WEBVTT X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:0 00:18.280 --> 00:23.000 Hello, this is Francesco Nagari: Deloitte Global IFRS Insurance Leader 00:23.000 --> 00:28.400 Welcome to the third of our new series of recorded IFRS 17 webcasts 00:28.400 --> 00:31.920 for our clients and our people around the world 00:31.920 --> 00:36.200 Today we take a little detour on the production line for our webcast 00:36.200 --> 00:40.800 and we will not discuss the application of IFRS 17 in practice 00:40.800 --> 00:45.000 Instead, we will discuss a proposed change to IFRS 17 00:45.000 --> 00:49.680 that relates to the way entities can restate their comparative information 00:49.680 --> 00:55.920 under IFRS 9 when they adopt this standard at the same time as IFRS 17 00:55.920 --> 00:59.600 The amendment proposed by the IASB was open for comments 00:59.600 --> 01:04.200 until 27 September 2021 01:04.200 --> 01:07.960 Please take notice of the disclaimer with regards to the content 01:07.960 --> 01:11.400 of this webcast as displayed earlier 01:11.400 --> 01:15.400 The speakers for this webcast are myself and Liza Gonzalo 01:15.400 --> 01:16.960 one of my colleagues and a director 01:16.960 --> 01:21.440 in the global IFRS 17 leadership team at Deloitte 01:21.440 --> 01:24.960 Let me take you to the agenda for the webcast 01:24.960 --> 01:28.480 This amendment came in quite late but it is something 01:28.480 --> 01:32.840 that Deloitte welcomes because it is narrow and with benefits 01:32.840 --> 01:35.840 for both users and preparers 01:35.840 --> 01:38.400 I will give you the background to the amendment 01:38.400 --> 01:41.600 and then Liza will take you through the proposed amendment 01:41.600 --> 01:43.520 in all its details 01:43.520 --> 01:46.320 I will then conclude by summarizing the Deloitte position 01:46.320 --> 01:53.800 as documented in our comment letter to the IASB sent on 27 September 2021 01:53.800 --> 01:58.320 The letter is available from our IASPlus website or from the IASB website 01:58.320 --> 02:03.880 in the relevant project page 02:03.880 --> 02:07.120 Many insurers have taken advantage of the temporary exemption 02:07.120 --> 02:10.600 to defer the application of IFRS 9 when it became effective 02:10.600 --> 02:15.440 for all other entities on 1 January 2018 02:15.440 --> 02:19.760 This means that they will first apply IFRS 9 and IFRS 17 Insurance Contracts 02:19.760 --> 02:22.400 at the same time for annual reporting periods 02:22.400 --> 02:27.560 beginning on or after 1 January 2023 02:27.560 --> 02:32.000 The IASB decided that they would not change the IFRS 9 transition requirements 02:32.000 --> 02:35.160 because they believed that would have been beyond 02:35.160 --> 02:38.160 the consequential amendments of issuing IFRS 17 02:38.160 --> 02:41.800 and the same restatement regime should remain in place 02:41.800 --> 02:46.120 In short, IFRS 17 mandates restatement of comparatives 02:46.120 --> 02:48.320 while IFRS 9 does not 02:48.320 --> 02:53.560 In that regard, IFRS 9 also has a provision for financial instruments 02:53.560 --> 02:58.680 that may have been in existence on transition date but not on effective date 02:58.680 --> 03:02.920 because they have been sold during the comparative period to apply 03:02.920 --> 03:06.200 The IASB may not have anticipated that most insurers 03:06.200 --> 03:09.680 would be in a position to restate under IFRS 9 03:09.680 --> 03:13.760 without using hindsight and they would actively take that option 03:13.760 --> 03:16.640 This created some practical problems 03:16.640 --> 03:22.400 Let me explain what they are 03:22.400 --> 03:26.640 This table shows you what would happen without the changes 03:26.640 --> 03:30.400 proposed in the ED that we are discussing today 03:30.400 --> 03:35.400 if an insurer applies the transition provisions in the two pronouncements 03:35.400 --> 03:38.320 You can see that the restatement philosophy is quite different 03:38.320 --> 03:41.480 from a time reference date perspective 03:41.480 --> 03:45.760 IFRS 9 is centred on the date of initial application 03:45.760 --> 03:50.000 while IFRS 17 is centred on the transition date 03:50.000 --> 03:54.400 So, if an insurer decides to restate its comparatives for IFRS 9 03:54.400 --> 03:56.640 because it is permitted to do so 03:56.640 --> 03:59.960 it will face a problem for those financial instruments 03:59.960 --> 04:08.480 that have been sold after 1 January 2022 and before 31 December 2022 04:08.480 --> 04:14.920 Let's