3. Mind the Gap? IFRS 9 and IFRS Phase II for Insurance Contracts

Question 1

Mismatch of Effective Dates

Answer 1

2018: IFRS 9 for insurance and banking and will require certain items to be reported at fair value
2020: IFRS 4 Phase II

The mismatch of effective dates will result in mixed-basis (some liabilities still on a BV while assets on a MV) which will result in earnings volatility as market values change.

Question 2

Deferral Approach

Answer 2

1. Must be predominantly insurance (>75% of liabilities)
2. defer implementation of IFRS 9 for 2 years

Adv:

1. avoid earnings volatility
2. easier to compare to prior time periods

DisAdv:

1. difficult to compare to other entities
2. some already report on a FV basis
3. Some insurers have already invested resources to implement IFRS 9

Question 3

Overlay Approach

Answer 3

Apply IFRS 9 and volatility flows through OCI

Two options to present volatility:

1. Separate overlay adjustment from investment income
2. combine overlay adjustment with investment income (But then remove from profit and loss)

Adv: will provide financial statement users with more information