No let-up: Why insurers can’t afford to lose sight of IFRS 9

06 December 2018

The new accounting rules for insurers who have already elected to defer changes to their financial instruments accounting by 3 years, may have been delayed by an additional year, but they’ve not gone away. With so much to do and so many complex hurdles to overcome, to stand still is to fall behind.

Most market attention has focused on the extension of the deadline for the IFRS 17 Insurance Contracts standard, however the parallel deferral of IFRS 9 Financial Instruments for insurers also comes with significant pitfalls but also opportunities.

So why is it vital not to lose sight of IFRS 9? Given the importance of matching assets and liabilities, preparations for IFRS 17 and IFRS 9 should be as closely aligned as possible – the IASB’s decision to put both accounting standards back to 2022 recognises this.

Imminent disclosure requirements

The immediate challenge is the IFRS 9 deferral disclosures that need to be incorporated within your upcoming 2018 financial statements.

Whilst relatively brief, the disclosures may require a considerable amount of background work, depending on your existing financial asset mix. This includes your justification for applying the temporary exemption to IFRS 9.

Other tricky elements include reporting fair value information separately for financial assets that meet the Solely Payments of Principal and Interest (SPPI) contractual cash flow test and those that will be measured at fair value through profit or loss (FVTPL). You can’t assume that classification and measurement will be the same as IAS 39 - the new business model criteria can produce some surprising results. If you currently hold available-for-sale or held to maturity investments, you also face the challenge of testing a large number of financial instruments to check whether they’re SPPI-compliant or not – how can you make that process more manageable?

Balancing volatility and operational complexity

As you gear up for going live in 2022, key hurdles include determining the most appropriate classification of financial instruments and calculating the new expected credit loss impairment requirements. The desire to minimise accounting mismatches may require you to go through all your financial assets to gauge the business model the financial instrument is held in, the cash flow criteria of the instrument and how this tallies with the corresponding insurance liabilities. Specifically, it should be noted that debt instruments that fail the SPPI criteria and most equity instruments are now expected to be measured at FVTPL, including puttable instruments on mutual funds.

Key considerations don’t just include the asset-liability management (ALM) and the income statement implications of the accounting option, but also how much work is required. For example, the Other Comprehensive Income (OCI) option under IFRS 17 can reduce volatility in profit or loss where financial assets are measured at fair value through OCI under IFRS 9. However, this option can greatly increase the operational complexity of preparing financial statements, due to the need to calculate impairment on the investment portfolio and complete SPPI testing on purchases.

Making the most of the benefits

The good news is that close alignment between IFRS 9 and IFRS 17 can help to improve the quality and efficiency of financial reporting. This includes opportunities to streamline the chart of accounts and data collection, data storage and data dictionary solutions.

Bringing implementation together could also provide an important foundation for any finance transformation. The potential benefits include a faster period end close process, real-time performance data and differentiating insights into commercial threats and opportunities.

So how much alignment in the implementation of IFRS 9 and IFRS 17 are we seeing? Surprisingly little given both the matching challenges and potential advantages. It would appear that the original deadlines may have led to a siloed ‘needs-must’ approach. Therefore, one of the key benefits of the extra year to prepare is bringing the two accounting challenges together and moving forward on one front.

Look out for PwC’s report on what IFRS 9 means for insurers of the future, which we’ll be launching early in 2019.

 

Kathryn Le Coz

Kathryn Le Coz | Senior manager
Profile | Email | +44 (0)7725 632 974

Richard  Goodman

Richard Goodman | Senior Manager
Profile | Email | +44 (0) 7730 598929

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