• restate comparative amounts to reflect the overlay approach if, and only if, the
entity restated comparative information applying IFRS 9.
If an insurer applies the overlay approach, shadow accounting (see 8.3 above) may be
applicable. [IFRS 4.35L].
The reclassification between profit or loss and other comprehensive income may have
consequential effects for including other amounts in other comprehensive income, such
as income taxes. The relevant IFRS (e.g. IAS 12) should be applied to determine any
such consequential effects. [IFRS 4.35M].
10.2.1
Designation and de-designation of eligible financial assets
Eligible financial assets can be designated for the overlay approach on an instrument-
by-instrument basis. [IFRS 4.35G].
A financial asset is eligible for the overlay approach if, and only if, the following criteria
are met: [IFRS 4.35E]
• it is measured at fair value through profit or loss applying IFRS 9 but would not
have been measured at fair value through profit or loss in its entirety applying
IAS 39; and
• it is not held in respect of an activity that is unconnected with contracts within the
scope of IFRS 4. Examples of financial assets that would not be eligible for the overlay
approach are those assets held in respect of banking activities or financial assets held
in funds relating to investment contracts that are outside the scope of IFRS 4.
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The first criterion above limits the application of the overlay approach to those financial
assets for which application of IFRS 9 may result in additional volatility in profit or loss.
The Basis for Conclusions states that an example of such a financial asset is one that is
measured at fair value through profit or loss applying IFRS 9 but that would have been
bifurcated into a derivative and a host applying IAS 39. [IFRS 4.BC240(b)(i)].
The second criterion above is expressed in the negative (i.e. an asset is eligible if it is not
held in respect of an activity that is unconnected with contracts within the scope of
IFRS 4). Logically, this means that a financial asset is eligible for the overlay approach if it
is held in respect of a business activity that is connected with contracts within the scope
of IFRS 4. In the majority of situations this is likely to be obvious (e.g. the assets are held
to back insurance liabilities). In other situations, application depends on the specific facts
and circumstances. Although not mentioned in the text of the standard, the Basis for
Conclusions clarifies that financial assets held for insurance regulatory requirements (or
for internal capital requirements for the insurance business) are eligible for the overlay
approach on the grounds that what became IFRS 17 may affect them. [IFRS 4.BC240(b)(ii)].
An insurer may designate an eligible financial asset for the overlay approach when it
elects to apply the overlay approach (see 10.2 above). Subsequently, it may designate an
eligible financial asset for the overlay approach when, and only when: [IFRS 4.35F]
• that asset is initially recognised; or
• that asset newly meets the criteria above having previously not met that criteria.
For the purpose of applying the overlay approach to a newly designated financial asset:
[IFRS 4.35H]
• its fair value at the date of designation should be its new amortised cost carrying
amount; and
• the effective interest rate should be determined based on its fair value at the date
of designation (i.e. the new amortised cost carrying amount).
An entity should continue to apply the overlay approach to a designated financial asset
until that financial asset is derecognised. However, an entity: [IFRS 4.35I]
• should de-designate a financial asset if the financial asset no longer meets the
second criterion specified above. For example a financial asset will no longer meet
that criterion when an entity transfers that asset so that it is held in respect of its
banking activities or when an entity ceases to be an insurer. When an entity de-
designates a financial asset in this way it should reclassify from other
comprehensive income to profit or loss as a reclassification adjustment any balance
relating to that financial asset; [IFRS 4.35J] and
Insurance contracts (IFRS 4) 4369
• may, at the beginning of any annual period, stop applying the overlay approach to
all designated financial assets. An entity that elects to stop applying the overlay
approach should apply IAS 8 to account for the change in accounting policy (i.e.
account for the change retrospectively unless impracticable).
An entity that stops using the overlay approach because it elects to do so or because
it is no longer an insurer should not subsequently apply the overlay approach.
However, an insurer that has elected to apply the overlay approach but has no eligible
financial assets may subsequently apply the overlay approach when it has eligible
financial assets. [IFRS 4.35K].