have a look at the nature of this problem in the next slide 04:14.920 --> 04:19.400 As we peel to onion a bit more we can now see what the problem is 04:19.400 --> 04:23.160 Financial assets that are derecognised in the comparative period 04:23.160 --> 04:27.840 cannot be restated under IFRS 9 and must be accounted for 04:27.840 --> 04:30.600 under IAS 39 instead 04:30.600 --> 04:34.800 This is mandatory from IFRS 9 perspectives 04:34.800 --> 04:37.440 and that is whether you are restating comparatives or not 04:37.440 --> 04:40.200 So, if you are one of the many insurers 04:40.200 --> 04:45.920 able and willing to restate your 2022 financial information under IFRS 9 04:45.920 --> 04:48.960 you have a few problems that are not easy to solve 04:48.960 --> 04:52.560 unless you get a helping hand from the IASB 04:52.560 --> 04:59.120 Let me take you to the next slide for the issues that the ED attempts to solve 04:59.120 --> 05:04.200 The first issue is that because IFRS 9 is not permitted to be applied 05:04.200 --> 05:06.400 to derecognised financial assets 05:06.400 --> 05:10.160 the comparative information will include a mixture of financial assets 05:10.160 --> 05:14.960 classified and measured using both IFRS 9 and IAS 39 05:14.960 --> 05:18.680 The interdependency of the accounting for certain insurance contracts 05:18.680 --> 05:22.520 and the financial assets backing them would create an accounting mismatch 05:22.520 --> 05:25.960 between insurance contract liabilities and financial assets 05:25.960 --> 05:28.880 arising in the comparative information presented 05:28.880 --> 05:33.520 on initial application of IFRS 17 and IFRS 9 05:33.520 --> 05:37.760 Depending on the specific facts and circumstances of an insurer 05:37.760 --> 05:40.600 this may result in a significant impact 05:40.600 --> 05:45.160 on the usefulness of the comparative information 05:45.160 --> 05:49.640 Finally, there would be some operational challenges for insurers choosing 05:49.640 --> 05:52.800 to restate comparative information because of the need 05:52.800 --> 05:55.360 to wait till the end of the comparative period 05:55.360 --> 05:59.600 to identify financial assets to which IFRS 9 will apply 05:59.600 --> 06:02.560 in their restatement work 06:02.560 --> 06:04.840 Credit to the European insurance industry players 06:04.840 --> 06:09.200 who have brought these issues to the attention of the IASB and to the IASB 06:09.200 --> 06:11.840 for their prompt and practical response 06:11.840 --> 06:15.800 Let me hand over to Liza now who will tell you about 06:15.800 --> 06:20.000 the IASB response included in the ED 06:20.000 --> 06:21.760 Thanks Francesco 06:21.760 --> 06:26.800 In response, the IASB proposes a narrow-scope amendment 06:26.800 --> 06:32.920 to IFRS 17 to address those one-time classification differences 06:32.920 --> 06:36.640 that may arise in the comparative information presented 06:36.640 --> 06:41.960 as well as to help address the practical challenges identified by 06:41.960 --> 06:48.560 some insurers in the course of implementing both IFRS 17 and IFRS 9 06:48.560 --> 06:53.960 In a nutshell, the proposed amendment would permit, but not require 06:53.960 --> 06:59.440 entities to apply a classification overlay in the comparative period presented 06:59.440 --> 07:04.960 on the initial application of IFRS 17 and IFRS 9 07:04.960 --> 07:08.160 Applying the proposed classification overlay 07:08.160 --> 07:13.280 an entity is permitted to present the comparative information for 07:13.280 --> 07:18.160 a financial asset as if the classification and measurement requirements 07:18.160 --> 07:22.920 of IFRS 9 had been applied to that financial asset from 07:22.920 --> 07:26.560 the transition date of IFRS 17 07:26.560 --> 07:29.760 The proposed amendment aims to enhance the usefulness 07:29.760 --> 07:34.520 of the comparative information because such comparative information 07:34.520 --> 07:38.880 would be consistent with IFRS 9 as it would apply 07:38.880 --> 07:43.720 from the date of initial application and this approach could result 07:43.720 --> 07:47.320 in an enhanced comparability between periods 07:47.320 --> 07:52.280 So what are the key features of the proposed amendment? 