IFRS 17 and IFRS 9

Bridging the Gap

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IFRS 17 and IFRS 9 | Bridging the Gap

The International Accounting

Standards Board (IASB) has finally
ended deliberations on the new
Insurance Contracts Project and
released the Standard in May 2017 as
the International Financial Reporting
Standards (IFRS) 17.
This new Insurance Standard, focusing The synergy between IFRS 17 and IFRS 9
on insurance liability reporting, will have needs to be considered in terms of:
far-reaching consequences for an insurer • the changes required by the two
in terms of modelling, data, processes Standards; and
and systems; ultimately resulting in a • the complications arising from having
fundamentally different statement of two separate effective dates that may be
comprehensive income and more onerous several years apart.
disclosure requirements.
Hence, insurers would be ill-advised to
However, as insurers contemplate the start an IFRS 17 implementation project
expected impact of this new Insurance without a detailed assessment of the
Standard, they need to be aware of impact of IFRS 9 at the same time.
the interrelationship with the Financial
Instruments Standard – IFRS 9 – which
impacts the valuation of insurers’ assets for
accounting purposes.

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 IFRS 17 and IFRS 9 | Bridging the Gap

Impact

Insurance Earnings are a Consequence category is a critical element of accounting IFRS 9 introduces a
of both Liability and Asset Movement for financial instruments by insurance
situation where by
companies as it will facilitate improved
With IFRS 17 making significant changes to performance reporting for certain satisfying both criteria,
the valuation of liabilities of insurers, IFRS business models by removing volatility in
insurers can use the
9 has made changes to the valuation and profit and loss (P&L), particularly where
income recognition of assets. The effect insurers hold debt instruments. measurement options
of IFRS 9 can be split into three categories,
of amortised cost or
namely: However, while insurers do use simple
1. Classification and measurement (C&M) debt instruments in order to match their fair value through other
2. Impairment liabilities, their asset strategy is often more
comprehensive income
3. Hedge accounting complex, involving the use of derivatives,
for example, in order to diversify credit (FVOCI).
The impact on insurers differ, depending exposure and manage interest-rate risk.
on the products sold and assets held to IFRS 9 adds a layer of complexity by looking
back the liabilities of these products. at the business purpose of the investment
for each of the product types. With the
Classification and Measurement contractual cash-flow test and business
Although the C&M requirements and model assessment being introduced to
conclusions under IFRS 9 may not be reach the amortised cost classification,
significantly different from those under the possible difficulty in satisfying the
the current Financial Instrument Standard criteria for complex instruments is likely to
(IAS 39), the process of reaching these result in more financial instruments being
conclusions, information required and classified in the residual category of Fair
prescribed method of reporting are quite Value through Profit and Loss (FVTPL) than
different. under IAS 39.

The C&M categories have been redefined IFRS 17 allows an election for the effect of
in IFRS 9 and consideration is being changes in discount rate to be recognised
given to whether the entity’s business through P&L or through OCI. Because
model is evaluated as one held to of this, insurers must be cognisant of
collect contractual cash flows, one how their balance sheet management
where the intention is to hold to collect strategies, and the accounting treatment
and sell or one where the intention is under IFRS 9 of the asset used for these
just sales. This assessment, combined strategies, will impact the presentation
with the assessment of the contractual of their statement of comprehensive
cash flow characteristics, will impact income. Choices will impact the volatility
the measurement option available to of their income statements and net asset
insurers. IFRS 9 introduces a situation positions.
where by satisfying both criteria, insurers
can use the measurement options of
amortised cost or fair value through other
comprehensive income (FVOCI).

The introduction of the FVOCI category to

IFRS 9 was seen as a positive development
and represented a significant improvement
to the standard, in combination with the
use of FVOCI in IFRS 17, for insurance
companies. The FVOCI measurement

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IFRS 17 and IFRS 9 | Bridging the Gap

The following diagrams show the impact of the different treatment of changes in assets
and liabilities resulting from interest rate movements on the P&L, OCI and Balance Sheet of
Insurers.

