is available
until an insurer’s first accounting period beginning on or after 1 January 2021 which
is the effective date of IFRS 17 (see 10.1 below); and
• an optional overlay approach that permits insurers to reclassify between profit or
loss and other comprehensive income an amount equal to the difference between
the amount reported in profit or loss for designated financial assets applying IFRS 9
and the amount that would have been reported in profit or loss for those assets if
the insurer had applied IAS 39 (see 10.2 below).
As both the temporary exemption and the overlay approach are optional an insurer can
still apply IFRS 9 as issued by the IASB and not use either of the permitted alternatives.
In this context, an insurer includes an entity that issues financial instruments that contain
a discretionary participation feature. [IFRS 4.5]. Therefore, if the qualifying criteria are met,
both the temporary exemption and the overlay approach are also available to an issuer of
a financial instrument that contains a discretionary participation feature. [IFRS 4.35A].
An entity should apply these amendments for annual periods beginning on or after
1 January 2018 (i.e. the effective date of IFRS 9). [IFRS 4.46]. The overlay approach may be
applied only when an entity first applies IFRS 9 and therefore an insurer which early applies
IFRS 9 may also adopt the overlay approach at the same time. [IFRS 4.35C, 48]. An entity that
has previously applied any version of IFRS 9, other than only the requirements for the
presentation in OCI of gains and losses arising from changes in own credit risk on financial
liabilities designated at fair value through profit or loss (see Chapter 46 at 2.4), is not
permitted to use either the temporary exemption or the overlay approach. [IFRS 4.20B, 35C(b)].
4350 Chapter 51
IAS 8 requires an entity to disclose information when it has not applied a new IFRS that
has been issued but is not yet effective. [IAS 8.30]. Accordingly, the IASB believes that
insurers are required to provide information about the expected date of these
amendments before they are effective including whether the insurer expects to apply
the temporary exemption from IFRS 9. [IFRS 4.BC273].
The diagram below summarises the various options available until 2021, when IFRS 17
is effective and IFRS 9 must be applied.
2018
2019
2020
2021
Option 1: IFRS 9
IFRS 17
Option 2: IFRS 9 plus Overlay
Effective in 2021
Option 3: IFRS 9 Deferral
10.1 The temporary exemption from IFRS 9
For an insurer that meets the eligibility criteria, the temporary exemption permits, but
does not require, the insurer to apply IAS 39 rather than IFRS 9 for annual reporting
periods beginning before 1 January 2021. Therefore, an insurer that applies the
temporary exemption does not adopt IFRS 9. [IFRS 4.20A]. As a result, an insurer applies
one standard to all its financial assets and financial liabilities: IAS 39 if it applies the
temporary exemption; IFRS 9 if it does not.
An insurer that applies the temporary exemption from IFRS 9 should: [IFRS 4.20A]
• use the requirements in IFRS 9 that are necessary to provide the disclosures
discussed at 10.1.5 below; and
• apply all other applicable IFRSs to its financial instruments except as described below.
Eligibili
ty for the temporary exemption is assessed at the reporting entity level. That is,
an entity as a whole is assessed by considering all of its activities. [IFRS 4.BC252]. So, for
example, a conglomerate financial institution assesses its eligibility to apply the
temporary exemption in its consolidated financial statements by reference to the entire
group. This indicates that a separate eligibility assessment is required for the separate
financial statements of the parent company of the group. Subsidiaries within the
conglomerate that issue their own separate, individual or consolidated financial
statements must also assess the eligibility criteria at the relevant reporting entity level.
Consequently, it is unlikely that all reporting entities consolidated within group financial
statements will meet the criteria for the temporary exemption even if the criteria are
met in the group financial statements. This means that conglomerates that elect to use
the temporary exemption, where permitted, are likely to have some subsidiaries
required to apply IFRS 9 in the subsidiaries’ own financial statements.
The impact of the temporary exemption on financial conglomerates has proved
controversial in some jurisdictions. Consequently, the EU-adopted version of IFRS
permits a ‘financial conglomerate’ to use a mixed accounting model for financial
instruments in its consolidated financial statements – see 10.1.6 below.
Insurance contracts (IFRS 4) 4351
The following examples illustrate how eligibility would be determined at the reporting
entity level. Example 51.34 illustrates the situation when the predominant activity of the
group is an insurance business and Example 51.35 illustrates the situation when the
predominant activity of the group is not an insurance business.
Example 51.34: Determination of eligibility for the temporary exemption at
reporting entity level when the group is eligible for the temporary
exemption
HoldCo group as a whole and Subsidiary A meet the criteria for the using the temporary exemption
(see 10.1.1 below). HoldCo itself and Subsidiary B do not meet the criteria for the temporary exemption.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 861