10.2.2 First-time
adopters
First-time adopters are permitted to apply the overlay approach. A first-time adopter
that elects to apply the overlay approach should restate comparative information to
reflect the overlay approach if, and only if, it restates comparative information to
comply with IFRS 9. IFRS 1 allows a first-time adopter not to apply IFRS 9 to its
comparative period if its first IFRS reporting period begins before 1 January 2019 (see
Chapter 5 at 5.24). [IFRS 4.35N].
10.2.3
Disclosures required for entities applying the overlay approach
Insurers that apply the overlay approach should disclose information to enable users of
the financial statements to understand: [IFRS 4.39K]
• how the amount reclassified from profit or loss to other comprehensive income in
the reporting period is calculated; and
• the effect of that reclassification on the financial statements.
To comply with these principles an insurer should disclose: [IFRS 4.39L]
• the fact that it is applying the overlay approach;
• the carrying amount at the end of the reporting period of financial assets to which
the entity applies the overlay approach by class of financial assets (‘class’ is
explained in Chapter 50 at 3.3);
• the basis for designating financial assets for the overlay approach, including an
explanation of any designated financial assets held outside the legal entity that
issues contracts within the scope of IFRS 4;
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• an explanation of the total amount reclassified between profit or loss and other
comprehensive income in the reporting period in a way that enables users of the
financial statements to understand how that amount is derived, including:
• 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;
• the effect of the reclassification and consequential effects (e.g. income taxes) on
each affected line item in profit or loss; and
• if during the reporting period the insurer has changed the designation of financial assets
:
• the amount reclassified between profit or loss and other comprehensive in
the reporting period relating to newly designated financial assets applying the
overlay approach;
• the amount that would have been reclassified between profit or loss and other
comprehensive income in the reporting period if the financial assets had not
been de-designated; and
• the amount reclassified in the reporting period to profit or loss from
accumulated other comprehensive income for financial assets that have been
de-designated.
If an entity applies the overlay approach when accounting for its investment in an
associate or joint venture using the equity method it should disclose the following, in
addition to information required by IFRS 12: [IFRS 4.39M]
• the information set out above 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 reporting entity’s share
of those amounts (see Chapter 13 at 5.1.1); and
• the quantitative information set out above and the effect of the reclassification on
profit and loss and other comprehensive income in aggregate for all 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.
Designation of financial assets is always voluntary on an instrument-by-instrument basis
under the overlay approach. Therefore, an entity could always avoid the need for these
disclosures for associates and joint ventures by not designating an investee’s financial
assets for the overlay approach.
Insurance contracts (IFRS 4) 4371
11 DISCLOSURE
One of the two main objectives of IFRS 4 is to require entities issuing insurance
contracts to disclose information about those contracts that identifies and explains the
amounts in an insurer’s financial statements arising from these contracts and helps users
of those financial statements understand the amount, timing and uncertainty of future
cash flows from those insurance contracts. [IFRS 4.IN1].
For many insurers, the disclosure requirements of the standard had a significant impact
when IFRS 4 was applied for the first time because they significantly exceeded what
were required under most local GAAP financial reporting frameworks.
In drafting the disclosure requirements, the main objective of the IASB appears to have
been to impose similar requirements for insurance contracts as for financial assets and
financial liabilities under IFRS 7.
The requirements in the standard itself are relatively high-level and contain little
specific detail. For example, reconciliations of changes in insurance liabilities,
reinsurance assets and, if any, related deferred acquisition costs are required but no
details about the line items those reconciliations should contain are specified. By
comparison, however, other standards such as IAS 16, provide details of items
required to be included in similar reconciliations for other amounts in the statement
of financial position.
The lack of specific disclosure requirements is probably attributable to the diversity of
accounting practices permitted under IFRS 4. We suspect the IASB probably felt unable
to give anything other than generic guidance within the standard to avoid the risk that
local GAAP requirements may not fit in with more specific guidance.
However, the disclosure requirements outlined in the standard are supplemented by
sixty nine paragraphs of related implementation guidance which explains how
insurers may or might apply the standard. According to this guidance, an insurer
should decide in the light of its circumstances how much emphasis to place on
different aspects of the requirements and how information should be aggregated to
display the overall picture without combining information that has materially different
characteristics. Insurers should strike a balance so that important information is not
obscured either by the inclusion of a large amount of insignificant detail or by the
aggregation of items that have materially different characteristics. To satisfy the
requirements of the standard an insurer would not typically need to disclose all the
information suggested in the guidance. [IFRS 4.IG12].
