International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 864
that are solely payments of principal and interest on the principal amount
outstanding (which includes equity instruments measured at fair value
through OCI under IFRS 9);
• that would meet the definition of held for trading under IFRS 9; or
• that is managed or whose performance is evaluated on a fair value basis.
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When disclosing the fair value at the end of the reporting period and the change in fair
value of the two groups, the insurer: [IFRS 4.39F]
• may use the carrying amount of a financial asset measured at amortised cost as its
fair value if that is a reasonable approximation (e.g. for short-term receivables); and
• should consider the level of detail necessary to enable users of the financial
statements to understand the characteristics of the financial assets.
This disclosure requirement means that insurers applying the temporary exemption
need to allocate their financial assets into the two groups above, an exercise that will be
of similar complexity to that required on adoption of IFRS 9.
There is no explicit requirement to distinguish between the different measurement
models used under IFRS 9 for financial assets in each group (e.g. to distinguish between
those assets measured at amortised cost and those at fair value through OCI or fair value
through profit or loss) although there is a requirement to consider the detail necessary
to enable users of the financial statements to understand the characteristics of the
financial assets. In addition, there is no requirement to sub-analyse the change in fair
value of the financial assets within each group (e.g. between realised and unrealised
gains or losses). As IFRS 7 and IFRS 13 already require disclosure of the fair value of
financial assets measured at amortised cost (see Chapter 14 at 20.4) information about
fair values at each reporting date should generally be available although not analysed by
the two groupings required.
As well as disclosing fair values and changes in fair values, an insurer should also disclose
information about credit risk exposure, including significant credit risk concentration,
inherent in the first group of financial assets. At a minimum, an insurer should disclose
the following information for those financial assets at the end of the reporting period:
[IFRS 4.39G]
• the carrying amounts applying IAS 39 (before adjusting for any impairment
allowances in the case of financial assets measured at amortised cost) by credit risk
rating grades as defined in IFRS 7; and
• the fair value and carrying amount applying IAS 39 (before adjusting for any
impairment allowances in the case of financial assets measured at amortised cost)
for those financial assets that do not have low credit risk at the end of the reporting
period. IFRS 9 sets out guidance assessing whether the credit risk on a financial
instrument is considered low (see Chapter 47 at 6.4.1).
As with the requirement to disclose fair values and changes in fair values, there is no
explicit requirement to distinguish between the different measurement models used
under IFRS 9 for financial assets in each group (e.g. to distinguish between those assets
measured at amortised cost, those at fair value through OCI or those at fair value
through profit or loss). Details of impairment losses for those financial assets under
IFRS 9 are also not required. In addition, there is no requirement for credit risk
information for the second group of financial assets in addition to the disclosures
required already by IFRS 7.
The following example illustrates the disclosure requirements above (for simplicity no
comparative disclosures are made):
Insurance contracts (IFRS 4) 4363
Example 51.41: Illustrative disclosures required in order to compare insurers
applying the temporary exemption with entities applying IFRS 9
The table below presents an analysis of the fair value of classes of financial assets as at the end of the reporting
period, as well as the corresponding change in fair value during the reporting period. The financial assets are
divided into two categories:
• Assets for which their contractual cash flows represent solely payments of principal and interest (SPPI),
excluding any financial assets that are held for trading or that are managed and whose performance is
evaluated on a fair value basis; and
• All financial assets other than those specified in SPPI above (i.e. those for which contractual cash flows
do not represent SPPI, assets that are held for trading and assets that are managed and whose performance
is evaluated on a fair value basis).
In the table the amortised cost of cash and cash equivalents and short-term receivables has been used as a
reasonable approximation to fair value.
Asset type (CU’m)
SPPI financial assets
Other financial assets
Fair
Fair Value
Fair value
Fair value
value
change
change
Cash and cash equivalents
50
1
–
–
Debt securities
200
10
100
10
Equity securities
–
–
200
20
Short-term receivables
20
–
–
–
Derivatives –
–
40
(6)
Total 270
11
340
24
The following table shows the carrying amount of the SPPI assets included in the table above by credit risk
rating grades reported to key management personnel. The carrying amount is measured in accordance with
IAS 39 although this is prior to any impairment allowance for those measured at amortised cost.
