Pending Changes to IFRS 17 Standard

On November 14, 2018, the International Accounting Standards Board (IASB) announced that they had voted to propose a one year deferral of the effective date of IFRS 17 to the 2022 reporting year. They also voted to propose deferral of IFRS 9 implementation for one more year, for insurers who were previously allowed to defer IFRS 9 implementation to coincide with IFRS 17. This announcement followed discussion by the IASB during 2018 of a number of identified issues reflecting public feedback on IFRS 17 and implementation challenges, of which 25 were identified as warranting some further review.

The Board proceeded to further discuss this list of issues in their monthly meetings from December 2018, through March 2019, and condensed this list to 13 issues for which amendments appeared to be warranted. After the April 2019 meeting the IASB announced:

  1. An Exposure Draft of proposed changes to IFRS 17 would be prepared for public comment, and published around June 30, 2019. The comment period will be reduced from the normal 120 days to 90 days for this Exposure Draft. The intention is to have the amended standard published by mid-2020.
  2. The Exposure Draft would address the list of specific issues identified during the preceding four monthly meetings.
  3. The one year delay in the effective date of IFRS 17 and the further postponement of the effective date of IFRS 9 to coincide with IFRS 17 for insurers subject to both standards as previously announced in November, was again confirmed.
  4. The intention of the IASB is to consider no further revisions to IFRS 17 beyond those in this pending Exposure Draft until after the implementation of the new standard.

Impact on our IFRS 17 Solution Plans

Despite the uncertainty regarding the final wording of the IFRS 17 standard, Moody's Analytics will not be slowing down its development project for planned enhancements the AXIS actuarial system, including the new IFRS 17 Link modules, as a result of these announcements. We will continue to work with our clients to deliver the full IFRS 17 solution functionality needed to support the new standard in a timely manner, and the additional time allowed by this delay is expected to be useful to insurers to implement and test the new processes required, and understand more fully the impact of the standard on financial reporting.

Amendments to the IFRS 17 Standard which could have some impact on either the AXIS system or RiskIntegrity IFRS 17 functionality are further discussed below. The impact of these changes on the overall development project is relatively minor and unlikely to affect the timelines for the delivery of future enhancements in the current project plan.

Issues Expected to be Addressed in the Pending Exposure Draft

Of the various issues for which proposed amendments were identified in the April 2019 IASB meeting, only five appear likely to have some relevance to IFRS functionality being developed or already released in the AXIS system or in the RiskIntegrity IFRS 17 solution, as summarized below. For more information on these or on the entire list, refer to the IASB April 2019 Agenda Paper 2A and the agenda papers for the Meetings from December 2018 to March 2019, where these issues were discussed in detail.

Description of Issue Proposed Changes to IFRS 17
3 - Insurance acquisition cash flows relating to expected contract renewals and related disclosure requirements Insurers would be able to capitalize and amortize insurance acquisition cash flows that relate to future contract renewals (i.e. beyond the contract boundary); disclosures would be required related to roll forward of these assets and the timing of expected amortization.
4 - Contractual service margin allocation relating to investment components and related disclosure requirements The standard would be amended to clarify the coverage period for certain contracts that combine insurance and investment related services and require that coverage units used for the amortization of the CSM consider both the insurance coverage as well as the investment-return service period.
5 - Extension of the risk mitigation option The insurer would be permitted to apply the risk mitigation option (whether or not to a recognize a change in financial Risk of underlying items or in fulfillment cash flows in the CSM vs P&L) for insurance contracts with direct participation features when the entity uses reinsurance contracts held to mitigate financial risks. Previously this option was restricted to the use of derivatives for the risk mitigation.
6 - Reinsurance contracts held when underlying contracts are onerous When an insurer recognizes a loss on initial recognition of a group of onerous contracts, they would be permitted to recognize an offsetting gain from reinsurance held rather than defer that gain through the CSM on reinsurance held.
7 - Simplified presentation of insurance contracts in the statement of financial position An insurer would be permitted to determine the presentation of IFRS 17 contract assets and liabilities in the statement of financial position based on portfolios of insurance contracts rather than groups of insurance contracts.

Amendments to IFRS 17 Arising from Annual Improvement Process

In addition to the more significant issues discussed in the recent IASB meetings and described above, there were also some minor issues identified in discussions earlier in 2018, and intended to be addressed under the Annual Improvements process. These are now expected to result in a series of small amendments introduced in the pending Exposure Draft to either clarify the wording in the Standard or to correct relatively minor unintended consequences and oversights.

Of these proposed minor amendments, which are outlined in Agenda Paper 2D from the April 2019 IASB meeting, only the following are expected to have any impact on AXIS or RiskIntegrity IFRS 17 functionality:

Description of Issue Proposed Changes to IFRS 17
Wording of B96c of IFRS 17 regarding the treatment of changes in the investment component under the general model appears to inappropriately allow changes relating to the time value of money and financial risk to be recognized in CSM vs. in profit and loss. Amendment to paragraph B96(c) of IFRS 17 to clearly exclude changes relating to the time value of money and financial risk from the adjustment to the contractual service margin.
Wording of paragraph B96(d) regarding the optional disaggregation of changes to the risk adjustment for non-financial risk does not specify the treatment of changes in the risk adjustment caused by the time value of money and financial risk, if they are disaggregated. The standard would be amended to clarify that changes in risk adjustment where disaggregated and attributed to the time value of money and financial risk would be recognized in Profit and Loss, and not the CSM.
Questions were raised regarding the definition of the Investment Component of an insurance contract in certain types of contracts. The definition of the investment component would be clarified to address the confusion.
The wording of Paragraphs 47 to 51 regarding the loss component refers to changes estimates of future cash flows in paragraphs 48(a) and 50(b), which appears to inadvertently exclude changes in the risk adjustment from the determination of the loss component. The wording of paragraphs defining the loss component will be changed as needed to include changes in the Fulfillment Cash Flows in total.