1 Amortised cost (assets) /OCI option (liabilities)

• Value of liability changes as a result of impact of changes in interest

rate on the discount rate (change goes through OCI)
• Account value of asset not affected by interest rate movements
(although impacted by amortisation/impairment)

P&L OCI B/S Value of

asset (+)

Value of
liability (-)

2 Fair value through P&L (assets)/ OCI option (liabilities)

• Change in value of asssets (as a result of changing interest rates) to P&l

• Change in the value of liabilities (discount rate) to OCI
• Impacts largely offset in balance sheet, but mismatch in P&L and OCI

P&L OCI B/S Value of

asset (+)

Value of
liability (-)

3 Fair value through OCI (assets)/OCI option (liabilities)

• Change in value of asssets (as a result of changing interest rates) to OCI

• Change in the value of liabilities (discount rate) to OCI
• Impacts largely offset in balance sheet and OCI, minimal mismatch

P&L OCI B/S Value of

asset (+)

Value of
liability (-)

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 IFRS 17 and IFRS 9 | Bridging the Gap

Technical
Requirements

4 Amortised cost (assets)/P&L option (liabilities)

• Value of liability changes as a result of impact of changes in the

interest rate on the discount rate (change goes through P&L)
• Accounting value of asset not affected by interest rate movements
(although impacted by amortision/impairment)

P&L OCI B/S Value of

asset (+)

Value of
liability (-)

5 Fair value through P&L (assets)/ P&L option (liabilities)

• Change in value of assets (as a result of changing interest rates) to P&L

• Change in the value of liabilities (discount rate) to P&L
• Impacts largely offset in P&L and balance sheet, minimal mismatch

P&L OCI B/S Value of

asset (+)
Tools and
Solutions

Value of
liability (-)

6 Fair value through OCI (assets)/P&L option (liabilities)

• Change in value of assets (as a result of changing interest rates) to OCI

• Change in the value of liabilities (discount rate) to P&L
• Impacts largely offset in balance sheet, but mismatch in P&L and OCI

P&L OCI B/S Value of

asset (+)

Value of
liability (-)

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IFRS 17 and IFRS 9 | Bridging the Gap

Operating model

Timelines &
Principles

Impairment dates of IFRS 9 (1 January 2018) and IFRS 17 at FVTPL under IAS 39 and liabilities that
If assets are recognised at amortised (1 January 2021) arise because the insurer issues or fulfils
cost, there is a need to understand the obligations arising from the liabilities listed
new requirements because the revised Several insurance companies raised previously.
impairment calculations are complex and this issue with the IASB, citing key
require forward-looking information that concerns: Each approach has its own potential
might not currently be readily available. • Explaining the impact of IFRS 9 on shortcomings.
Most companies’ existing systems will be performance prior to the adoption of • The overlay approach results in
unable to track the necessary information the new measurement requirements additional administrative effort. It
while their general ledgers are unlikely to for insurance liabilities could prove requires that insurers perform a
be set up to produce this information on challenging for some insurers parallel run of IFRS 9 and IAS 39 during
an appropriately granular level. As there • Temporary increases in accounting the period between the effective dates
is also a large amount of management mismatches and other sources of to identify the financial instruments
estimation involved, service organisations volatility in profit and loss which meet the criteria and the amount
like investment custodians won’t be able to • Confusion for users of financial that will be shifted from P&L to OCI.
assist with the type of data involved. statements • Some opponents to the temporary
There are also similar data requirements • More cost and effort for both exemption argued that allowing
under IFRS 17, and combining projects that preparers and users of financial insurers to defer implementation of
review and change accounting systems statements in adopting two major IFRS 9 may lead to both the asset and
for both IFRS 9 and IFRS 17 must be standards at different time periods the liability sides of the balance sheet
considered. being accounted for under diverse
In December 2015, an exposure draft and arbitrary accounting policies as
Hedge Accounting for an amendment to IFRS 9 was insurers would be able to choose which
Fortunately, the one area of IFRS 9 that issued in which the IASB proposed to standard to apply – IAS 39 or IFRS 9.
is not expected to significantly impact introduce two options to manage the
insurers is the hedging aspect, provided different effective dates:
insurers consider the new requirements 1. The overlay approach: which would
for their existing and new economic permit entities that issue contracts
hedging programmes. The macro-hedging within the scope of IFRS 17 to reclassify,
proposals (which are yet to be finalised) from P&L to OCI, some of the income
might be of more interest to insurers. or expenses arising from designated
The IASB has retained the existing macro financial assets.
hedge accounting requirements applicable 2. Temporary exemption (deferral
under the previous standard so adopters approach): This temporary exemption
of IFRS 9 may, as an accounting policy is targeted at entities that are most
choice, continue to apply the macro fair affected by the different effective
value hedge accounting model for interest dates because their activities are
rate risk as stated in IAS 39. predominantly connected with insurance
and they have not applied IFRS 9
Different Implementation Dates previously. Insurers wanting to elect this
The effective dates of IFRS 9 and IFRS 17 option must pass what is being referred
were planned to be the same. However, to as the “predominance test”.
prior delays in the finalisation of IFRS
17 have meant that this would not have The predominance test is focused around
been possible. As the Standard was being the proportion of insurance liabilities in
drafted, the IASB committed to provide proportion to the entity’s total liabilities.
approximately three years to adopt the Liabilities connected with insurance
new Standard after its publication. They comprise liabilities arising from contracts
have kept this commitment and there will within the scope of IFRS 17, non-derivative
be a three year gap between the effective investment contract liabilities measured