Asset type (CU’m)
Credit
rating
Total
AAA
AA/A
BBB
BB/B
Unrated
Cash and cash equivalents
50
5
44
1
–
–
Debt securities
210
20
110
60
10
10
Short-term receivables
20
–
–
–
–
20
Total 280
25
154
61
10
30
The following table provides information on the fair value and carrying amount under IAS 39 for those SPPI
assets which the Group has determined do not have a low credit risk. The carrying amount is measured in
accordance with IAS 39 although this is prior to any impairment allowance for those measured at amortised cost.
Asset type (CU’m)
Fair value
Carrying amount
Cash and cash equivalents
1 1
Debt securities
40 45
Short-term receivables
5 5
Total
46 51
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An insurer should also disclose information about where a user of financial statements
can obtain any publicly available IFRS 9 information that relates to an entity within the
group that is not already provided in the group’s consolidated financial statements for
the relevant reporting period. Such information could be obtained from publicly
available individual or separate financial statement of an entity within the group that
has applied IFRS 9. [IFRS 4.39H].
When an entity elects to apply the exemption from using uniform accounting policies
for associates and joint ventures, discussed at 10.1.4 above, it should disclose that fact.
[IFRS 4.39I].
In addition, if an entity applied the temporary exemption from IFRS 9 when accounting
for its investment in an associate or joint venture using the equity method it should
disclose the following in addition to the information required by IFRS 12 – Disclosure
of Interests in Other Entities: [IFRS 4.39J]
• the information required above (e.g. fair value analysis and credit risk disclosures)
for each associate or joint venture that is material to the entity. The amounts
disclosed should be those included in the IFRS financial statements of the associate
or joint venture after reflecting any adjustments made by the entity when using the
equity method rather than the entity’s share of those amounts (see Chapter 13
at 5.1.1); and
• the quantitative information required above (e.g. fair value analysis and credit risk
disclosures) in aggregate for individually immaterial associates or joint ventures.
The aggregate amounts:
• disclosed should be the entity’s share of those amounts; and
• for associates should be disclosed separately from the aggregate amounts
disclosed for joint ventures.
If applicable, this requires disclosure of financial assets which are not shown separately
on the reporting entity’s balance sheet (as only the net equity investment in an associate
or joint venture is disclosed). Therefore, this will require the reporting entity to have
access to the underlying records of the associate(s) and joint venture(s). As worded,
these disclosure requirements apply only for an associate or joint venture where the
reporting entity applies IFRS 9 but elects to apply the temporary exemption in equity
accounting for its associate or joint venture. They do not apply for any associate and
joint venture when the reporting entity applies the temporary exemption but elects to
apply IFRS 9 when equity accounting for an associate or joint venture. As discussed
at 10.1.4 above, this election can be made separately for each associate or joint venture.
10.1.6
EU ‘top-up’ for financial conglomerates
As explained at 10.1 above, the effect of the amendments on financial conglomerates
has proved controversial in some jurisdictions. The European Commission considers
that the amendments are not sufficiently broad in scope to meet the needs of all
significant insurance entities in the Union. Consequently, for those entities that
prepare financial statements in accordance with IFRS as adopted by the EU, the
following modification applies:
Insurance contracts (IFRS 4) 4365
‘A financial conglomerate as defined in Article 2(14) of Directive 2002/87/EC may elect
that none of its entities operating in the insurance sector within the meaning of
Article 2(8)(b) of that Directive apply IFRS 9 in the consolidated financial statements for
financial years the commencement of which precedes 1 January 2021 where all of the
following conditions are met:
(a) no financial instruments are transferred between the insurance sector and any other
sector of the financial conglomerate after 29 November 2017 other than financial
instruments that are measured at fair value with changes in fair value recognised
through the profit or loss account by both sectors involved in such transfers;
(b) the financial conglomerate states in the consolidated financial statements which
insurance entities in the group are applying IAS 39;
(c) disclosures requested by IFRS 7 are provided separately for the insurance sector
applying IAS 39 and for the rest of the group applying IFRS 9’.7
The purpose of (a) above is to prevent a group transferring financial instruments
between different ‘sectors’ (i.e. between insurance and non-insurance subsidiaries) with
the purpose of either avoiding measurement of those financial instruments at fair value
through profit or loss in the group financial statements or recognising previously
unrecognised fair value gains or losses in profit or loss.
