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© 2013 Deloitte LLP IASB deliberates further to move closer to the publication of its final draft IFRS 4 Phase II Update IASB meetings – December 2012 Francesco Nagari Deloitte Global IFRS Insurance Lead Partner 8 January 2013
© 2013 Deloitte LLP Agenda Highlights of decisions from December 2012 IASB only meetings Detailed analysis of the Staff recommendations and Board discussions Update on timetable and next steps 1IFRS 4 Phase II – Webcast (December 2012)
© 2013 Deloitte LLP IASB only decisions – 14 December This month’s decisions have now substantially completed the accounting requirements for the residual margin which will be the key driver for profit recognition under the new IFRS The residual margin for participating contracts will be allocated according to services provided and its unlocking would not include changes in participating assets’ expectations The revenue recognition guidance on constraints to the allocation of residual margin will not apply to insurance contracts Impairment of reinsurance contracts held by the insurer will not follow the IFRS 9 requirements and the expected default losses will be recognised using the BBA 2IFRS 4 Phase II – Webcast (December 2012) Highlights
© 2013 Deloitte LLP Principle for the unlocking of the residual margin Paper 2A Staff Recommendation The Staff recommended that the residual margin should be unlocked for differences between current and previous estimates of cash flows relating to future coverage or other future services Discussion Brief discussion on the proposed refinement of the previous tentative decision on unlocking of residual margin that did not contain the reference to future coverage/future services The four issues where this change will make an impact are a)incurred claims; b)experience differences in premium receipts; c)repayments of investment components; and d)contracts with asset-dependent cash outflows 3IFRS 4 Phase II – Webcast (December 2012)
© 2013 Deloitte LLP Principle for the unlocking of the residual margin Paper 2A (cont.) Discussion Changes in estimates of incurred claims would never trigger the unlocking of the residual margin Changes in estimates for premiums would trigger the unlocking of the residual margin only if the premium refers to future coverage – this would be in line with the treatment of changes in future benefits/claims Delay or acceleration of repayment of investment components would trigger a residual margin unlocking only if it relates to future coverage or other services Changes in the estimate of asset-dependent cash flows would trigger the unlocking of the residual margin only if they relate to future periods The IASB supported the staff recommendations 4IFRS 4 Phase II – Webcast (December 2012) DecisionIASB vote Approve Staff recommendationUnanimous
© 2013 Deloitte LLP Proposals relating to the margin for participating contracts- Paper 2B Staff recommendations – Margin for participating contracts The residual margin for participating contracts is adjusted for changes in the value of the premiums by adjusting the margin for changes in the value of the underlying items as measured using IFRS Discussion Extensive discussion focussed on the proposed principle to use changes in the asset linked to the participating cash flows to unlock the residual margin The Staff argued that there should be consistency between unlocking and initial recognition when expected future asset returns are considered to determine the future cash flows Several IASB members disagreed and noted that all insurers have exposure to assets that back their insurance liabilities and this is not peculiar of participating business. On that basis they rejected the proposal of a different unlocking basis for participating contracts 5IFRS 4 Phase II – Webcast (December 2012) DecisionIASB vote Reject Staff recommendation8 against and 7 in favour
© 2013 Deloitte LLP Proposal relating to the margin for participating contracts- Paper 2B (cont.) Staff recommendation – release of the margin and Revenue Recognition principles The Staff recommended that the allocation of the residual margin for all insurance contracts should not to apply the Revenue Recognition guidance on constraints to the allocation of revenue Discussion These principles would constrain the recognition of the residual margin to amounts that the insurer is reasonably assured to be entitled. The Revenue Recognition ED contains indicators of this status The Staff argued that most of these indicators would not be passed by insurance contracts and the new IFRS for Insurance Contracts should not use them Discussion on this item was brief with the only output being the request for some application guidance to be developed on the appropriate basis for allocating the residual margin without reference to the Revenue Recognition principles 6IFRS 4 Phase II – Webcast (December 2012) DecisionIASB Vote Approve Staff recommendationUnanimous
© 2013 Deloitte LLP Impairment of reinsurance contracts held Paper 2C Proposed Staff Recommendation The cedant should account for the initial estimate and subsequent changes in estimates of expected credit losses in accordance with the insurance contract decisions, with the cedant adjusting the residual margin for changes in cash flows assumptions as a result of different expected credit losses. Discussion Lively debate followed. One IASB member was absent. The IASB agreed that the IFRS 9 impairment model would not be suitable for reinsurance assets However the proposal to require unlocking of the residual margin for subsequent changes in expected credit losses resulted in substantial disagreements 7IFRS 4 Phase II – Webcast (December 2012)
© 2013 Deloitte LLP Impairment of reinsurance contracts held Paper 2C (cont.) The IASB members led their Staff to the refinement of the recommendation and to a combined approach Amended decision a)Upon initial recognition of a reinsurance contract a cedant will set the residual margin in the reinsurance asset including the estimates of expected credit losses. b)However any subsequent changes to cash flows relating to revised estimate of expected credit losses will be recognised through income 8IFRS 4 Phase II – Webcast (December 2012) DecisionIASB Vote Approve Staff recommendation as amended a)Unanimous b)13 v. 1
© 2013 Deloitte LLP Next steps and timetable Next joint meeting expected to be held in the week commencing 28 January IASB will commence its field testing preparation during this month The Staff progress report published in late December on the status of the project presents the following timetable: 9IFRS 4 Phase II – Webcast (December 2012)
© 2013 Deloitte LLP. Contact details Francesco Nagari Deloitte Global IFRS Insurance Lead Partner Deloitte Insights into IFRS Insurance (i2ii) Insurance Centre of Excellence: 10
This seminar and the accompanying hand-outs cover topics only in general terms and are intended to give a wide audience an outline understanding of issues relating to accounting applicable to entities in the insurance sector, and therefore cannot be relied on to cover specific situations; applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you obtain professional advice before acting or refraining from acting on any of its contents. We would be pleased to advise you on the application of the principles demonstrated at the seminar and other matters to your specific circumstances but in the absence of such specific advice cannot be responsible or liable. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein, whose member firms are legally separate and independent entities. Please see for a detailed description of the legal structure of DTT and its member firms. © 2013 Deloitte LLP. 11
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