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24 September 2013

Draft responses to IASB's ED/2013/7 "Insurance Contracts": EFRAG, FRC

EFRAG and FRC issued their Draft Comment Letters to the IASB's revised Exposure Draft Insurance Contracts (ED/2013/07). Comments on EFRAG's draft letter are invited by 18 October, 2013. Comments on the FRC's draft letter are invited by 10 October, 2013.


EFRAG notes that the IASB’s proposals include a measurement and presentation exception for contracts that require the entity to hold the underlying items and specify a link to the returns of those items. EFRAG agrees with the IASB’s objective to eliminate accounting mismatches when the terms of the contract mean that the entity will not suffer any economic mismatches, as this is consistent with EFRAG's view that accounting mismatches should be avoided, while all economic mismatches should be faithfully represented. EFRAG supports 'mirroring' as a principle and some aspects of the approach proposed by the IASB. However, EFRAG has concerns on several aspects of the proposed approach, namely:

  • In EFRAG's view, 'mirroring' should start from the liabilities side and not from the assets side;
  • The proposed measurement and presentation exception will only apply to limited types of contracts. If the IASB proposal is retained, EFRAG believes the scope should be wider;
  • Part of the insurance liability will be measured on a basis different from the present value of the fulfilment cash flows; and
  • Presenting the effects of changes in the discount rate partly in other comprehensive income and partly in profit or loss would make financial statements difficult to understand and would impair comparability of contracts with similar economic features. EFRAG supports the proposal that the discount rate used to measure asset dependent cash flows shall reflect the extent of that dependence.

Comments are invited by 18 October, 2013.

Press release

Draft comment letter


FRC is concerned that the introduction of the requirement in the 2013 ED to measure and present insurance liabilities in the Other comprehensive Income (OCI) will have implications for current business practices in the industry. The business model for many insurers is to hold financial assets that allow them to match the value and incidence of cash flows arising from their insurance liabilities. The classification and measurement requirements in IFRS 9, not only take the nature of the financial instrument into account but also, require a consideration of the entity’s business model for holding the financial asset. FRC therefore agrees with Stephen Cooper’s alternative view that, the proposals in the ED that insurance liabilities are recognised and presented in OCI will create extensive accounting mismatches and likely lead to asset liability measurement mismatch being hardcoded into accounting for insurance contracts. FRC believes this will result in increased complexity in the financial statements rendering them less understandable for the users. FRC is also concerned that the implication of this mismatch is to incentivise insurers to hold assets that can be held at FV-OCI (e.g. corporate debt) rather than those compulsorily required to be FV-PL (e.g. equities). FRC believes that IASB should consider making the requirements for classification and measurement of insurance contracts consistent with those for financial assets. FRC believes this would entail requiring insurance liabilities to be classified as FV-PL with an option to recognise and present them in OCI based on business model and nature of the liability. FRC believes this approach will be consistent with that applied by other financial companies, e.g. banks.

The ED proposes a mirroring approach for measurement of assets and liabilities where the contract specifies a link to returns on those underlying items. Although, in theory, this exception to the overall measurement requirements for insurance contracts is addressing the concern from insurers about contracts where payments to policyholder are linked to returns on assets, FRC believes that these proposals are likely to be complicated to apply and understand in practice. Problems are likely to arise from the mandatory requirements: for there to be a contractually specified link between the assets and payments to policyholders; for a decomposition and separate measurement of cash flows between those that vary with the underlying assets and those that do not; and likely arbitrary presentation of those “decomposed” cash flows in the statement of financial position and the returns on them in the income statement.

Comments are invited by 10 October, 2013.

Draft comment letter

Link to IASB's project – insurance contract

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