Friday, July 4th, 2014
The IASB during the June 2014 meeting has continued its re-deliberations on its 2013 exposure draft Insurance Contracts and has discussed on the issues. The Board also held decision-making discussions on the following topics:
When observable market information is not available, the ED on IFRS 4 (Phase II) – Insurance Contracts requires entities to use estimation techniques to determine the appropriate discount rate. However, the concerns have been raised on how to estimate discount rates when there is a lack of observable data. As the staff felt this lack of clarity could give rise to diverse interpretations, the staff recommended that the Board provides additional application guidance to:
At the same time, any unobservable inputs should not contradict any available and relevant market data. The measurement objective of the ED is not a fair value estimate, but the guidance in IFRS 13 needs to be considered when determining discount rate used for measuring insurance liabilities.
The staff asked the Board to confirm the principle in the ED that the discount rates should be consistent with observable current market prices for instruments with cash flows whose characteristics are consistent with those of the insurance contract.
During the meeting, some concerns were raised on the issue that may arise where the observable market data may not have any observable transactions for certain durations, but there are a few longer durations with an observable transaction. Therefore, it needs to be clarified whether any transactions for longer-durations contracts would represent data from an active market and would be required to be used.
Asymmetrical accounting treatment
The concern in relation to asymmetry in the accounting treatment for a cedant’s reinsurance contracts and the underlying contracts. In accordance with the ED, a gain on a reinsurance contract is not recognised even if the contractual service margin on the underlying direct contracts is nil and changes in estimates of future cash flows are reported in profit or loss.
The IASB has tentatively decided that subsequent changes in cash flow estimates of reinsurance contracts held should be recognised in profit or loss by the cedant when changes in the expected reinsured losses of the underlying direct contracts are recognised in profit or loss. This would occur when, for example, the underlying direct contracts have become onerous and the CSM on these contracts has been reduced to nil. As a result, it is possible that some of the cash flow changes related to a reinsurance contract are recorded in profit or loss, whilst other changes of that contract are adjusted against CSM.
Level of aggregation
In the meeting, the staff explained that the comment letters to the ED have raised an issue that different levels of aggregation could arise and asked that the Board further clarify which elements exist within the model that would be subject to a different level of aggregation and what factors need to be considered in determining the level of aggregation for these respective elements. Therefore, the staff has recommended to:
Accounting policy for presenting effects of changes in discount rates
In the March meeting, the Board had tentatively decided that an entity should choose to present the effect of changes in discount rates in profit and loss or in other comprehensive income as its accounting policy. The Board required that an entity should apply that accounting policy to all contracts within a portfolio. The staff also asked the Board to further clarify the level of aggregation for applying the accounting policy choice on where to recognise the effects of changes in discount rates.