Regulation (EU) 2017/1988 amends IFRS 4 to allow insurers to defer the application of IFRS 9 until January 1, 2021. This measure aims to mitigate the temporary accounting impacts due to the gap between the implementation of IFRS 9 and the new IFRS 17 standard. The amendments ensure that insurance entities can continue using existing accounting standards without facing excessive volatility in their financial…
The document is Regulation (EU) 2017/1988 of the European Commission, published on November 3, 2017. It amends Regulation (EC) No 1126/2008 concerning the adoption of international accounting standards, particularly IFRS 4 on insurance contracts. This regulation aims to incorporate the amendments to IFRS 4 published by the IASB in September 2016, which concern the temporary exemption from applying IFRS 9 Financial Instruments for insurers. The scope covers insurance entities, including those belonging to financial conglomerates, within the European Economic Area, for financial years beginning on or after January 1, 2018, until January 1, 2021. The document contains 12 pages.
Regulation (EU) 2017/1988 amends IFRS 4 to introduce a temporary exemption allowing entities primarily engaged in insurance activities to defer the application of IFRS 9 Financial Instruments until January 1, 2021 (p. 1-2). This measure addresses the mismatch between the effective date of IFRS 9 (January 1, 2018) and that of the new IFRS 17 standard on insurance contracts (January 1, 2021), thus avoiding accounting volatility and inconsistencies in financial statements (p. 1). The exemption applies to insurers who have not yet applied IFRS 9 and whose activities are primarily related to insurance, according to specific liability weighting criteria (p. 4-6). For insurers integrated into financial conglomerates, deferral is also possible under strict conditions, notably a temporary prohibition on transferring financial instruments between sectors to prevent accounting arbitrage (p. 1-2). The regulation also introduces an "overlay" approach allowing insurers applying IFRS 9 to reclassify certain differences between IFRS 9 and IAS 39 in financial statements to reduce volatility (p. 7-9). Insurers benefiting from the exemption must provide detailed information on their situation, the criteria met, as well as on the fair value and risks related to financial assets under IAS 39 (p. 9-11). The objective is to ensure a smooth transition to IFRS 9 and IFRS 17 while guaranteeing transparency and comparability of financial information (p. 1-2). The regulation applies from financial years beginning on January 1, 2018, and is mandatory in all Member States (p. 3).
The regulation responds to the September 2016 publication by the IASB of amendments to IFRS 4 aimed at managing the mismatch between the effective dates of IFRS 9 (financial instruments standard) on January 1, 2018, and IFRS 17 (insurance contracts standard) on January 1, 2021 (p. 1). This mismatch could have caused accounting volatility and increased complexity for insurers, especially those integrated into financial conglomerates. The European Commission, after consulting EFRAG, deemed it necessary to adopt a temporary exemption to allow insurers to defer the application of IFRS 9 until IFRS 17 comes into force (p. 1). The objective is to avoid competitive distortions and ensure better clarity of consolidated financial statements. The scope covers entities primarily active in insurance, including those subject to Directive 2002/87/EC on financial conglomerates (p. 1-2). The regulation specifies application conditions, disclosure obligations, and measures to prevent accounting arbitrage. The scope is limited in time until January 1, 2021, the effective date of IFRS 17 (p. 2).
Temporary exemption from IFRS 9 for insurers:
- The exemption allows insurers meeting strict criteria (notably not having applied IFRS 9 previously and having an activity mainly related to insurance) to continue applying IAS 39 until January 1, 2021 (p. 4-6).
- The definition of an activity mainly related to insurance is based on the weighting of insurance-related liabilities, with a threshold above 90%, or between 80% and 90% without significant non-insurance activity (p. 5-6).
- Entities must annually reassess their eligibility for the exemption, especially in case of significant changes in their activities (p. 6).
Application to financial conglomerates:
- Financial conglomerates may defer the application of IFRS 9 for their insurance entities under conditions, notably a temporary prohibition on transferring financial instruments between sectors, except for those measured at fair value through profit or loss (p. 1-2).
- This measure aims to avoid accounting arbitrage and preserve the understanding of consolidated financial statements (p. 2).
Overlay approach:
- Allows insurers applying IFRS 9 to reclassify between profit or loss and other comprehensive income the difference between measurement under IFRS 9 and IAS 39 for certain designated financial assets (p. 7-9).
- This approach is optional, applicable only at the first adoption of IFRS 9, and aims to reduce accounting volatility related to changes in standards (p. 7-8).
- Precise criteria define eligible financial assets, excluding notably those held for activities unrelated to insurance contracts (p. 8).
Disclosure obligations:
- Insurers benefiting from the exemption must provide detailed information on their eligibility, the nature of their liabilities, changes in activity, as well as on the fair value and credit risks of financial assets under IAS 39 (p. 9-11).
- Those applying the overlay approach must explain the calculation of reclassified amounts and their impact on financial statements (p. 10-11).
Entry into force and application:
- The regulation applies to financial years beginning on or after January 1, 2018 (p. 3, 11-12).
- The deferral of IFRS 9 application is temporary, until January 1, 2021, the effective date of IFRS 17 (p. 2, 11-12).
Established facts:
- The IASB published amendments to IFRS 4 in September 2016 allowing a temporary exemption from IFRS 9 for insurers (p. 1).
- The European regulation transposes these amendments into European law, with specific conditions for insurers and financial conglomerates (p. 1-3).
- The exemption is time-limited until January 1, 2021 (p. 2).
Assumptions and interpretations:
- The deferral of IFRS 9 is justified by the mismatch between the effective dates of IFRS 9 and IFRS 17, to avoid excessive accounting volatility (p. 1).
- The prohibition on transferring financial instruments between sectors within conglomerates aims to prevent accounting arbitrage (p. 2).
Uncertainties:
- The precise impact of the exemption on the comparability of consolidated financial statements depends on the rigor of information provided by entities (p. 9-11).
- The rarity of significant changes in insurers' activities that could affect their eligibility for the exemption is noted but remains a factor to monitor (p. 6).
Lessons learned:
- The standard offers a pragmatic solution to manage the transition between two major standards while maintaining transparency through enhanced disclosure obligations (p. 9-11).
- The overlay approach constitutes an innovative mechanism to mitigate accounting volatility related to the adoption of IFRS 9 (p. 7-9).
The European Commission concludes that the amendments to IFRS 4, incorporating the temporary exemption from IFRS 9, meet the adoption criteria and are necessary to ensure a smooth transition to IFRS 9 and IFRS 17 (p. 1). It recommends that insurers and financial conglomerates apply these provisions from financial years beginning on January 1, 2018, respecting the defined conditions and disclosure obligations (p. 2-3). The deferral of IFRS 9 is time-limited until January 1, 2021, the effective date of IFRS 17, to ensure that the accounting improvements brought by IFRS 9 become effective as soon as possible (p. 2). The regulation also imposes measures to prevent accounting arbitrage, notably the temporary prohibition on transferring financial instruments between sectors within conglomerates (p. 2). Finally, the overlay approach is proposed as an optional tool to reduce accounting volatility during the adoption of IFRS 9 (p. 7-9). The regulation is mandatory and directly applicable in all Member States (p. 3).
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