IAS/IFRS Insurers and IAS / IFRS Frank Helsloot (AXA Group Belgium) Luxembourg 23 February 2005 ALACConference

IAS/IFRS ALACConference 2 Table of Contents  IAS - IFRS --> some principles  Classification of Assets and Liabilities ---> some industry related principles  Conclusions

IAS/IFRS ALACConference 3 IAS - IFRS Some principles IAS/IFRS ALACConference

IAS/IFRS ALACConference 4 IAS / IFRS  Framework  IAS (International Accounting Standard)  SIC (Standard Interpretations Committee)  IFRS (International Financial Reporting Standard) –Standard –Implementation Guidance –Basis for Conclusions  Exposure Draft (Standard in preparation)

IAS/IFRS ALACConference 5 Some Principles  Accounting (recognition and derecognition) economic reality prevails legal reality activity based instead of industry based component approach asset / liability approach instead of deferral and matching  Presentation in / out balance cash flow statement Statement of changes in equity  Measurement amortised cost fair value  Disclosures detailed information management information

IAS/IFRS ALACConference 6 Classification of Assets and Liabilities Some Industry Related Principles IAS/IFRS ALACConference

IAS/IFRS ALACConference 7 Classification of assets and liabilities  Financial Instruments (IAS 39 - IAS 32) –Measurement categories –Amortised Cost and Fair Value –Impairment –Embedded derivatives –Hedges –Trade date versus settlement date  Real Estate (IAS 40 and IAS 16)  Insurance –Insurance contract –Discretionary participation –IAS 39 IFRS 4  Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts

IAS/IFRS ALACConference 8 Classification of assets and liabilities  Financial Instruments (IAS 39 - IAS 32) –Measurement categories –Amortised Cost and Fair Value –Impairment –Embedded derivatives –Hedges –Trade date versus settlement date  Real Estate (IAS 40 and IAS 16)  Insurance –Insurance contract –Discretionary participation –IAS 39 IFRS 4  Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts

IAS/IFRS ALACConference 9 Financial Instruments: Measurement Categories Strict use of HTM Limited use of FV designated (under discussion) Derivatives and embedded derivatives are at trading

IAS/IFRS ALACConference 10 Financial Instruments: Measurement Rules  Amortised Cost: (assets and liabilities) –Add all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (IAS 18), transaction costs and other premiums or discounts ----> Cash flow schema ----> Internal administrative costs are excluded –Calculate the Effective Interest Rate: rate that discounts the estimated future cash payments or receipts through the expected life of the financial instrument –Carrying amount based on Effective Interest Rate –Contractual book value (cash flow based) –Changes in applications needed (IT budget!)

IAS/IFRS ALACConference 11 Measurement Rules: Amortised Cost: simpl.example

IAS/IFRS ALACConference 12 Financial Instruments: Measurement Rules  Fair Value: (assets and liabilities) –incorporate all embedded derivatives in the product (mortgages: cap and floor, prepayment option,….) –changes in fair value are reported in either P/L (volatility!!) or Equity (depends on portfolio) –deferred acquisition cost not recognised (immediately in P/L) –fair value can not be lower than amount payable on demand) –when there is no market: fair value will largely equate to a mark-to-model system –measurement is contract by contract –either accounting or disclosures –changes in applications needed (IT budget!)

IAS/IFRS ALACConference 13 Financial Instruments: Measurement Rules  Impairment Type of financial assetBasis for ImpairmentP/L charge reversible Amortised CostRecoverable amountYes Available for sale Equity securitiesMarket amountNo Debt securitiesRecoverable amountYes

IAS/IFRS ALACConference 14 Financial Instruments: Derivatives  Definition of a derivative: 3 characteristics: – its value changes in response to the change in a specified ‘underlying’ interest rate security price foreign exchange rate index of prices or rates credit rating –it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors –it is settled at a future date  Can be contained explicit (guaranteed interest rate) or even implicit (prepayment option) in a contract: ---> embedded derivative

IAS/IFRS ALACConference 15 Financial Instruments: Embedded derivatives  Identification of embedded derivatives in –Assets: Financial instruments IAS 39 –Liabilities: Insurance investments IAS 39 Insurance contracts  Test for separation –no separation if feature does not meet the definition of derivative if host at fair value (trading or trading designated) if closely related feature meets definition of insurance contract  Measurement at Fair value

IAS/IFRS ALACConference 16 Financial Instruments: Hedges  Fair-value hedges  Cash-flow hedges  Hedges of a Net Investment in a Foreign Operation  Portfolio hedge of interest rate risk  Hedge Disclosures  Effectiveness test  Alternative: ? Use of ‘Fair Value through P/L designated’ portfolio

