Posted by & filed under Financial Reporting.

4 February 2016

Mr H. Hoogervorst
Chairman
International Accounting Standards Board 30 Cannon Street
London EC4M 6XH
UNITED KINGDOM

Dear Mr Hoogervorst

commentletters@ifrs.org

ED/2015/11 ‘Applying IFRS 9 Financial Instruments With IFRS 4 Insurance Contracts’

The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with the purpose of advancing Australia’s financial competitiveness. The G100 is pleased to provide comment on this ED.

The G100 believes that the IASB should give a high priority to issuing the new insurance contracts standard as soon as possible to enable companies to prepare for its implementation in an orderly fashion. The beginning of the comparative year for the mandatory application of IFRS 9 ‘Financial Instruments’ is now less than twelve months away. Although the temporary exemption may apply in some circumstances, issuing the requirements of the new insurance standard before then will enable companies to assess the impact of any differences and make decisions prior to the commencement of the comparative year.

Q1 Addressing the concerns raised

Paras BC9-BC21 describe the following concerns raised by some interested parties about the different effective dates of IFRS 9 and the new insurance contracts Standard:

  1. Users of financial statements may find it difficult to understand the additional

    accounting mismatches and temporary volatility that could arise in profit or loss if

    IFRS 9 is applied before the new insurance contracts Standard (paras BC10-BC16).

  2. Some entities that issue contracts within the scope of IFRS 4 have expressed concerns about having to apply the classification and measurement requirements in IFRS 9 before the effects of the new insurance contracts Standard can be fully

    evaluated (paras BC17-BC18).

  3. Two sets of major accounting changes in a short period of time could result in

    significant cost and effort for both preparers and users of financial statements (paras

    Bc19-BC21).

The proposals in this ED are designed to address these concerns. Do you agree that the IASB should seek to address these concerns? Why or why not?
The G100 agrees that it is appropriate for the IASB to address these concerns as the issues may have significant effects in some jurisdictions.

However, from an Australian perspective the operation of AASB 1023 ‘General Insurance Contracts’ and AASB 1038 ‘Life Insurance Contracts’ deal with financial assets backing general and life insurance contracts respectively and as such the concerns of accounting mismatches and temporary volatility are not expected to arise.

Q2 Proposing both an overlay approach and a temporary exemption from applying IFRS 9
The IASB proposes to address the concerns described in paras BC9-BC21 by amending IFRS4:

  • a. to permit entities that issue contracts within the scope of IFRS 4 to reclassify from profit or loss to other comprehensive income some of the income or expenses arising from designated financial assets that:
  1. are measured at fair value through profit or loss in their entirety applying IFRS 9 but
  2. would not have been so measured applying IAS 39 (the ‘overlay approach’) see paras BC24-BC25:
  • b. to provide an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 (the ‘temporary exemption from applying IFRS 9’) see paras BC26-BC31.

Do you agree that there should be both an overlay approach and a temporary exemption from applying IFRS 9? Why or why not?

If you consider that only one of the proposed amendments is needed, please explain which and why.
While it would have been preferable for effective dates of the Standards to be aligned the G100 considers that each of the approaches addresses the concerns arising in some jurisdictions and represent a reasonable short-term approach to address these concerns.

Q3 The overlay approach

Paras 35A-35F and BC32-BC53 describe the proposed overlay approach.

  1. Paras 35B and BC35-BC43 describe the assets to which the overlay approach can be applied. Do you agree that the assets described (and only those assets) should be eligible for the overlay approach? Why or why not? If not, what do you propose instead and why?
  2. Paras 35C and BC48-BC50 discuss presentation of amounts reclassified from profit or
  3. loss to other comprehensive income applying the overlay approach. Do you agree with the proposed approach to presentation? Why or why not? If not, what do you propose instead and why?
  4. Do you have any further comments on the overlay approach?

The G100 believes that the two options should be available to those entities based in jurisdictions where the different implementation dates of IFRS 9 and IFRS 4 give rise to concerns about the mismatching that may arise. While providing choice of treatment is likely to lead to a lack of comparability between entities it is a reasonable short-term compromise. A residual concern is that matters described as ‘temporary’ often become permanent and accordingly we support the proposals to have a ‘sunset clause’.

Q4 The temporary exemption from applying IFRS 9

As described in paras 20A and BC58-BC60 the ED proposes that only entities whose predominant activity is issuing contracts within the scope of IFRS 4 can qualify for the temporary exemption from applying IFRS 9.
a. DoyouagreethateligibilityforthetemporaryexemptionfromapplyingIFRS9should

be based on whether the entity’s predominant activity is issuing contracts within the

scope of IFRS 4? Why or why not? If not, what do you propose instead and why?
As described in paras 20C and BC62-BC66, the ED proposes that an entity would determine whether its predominant activity is issuing contracts within the scope of IFRS 4 by comparing the carrying amount of its liabilities arising from contracts within the scope of IFRS 4 with the total carrying amount of its liabilities (including liabilities arising from contracts within the scope of IFRS 4).

b. Do you agree that an entity should assess its predominant activity in this way? Why or why not? If you believe predominance should be assessed differently, please describe the approach you would propose and why.

Paras BC55-BC57 explain the IASB’s proposal that an entity would assess the predominant activity of the reporting entity as a whole (ie assessment at the reporting entity level).

c. Do you agree with the proposal that an entity would assess its predominant activity at the reporting entity level? Why or why not? If not, what do you propose instead and why?

The G100 agrees with the approach to applying the temporary exemption

Q5 Should the overlay approach and the temporary exemption from applying IFRS 9 be optional?
As explained in paras BC78-BC81, the ED proposes that both the overlay approach and the temporary exemption from applying IFRS 9 would be optional for entities that qualify. Consistently with this approach, paras BC45 and BC76 explain that an entity would be permitted to stop applying those approaches before the new insurance contracts Standard is applied.

a. Do you agree with the proposal that the overlay approach and the temporary exemption from applying IFRS 9 should be optional? Why or why not?

b. Do you agree with the proposal to allow entities to stop applying the overlay approach or the temporary exemption from applying IFRS 9 from the beginning of any annual reporting period before the new insurance contracts Standards is applied? Why or why not?

The G100 believes that the choice of approach should be optional so that entities can apply the approach which best meets their circumstances.

Q6 Expiry date for the temporary exemption from applying IFRS 9

Paras 20A and BC77 propose that the temporary exemption from applying IFRS 9 should expire at the start of annual reporting periods beginning on or after 1 January 2021.
Do you agree that the temporary exemption should have an expiry date? Why or why not?

Do you agree with the proposed expiry date of annual reporting periods beginning on or after 1 January 2021? If not, what expiry date would you propose and why?

The G100 supports the existence of an expiry date for the temporary exemption. This provides clarity and certainty for entities and a discipline for the IASB to complete its insurance project on a timely basis. As mentioned above, the G100 believes that the IASB should give a high priority to issuing the new insurance standard as soon as possible.

Sincerely

Group of 100 Inc

Zlatko Todorcevski

President