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18 November 2013

EFRAG publishes final comment letter on IASB's revised ED Insurance Contracts

Regarding the general measurement and presentation requirements, EFRAG does not support the mandatory use of OCI to report the impact of changes in the discount rate of the insurance liabilities.

EFRAG believes that avoiding mismatches calls for alignment of measurement of assets that are backing insurance liabilities.

EFRAG recommends the IASB to identify a third ‘liability-driven’ long-term investment business model as stated in our letter of 25 October 2013, which was based on the feedback received in its ‘Long-term investing activities business model’ consultation.

EFRAG recommends including insurance liabilities in the scope of the macro hedging project to address accounting mismatches that may result from measuring at fair value through profit or loss derivatives held as part of hedging strategies when the fair value through other comprehensive income is selected.

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 appreciates the IASB’s efforts to address the accounting mismatch issue for contracts with asset dependent cash flows. However, EFRAG does not support the proposed ‘mirroring approach’.

In the context of contracts with asset dependent cash flows, EFRAG has considered the key principles and mechanics of an insurance industry alternative approach. EFRAG believes that this approach, can address some of the concerns which EFRAG expresses in respect of the ‘mirroring approach’. Therefore, EFRAG supports the key principles of the insurance industry alternative approach. However, EFRAG believes that there are still some aspects in this alternative approach that need to be further developed. EFRAG notes that the same applies for the IASB approach, although aspects may be different.

EFRAG believes that the IASB should allow sufficient time for testing any alternative proposal to ensure that the application mechanisms work appropriately for various products under different economic scenarios.

Regarding the proposals on transition, EFRAG agrees with the proposed modified retrospective approach as EFRAG understands that in many circumstances entities would be able to make a reasonable estimate of the remaining contractual service margin based on historic public and internal information about portfolios. However, if the IASB were to require different effective dates for IFRS 9 and the new insurance contracts standard and IFRS 9 would be effective earlier, EFRAG recommends that for all entities where insurance forms a significant part of an entity’s’ activities.

EFRAG further recommends a three year implementation period from the date of publication of the new insurance contracts standard.

In relation to the ED proposals for insurance contract revenue and expense, EFRAG believes that the earned premium approach, which recognises revenue as services are provided, offers the promise of significant advantages.

Press release

Final comment letter

© EFRAG - European Financial Reporting Advisory Group

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