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 IFRS 17 and IFRS 9 | Bridging the Gap

Importantly, the deferral approach introduces challenges

for group entities. If an entity in a group structure meets
the hurdles for deferral and elects the exemption and
another entity in the same group is not able to defer,
the consolidation of these entities will become more
complex and intricate.

The deferral approach also has there is a requirement to collect and

onerous disclosure requirements, The aim is to reflect changes in insurance store credit data not currently used, must
including the separate disclosure liabilities and the associated backing assets occur. Finally, the need to build models
of the fair value at the end of the in the same place, either in P&L or in OCI. to determine both 12-month and lifetime
reporting period and the fair value If the related changes are reported in expected credit losses and monitor the
change during the reporting period different places, performance reporting development of changes in the credit
for: does not provide useful information. Both quality, is required.
1. The financial assets with contractual the asset and liability sides of the business
cash flows that are not solely payments must be understood. Actuaries must be For hedge accounting, insurers who
of principal and interest (“SPPI”) aware of FVTPL and how various financial currently use hedge accounting under
2. All other financial assets i.e.: those assets are accounted for because it might IAS39 can elect to stay with the standard
assets with contractual cash flows that change the way, for example, impairments until the macro hedging project is finalised.
are SPPI are considered in their models. However, they could benefit from the IFRS
9 hedging changes, such as the relaxation
Therefore, an entity would need to Impact Assessments of the 80%−125% test and hedging with
ensure that the SPPI test, as required by In the lead up to IFRS 9, many financial options.
IFRS 9, is still performed to comply with institutions used impact assessments to
this disclosure requirement. Combined gauge the effect of the standard on their Lastly, with regard to the options around
with the numerous other disclosure systems, target operating models and the implementation date of IFRS 9, if the
requirements, it might diminish the financial statements. Impact assessments overlay approach is adopted, an insurance
attractiveness of the deferral approach. could be effective in determining the entity would have to calculate its insurance
high-level implications of applying the liabilities by considering the impact of both
How can insurers get ahead and start new C&M requirements for insurers. This an IAS 39 measurement and an IFRS 9
maximising these interrelationships? includes assessing the proportion of debt measurement. The deferral of IFRS 9 would
instruments that could fail the SPPI test as likely require significant disclosures. This
Asset-Liability Management (ALM) well as the business model requirements. implies that, regardless of which solution
Considerations Consideration is also given to the insurer’s is chosen by the insurer, the operational
When considering IFRS 9, it is important to ability to use different C&M categories and requirements will still be significant as they
understand the asset-liability management the application of insurance accounting will have to prepare both IFRS 9 and IAS
of insurance companies which is centred options. If mismatches remain, changes 39 numbers as from the 2018 financial
on ALM where liabilities, guarantees and to the investment strategy and mix might year. Insurers should therefore expedite
related assets (including derivatives) need to be considered. preparations to implement the new
are managed together. The accounting standard.
practices should reflect this strategy. Choices that need to be made
Accounting treatments that deal with For all assets not valued using FVTPL, the
components in isolation will result in criteria for the key judgements required Contact
different measurement and presentation need to be developed to allow for potential Amit Bhana
requirements and will not adequately impairments. An assessment of whether Direct: +27 11 209 8438
reflect insurance business and the related the operational simplifications for “low Mobile: +27 83 697 9272
performance in earnings. credit risk” assets can be used, or whether Email: [email protected]

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