08 February 2016

EBA, Deloitte and FRC comment on IASB’s ED Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

EBA

The EBA takes note of the IASB’s efforts to address the issue of different application dates of IFRS 9 Financial instruments (‘IFRS 9’) and IFRS 4 Insurance Contracts (‘IFRS 4’) and the resulting accounting mismatches.

The EBA believes that addressing the insurance concerns should not be an impediment to the application of IFRS 9 by banks and banking groups in their financial statements prepared in accordance with IFRS.

In providing EBA´s comments, the EBA acknowledges the difficulty for the IASB of finding a solution that meets the needs of stakeholders and that will be applied for a limited time only. In this regard, the EBA can understand the reasons for the IASB to provide the possibility to apply an overlay approach or a temporary exemption from applying IFRS 9 at the reporting entity level when a predominance test is met. The EBA also supports the rationale of the IASB regarding the design of the predominance test as explained in paragraph 65 of the Basis for Conclusions of the ED.

In addition, the EBA doesn’t support the alternative proposal to apply the temporary exemption below the reporting entity level as this would allow the use of two sets of accounting policies in the consolidated financial statements (IAS 39 and IFRS 9) of banking groups, which would make the financial statements more complex to understand and less transparent and comparable.

Full comment letter

Deloitte

As stated in the comment letter, Deloitte agrees:

• The ED has identified valid reasons to introduce a temporary solution to issues arising from transitioning to two major and interrelated new standards at different times.
• An option to defer IFRS 9 should be available for insurance activities and that a predominance criterion based on the carrying amount of liabilities is appropriate means to determine when that option should be available. However, Deloitte has concerns over the methodology for measuring that criterion and also disagree that it should be assessed only at the reporting entity level.
• The proposed expiry date for the deferral approach is appropriate, but recommend that the IASB conclude its deliberations on the new insurance contracts standard taking into account the inputs received from comment letters and outreach activities, so that the effective date of the new standard is within this timescale.

In addition, Deloitte does not believe that a clearly defined insurance business should be excluded from the deferral approach only because it is part of a larger group and recommend the predominance test be permitted at the reporting entity level or each level below the parent entity (“waterfall” approach). Further, Deloitte provided some suggestions on how the predominance test could be modified to ensure that the temporary deferral can be applied by an appropriate population of entities.

Full comment letter

FRC

The FRC has previously raised concerns about the additional accounting mismatches in the profit or loss of insurance companies resulting from this misalignment and is encouraged to see that the proposals in the ED go some way in addressing these concerns.

The FRC notes that the ED proposes two optional solutions: the “overlay” approach and a temporary exemption from applying IFRS 9 for certain qualifying reporting entities (the “deferral” approach). It is clear that there is no perfect solution to address the issues arising from the misalignment of effective dates and the FRC commends the IASB for the responsiveness it has shown thus far in proposing these solutions. However, the FRC believes further amendments are required to ensure that the temporary exemption from the application of IFRS 9 is a pragmatic and effective solution.

Full comment letter