The move is in response to concerns raised by insurance companies about the need to implement two major accounting changes on different dates (IFRS 9, Financial Instruments, has an effective date of 1 January 2018 while the new standard, which is still being finalised, will not come into operation before 2020 at the earliest).
They pointed out that if the requirements in IFRS 9 were applied ahead of the new standard, then their interaction with the requirements of IFRS 4, the existing insurance contracts standard, could potentially give rise to increased accounting volatility in profit or loss. This would make insurers’ financial statements hard to understand.
The insurers complained that some entities which issue insurance contracts might find it difficult to apply the IFRS 9 classification and measurement requirements for financial assets before the effects of the new insurance contracts standard could be fully evaluated.
And they also objected to the cost and effort involved in implementing two significant accounting changes in such a short period of time.
In response, the IASB is proposing to introduce two temporary measures into IFRS 4. The first is the “overlay approach” which is an option for entities to adjust profit or loss to remove any additional accounting volatility that may arise from qualifying financial assets.
The second, the “deferral approach”, is a temporary exemption from applying IFRS 9 for those entities whose predominant activity is issuing insurance contracts.
Commenting on the proposals, IASB chairman Hans Hoogervorst said, “The IASB is in the final stages of developing the new insurance contracts standard.
“Until it is in place, we believe the proposed changes balance meeting the needs of insurers with meeting the needs of users of financial statements.”
The deadline for comments is 8 February 2016.