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ED/2015/11 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Proposed amendments to IFRS 4)

In July 2014, the IASB issued the completed version of IFRS 9. IFRS 9 sets out the requirements for recognising and measuring financial instruments. It replaces IAS 39 Financial Instruments: Recognition and Measurement and has an effective date of 1 January 2018 with early application permitted.

The IASB is also at an advanced stage in its project to replace IFRS 4 Insurance Contracts. However, the IASB expects to allow an implementation period of approximately three years after the publication of the new insurance contracts Standard. Hence, the earliest possible mandatory effective date of the new insurance contracts Standard will be after the effective date of IFRS 9.

Some interested parties, in particular insurers and their representative bodies, have suggested that the IASB should permit insurers to defer the application of IFRS 9 in order to align the effective date of IFRS 9 with the effective date of the new insurance contracts Standard (ie provide insurers with a temporary exemption from applying IFRS 9). They give the following reasons:

(a) Users of financial statements may find it difficult to understand the additional accounting mismatches and temporary volatility that could arise in profit or loss if IFRS 9 is applied before the new insurance contracts Standard.

(b) Some entities that issue contracts within the scope of IFRS 4 have expressed concerns about having to apply the classification and measurement requirements in IFRS 9 before the effects of the new insurance contracts Standard can be fully evaluated.

(c) Two sets of major accounting changes in a short period of time could result in significant cost and effort for both users and preparers of financial statements.

These concerns could be addressed, at least in part, without the need to amend existing Standards (for example, by using the existing accounting requirements of IFRS 4, the transition requirements in the new insurance contracts Standard and enhanced voluntary disclosures). However, some consider that without amending existing Standards it would be difficult to adequately address the concerns expressed about the different effective dates of IFRS 9 and the new insurance contracts Standard. Hence, the IASB proposes to introduce:

(a) an option that would permit entities that issue contracts within the scope of IFRS 4 to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets (the ‘overlay approach’); and

(b) an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4. This temporary exemption is targeted at entities that are most affected by the different effective dates of IFRS 9 and the new insurance contracts Standard, because they engage purely in activities that result in contracts within the scope of IFRS 4.

To download the Exposure Draft, click here

Invitation to comment

The Exposure Draft is open for comment until 20 January 2016.

You may provide your comments online or email us at technical@masb.org.my