IAS/IFRS ALACConference 17 Financial Instruments: Trade date versus Settlement date  Assets: Trade date or Settlement date accounting –no difference on impact on P/L by purchases –difference on impact on P/L by sale (immediate recognition of P/L by trade date) –trade date will increase assets  Liabilities: Settlement date

IAS/IFRS ALACConference 18 Classification of assets and liabilities  Financial Instruments (IAS 39 - IAS 32) –Measurement categories –Amortised Cost and Fair Value –Impairment –Embedded derivatives –Hedges –Trade date versus settlement date  Real Estate (IAS 40 and IAS 16)  Insurance –Insurance contract –Discretionary participation –IAS 39 IFRS 4  Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts

IAS/IFRS ALACConference 19 Real Estate  IAS 40: Investment property –Either Cost or Fair Value for all investment property Cost depreciation based on its useful life (IAS 16): –split of the property in separate items –residual value Fair Value: volatility ? Impact on P/L  IAS 16: Property, Plant and Equipment –Cost model (benchmark) or Revaluation model (alternative treatment, positive valuation = equity) –When an item is revaluated: entire class should be revaluated

IAS/IFRS ALACConference 20 Classification of assets and liabilities  Financial Instruments (IAS 39 - IAS 32) –Measurement categories –Amortised Cost and Fair Value –Impairment –Embedded derivatives –Hedges –Trade date versus settlement date  Real Estate (IAS 40 and IAS 16)  Insurance –Insurance contract –Discretionary participation –IAS 39 IFRS 4  Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts

IAS/IFRS ALACConference 21 Insurance Contracts  Definitions: –Insurance contract: A contract under which one party (the insurer) accepts significant insurance risk (other than financial risk from another party) (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (whether an insured event will occur, when it will occur or how much the insures will need to pay if it occurs) (the insured event) adversely affects the policyholder.

IAS/IFRS ALACConference 22 Insurance Contracts  Definitions: –Discretionary participation: A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: –(a) that are likely to be a significant portion of the total contractual benefits; –(b) whose amount or timing is contractually at the discretion of the issuer; and –(c) that are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profit or loss of the company, fund or other entity that issues the contract.

IAS/IFRS ALACConference 23 Insurance Risk Investment ContractInsurance Contract Discretionary Participation IFRS 4 IAS 32 IAS 39 IAS 32 Measurement / Accounting Disclosures / Presentation Yes No Insurance Contracts

IAS/IFRS ALACConference 24 Insurance Contracts  Phase 1: –Investments: See IAS 39 - IAS 32: Financial Instruments –Amortised Cost –Fair Value –Insurance contracts: Phase 1: Local GAAP Embedded derivatives (IAS 39)  Phase 2: 2007?

IAS/IFRS ALACConference 25 Classification of assets and liabilities  Financial Instruments (IAS 39 - IAS 32) –Measurement categories –Amortised Cost and Fair Value –Impairment –Embedded derivatives –Hedges –Trade date versus settlement date  Real Estate (IAS 40 and IAS 16)  Insurance –Insurance contract –Discretionary participation –IAS 39 IFRS 4  Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts

IAS/IFRS ALACConference 26 Comparison Local GAAP versus IAS (simplified) Assets LocalIASChanges in FV Trading and (emb) derivatives Fair ValueTradingP/L Cost (hedging) TradingP/L TradingP/L Treasury Premium/ discount AFSEquity Fair ValueP/L Investments HTM (debt / equity based) AFSEquity Fair ValueP/L Loans Cost Loans and receivables Fair ValueP/L Real estate (IAS 40) Cost Fair ValueP/L Premium/ discount

IAS/IFRS ALACConference 27 Comparison Local GAAP versus IAS (simplified) Liabilities LocalIASChanges in FV Trading and (emb) derivativesFair Value TradingP/L Cost (hedging) TradingP/L Deposits CostAmortised Cost Fair ValueP/L Investment Contracts ReservePhase 1: Fair ValueP/L (Insurance IAS 39)Phase 1: Amortised Cost Insurance Contracts (Life) ReservePhase 1: Local GAAP Phase 2: FV ?P/L ? Insurance Contracts (Non Life) ReservePhase 1: Local GAAP Phase 2: FV ?P/L ?

IAS/IFRS ALACConference 28 Conclusions IAS/IFRS ALACConference

IAS/IFRS ALACConference 29 Conclusions  How to manage classification of assets and liabilities on Opening Balance IFRS ? –Define strategy about volatility in P/L and in Equity –Use of ‘Fair Value designated through P/L’ (under discussion) –Use of hedge accounting (under discussion)  How to manage P/L and Equity under IFRS? –Phase 1 –Phase 1 2

IAS/IFRS ALACConference 30 Thank you for your attention