The IASB is planning to assess the feedback from an external review of its planned insurance standard, IFRS 17, Insurance Contracts, at its Feb. 22, 2017, meeting.
The board still plans to issue the standard in the next few months and complete a project that dates back to 2004 and publication of IFRS 4, Insurance Contracts. The 2004 standard was never intended to be more than a temporary placeholder until the board could develop a standard with more substantive requirements.
According to the upcoming meeting’s agenda papers, the IASB staff still believes it can wrap up the final version of the standard and have it released in the first half of 2017, although the staff plans to ask board members to evaluate the recommended changes from the latest review and give their consent to the revisions the staff believes are necessary.
The external reviewers said the method for measuring the unearned profit on a pool of insurance contracts, called the contractual service margin, needed alteration and questioned the decisions the board reached in November 2016 that changes in the estimated future cash flows should be reflected in the service margin. One reviewer said the requirements were too vague with regard to how adjustments to the margin should be represented in an income statement.
A separate revision to the final standard calls for adding an exemption to the requirement for grouping insurance policies.
The most recent draft of the standard calls for insurers to sort their contracts into three groups as they are measured. One for contracts in which the benefits and other costs will exceed the premiums and other income and, as a result, are defined as “onerous”, a second group that is likely to earn a profit and considered not at risk of being considered onerous and the third group that consists of the remaining contracts.
According to the IASB, an exemption to the sorting requirement should be allowed for contracts that are subject to a law or regulation that prevents an insurer from pricing a policy based upon the level of risk associated with it.
The IASB plans to release a standard that will require insurers to measure their policies with a present value of their future cash flows that is adjusted for risk and an estimate of the service margin on a pool of contracts, the meeting agenda papers say. The cash flow and service margins will have to be updated each reporting period. The standard will also call for differentiating between standard insurance policies and policies that function as investments and include features like a guaranteed minimum rate of return.
The final standard is expected to be based upon Exposure Draft (ED) No. 2013-7, Insurance Contracts, which was published in June 2013. The IASB largely completed its discussions on the planned standard in February 2016, although it continued making limited adjustments to it until last November. In December, the board’s research staff sent a final draft of the standard out for an external review, and the upcoming meeting is expected to be the board’s final substantive discussion for the project before the final standard is released.
At a January 31 meeting of the IFRS Foundation, the IASB’s parent organization, the accounting board’s staff explained their plans for providing implementation support and professional education for financial professionals dealing with the new guidance. The board believes the support is necessary because the standard will mean a substantial change to the way insurers prepare their financial reports.
The accounting board also plans to establish a special group of insurers, auditors, and securities analysts to field questions about the standard and offer potential solutions ahead of the standard’s 2021 effective date. The IASB plans to announce the members and makeup of the group, which the board plans to call a transition resource group, after the standard’s publication.
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