A financial conglomerate (as defined above) which takes advantage of this ‘top-up’ to
use a mixed IFRS 9/IAS 39 measurement model for financial instruments in its
consolidated financial statements should not make an explicit and unreserved statement
that those consolidated financial statements comply with IFRS as issued by the IASB.
[IAS 1.16]. Similarly, depending on local regulations, use of the ‘top-up’ may affect the
ability of subsidiaries of the financial conglomerate that are parent entities from using
the exemption from preparing consolidated financial statements discussed in Chapter 6
at 2.3.1.D.
10.2 The overlay approach
An insurer is permitted, but not required, to apply the overlay approach to designated
financial assets. [IFRS 4.35B]. The overlay approach is intended to address the additional
accounting mismatches and volatility in profit or loss that may arise if an insurer applies
IFRS 9 before the forthcoming insurance contracts standard. [IFRS 4.BC240].
The overlay approach is elective on an instrument-by-instrument basis. Insurers may
therefore choose whether to apply the overlay approach and to what extent. There is
no ‘predominance test’ (see 10.1.1 above) and therefore the overlay approach can be
applied to designated financial instruments by any reporting entity, such as a financial
conglomerate, that has activities which are not predominantly connected with
insurance. The IASB acknowledged that the availability of choice reduces comparability
among insurers but decided not to require insurers to apply the overlay approach to all
eligible financial assets because there is no loss of information when an insurer applies
the overlay approach to only some financial assets. [IFRS 4.BC241].
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An insurer may elect to apply the overlay approach only when it first applies IFRS 9,
including when it first applies IFRS 9 after previously applying: [IFRS 4.35C]
• the temporary exemption discussed at 10.1 above; or
• only the requirements in IFRS 9 for the presentation in OCI of gains and losses
attributable to changes in the entity’s own credit risk on financial liabilities
designated at fair value through profit or loss.
An insurer that applies the overlay approach when applying IFRS 9 should: [IFRS 4.35B]
• reclassify between profit or loss and other comprehensive income an amount that
results in the profit or loss at the end of the reporting period for the designated financial
assets being the same as if the entity had applied IAS 39 to the designated financial
assets. Accordingly, the amount reclassified is e
qual to the difference between:
• the amount reported in profit or loss for the designated financial assets
applying IFRS 9; and
• the amount that would have been reported in profit or loss for the designated
financial assets if the insurer had applied IAS 39.
• apply all other applicable IFRSs to its financial instruments, except for the
application of the overlay approach.
An insurer should present the amount reclassified between profit and loss and other
comprehensive income applying the overlay approach: [IFRS 4.35D]
• in profit or loss as a separate line item; and
• in other comprehensive income as a separate component of other comprehensive
income.
The use of the overlay approach will result in financial instruments in the statement
of financial position being recognised and measured in accordance with IFRS 9 but
profit or loss and other comprehensive income will reflect a mixed measurement
model (i.e. gains and losses from some financial assets will reflect the requirements
of IAS 39 whilst gains and losses on other financial assets and all financial liabilities
will reflect the requirements of IFRS 9). The IASB has acknowledged that different
entities could use different approaches to designating financial assets (see 10.2.1
below) but notes that all financial assets will be accounted for in the statement of
financial position under IFRS 9 and considers that the proposed presentation and
disclosure requirements (see 10.2.3 below) will make the effect of the overlay
approach transparent.
Insurance contracts (IFRS 4) 4367
Unlike the temporary exemption from IFRS 9 (see 10.1 above), there is no expiry date
for the overlay approach so an insurer is able to continue to use this approach until the
new insurance contract accounting standard supersedes IFRS 4. The overlay approach
is available only for designated financial assets. Financial liabilities cannot be designated
for the overlay approach.
When an entity elects to apply the overlay approach it should: [IFRS 4.49]
• apply that approach retrospectively to designated financial assets on transition to
IFRS 9. Accordingly, for example, an entity should recognise as an adjustment to the
opening balance of accumulated other comprehensive income an amount equal to
the difference between the fair value of designated financial assets determined
applying IFRS 9 and their carrying amount determined applying IAS 39; and