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The implementation guidance does not, however, create additional disclosure requirements.
[IFRS 4.IG12]. On the other hand, there is a reminder that IAS 1 requires additional disclosures
when compliance with the specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and conditions on the entity’s
financial position and financial performance. [IFRS 4.IG13]. The guidance also draws attention
to the definition and explanation of materiality in IAS 1. [IFRS 4.IG15-16].
The disclosure requirements are sub-divided into two main sections:
(a) information that identifies and explains the amounts in the financial statements
arising from insurance contracts; and
(b) information that enables users of its financial statements to evaluate the nature and
extent of risks arising from insurance contracts.
Each of these is discussed in detail below. They are accompanied by examples
illustrating how some of disclosure requirements have been applied in practice.
As discussed at 2.2.2 above, disclosures for investment contracts with a DPF are within
the scope of IFRS 7 and IFRS 13, not IFRS 4.
11.1 Explanation of recognised amounts
The first disclosure principle established by the standard is that an insurer should identify
and explain the amounts in its financial statements arising from insurance contracts. [IFRS 4.36].
To comply with this principle an insurer should disclose:
(a) its accounting policies for insurance contracts and related assets, liabilities, income
and expense;
(b) the recognised assets, liabilities, income and expense (and cash flows if its
statement of cash flows is presented using the direct method) arising from
insurance contracts. Furthermore, if the insurer is a cedant it should disclose:
(i) gains or losses recognised in profit or loss on buying reinsurance; and
(ii) if gains and losses on buying reinsurance are deferred and amortised, the
amortisation for the period and the amounts remaining unamortised at the
beginning and the end of the period;
(c) the process used to determine the assumptions that have the greatest effect on the
measurement of the recognised amounts described in (b). When practicable,
quantified disclosure of these assumptions should be given;
(d) the effect of changes in assumptions used to measure insurance assets and
insurance liabilities, showing separately the effect of each change that has a
material effect on the financial statements; and
(e) reconciliations of changes in insurance liabilities, reinsurance assets and, if any,
related deferred acquisit
ions costs. [IFRS 4.37].
Each of these is discussed below.
Insurance contracts (IFRS 4) 4373
11.1.1
Disclosure of accounting policies
As noted at 11.1 above, IFRS 4 requires an insurer’s accounting policies for insurance
contracts and related liabilities, income and expense to be disclosed. [IFRS 4.37(a)]. The
implementation guidance suggests that an insurer might need to address the treatment
of some or all of the following:
(a) premiums (including the treatment of unearned premiums, renewals and lapses,
premiums collected by agents and brokers but not passed on and premium taxes
or other levies on premiums);
(b) fees or other charges made to policyholders;
(c) acquisition costs (including a description of their nature);
(d) claims incurred (both reported and unreported), claims handling costs (including a
description of their nature) and liability adequacy tests (including a description of
the cash flows included in the test, whether and how the cash flows are discounted
and the treatment of embedded options and guarantees in those tests – see 7.2.2
above). Disclosure of whether insurance liabilities are discounted might be given
together with an explanation of the methodology used;
(e) the objective of methods used to adjust insurance liabilities for risk and uncertainty
(for example, in terms of a level of assurance or level of sufficiency), the nature of
those models, and the source of information used in those models;
(f) embedded options and guarantees including a description of whether:
(i) the measurement of insurance liabilities reflects the intrinsic value and time
value of these items; and
(ii) their measurement is consistent with observed current market prices;
(g) discretionary
participation features (including an explanation of how the insurer
classifies those features between liabilities and components of equity) and other
features that permit policyholders to share in investment performance;
(h) salvage, subrogation or other recoveries from third parties;
(i) reinsurance
held;
(j) underwriting pools, coinsurance and guarantee fund arrangements;
(k) insurance contracts acquired in business combinations and portfolio transfers, and
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