07:52.280 --> 07:55.800 Let's look into the scope of applicability 07:55.800 --> 08:00.600 The proposed amendment is applied to a financial asset 08:00.600 --> 08:05.200 if the comparative information for that financial asset has not 08:05.200 --> 08:07.840 been restated for IFRS 9 08:07.840 --> 08:11.200 We will expand on this in a later slide 08:11.200 --> 08:16.960 Note that the classification overlay cannot be applied in two instances: 08:16.960 --> 08:22.560 First, it cannot be applied on a financial asset that is held 08:22.560 --> 08:26.840 in respect of an activity that is unconnected with contracts 08:26.840 --> 08:29.720 within the scope of IFRS 17 08:29.720 --> 08:35.800 Examples of excluded financial assets would be those financial assets 08:35.800 --> 08:41.400 held in respect of banking activities or financial assets held in respect 08:41.400 --> 08:45.640 of investment contracts outside the scope of IFRS 17 08:45.640 --> 08:51.560 Second, the classification overlay cannot be applied to comparative information 08:51.560 --> 08:58.400 for reporting periods before the transition date to IFRS 17 08:58.400 --> 09:02.400 The classification overlay is optional and would be applied 09:02.400 --> 09:05.440 on an instrument-by-instrument basis 09:05.440 --> 09:10.440 Also, the classification overlay would allow an entity to align 09:10.440 --> 09:14.600 the classification of the financial assets subject to the classification 09:14.600 --> 09:18.000 overlay with how the entity expects 09:18.000 --> 09:24.000 those financial assets will be classified on initial application of IFRS 9 09:24.000 --> 09:28.800 using reasonable and supportable information available 09:28.800 --> 09:31.760 at the transition date of IFRS 17 09:31.760 --> 09:34.800 In applying the classification overlay 09:34.800 --> 09:40.240 entities are not required to apply the impairment requirements of IFRS 9 09:40.240 --> 09:44.840 This means that entities can apply the expected credit loss 09:44.840 --> 09:49.320 impairment model of IFRS 9 on a financial asset subject 09:49.320 --> 09:55.800 to the classification overlay on an optional basis 09:55.800 --> 09:59.560 Any differences between the carrying amount of the financial asset 09:59.560 --> 10:05.400 at the transition date of IFRS 17 applying the classification overlay 10:05.400 --> 10:09.280 and the previous carrying amount at that date will be recognised 10:09.280 --> 10:15.200 in the opening retained earnings at the transition date of IFRS 17 10:15.200 --> 10:18.640 Lastly, in terms of disclosure requirements 10:18.640 --> 10:22.920 the entity should disclose in the notes to the financial statements 10:22.920 --> 10:28.240 the fact that it had applied the classification overlay 10:28.240 --> 10:33.000 Note that an entity is still required to apply the transition requirements 10:33.000 --> 10:39.840 in IFRS 9 to a financial asset at the date of initial application of IFRS 9 10:39.840 --> 10:45.960 regardless of whether the entity has applied the classification overlay 10:45.960 --> 10:50.360 We have discussed earlier that the classification overlay is available 10:50.360 --> 10:54.440 only to financial assets for which the comparative information 10:54.440 --> 10:57.960 has not been restated for IFRS 9 10:57.960 --> 11:01.400 This means that for entities that have chosen 11:01.400 --> 11:04.880 to restate the IFRS 9 comparative information 11:04.880 --> 11:09.600 the classification overlay would only apply to financial assets 11:09.600 --> 11:13.560 that have been derecognised during the comparative period 11:13.560 --> 11:19.160 This is because IFRS 9 transition requirements specifically prohibit 11:19.160 --> 11:23.360 the restatement of financial assets that have been derecognised 11:23.360 --> 11:28.440 before the initial application of IFRS 9 11:28.440 --> 11:32.800 On the other hand, for entities that have chosen not 11:32.800 --> 11:35.400 to restate IFRS 9 comparative information 11:35.400 --> 11:40.840 the classification overlay would be available for any financial asset 11:40.840 --> 11:45.680 it holds other than those that have been specifically scoped out 11:45.680 --> 11:49.320 from its application 11:49.320 --> 11:51.880 When applying the classification overlay 11:51.880 --> 11:57.320 the comparative information will be presented as if the financial asset 11:57.320 --> 12:00.800 had been accounted based on IFRS 9 requirements 12:00.800 --> 12:04.840 except for the impairment requirement which can be applied 12:04.840 --> 12:07.160 on an optional basis 12:07.160 --> 12:12.400 In doing so, entities are required to use reasonable and supportable 12:12.400 --> 12:17.440 information available at the transition date of IFRS 17 12:17.440 --> 12:22.120 to determine the expected classification of a financial asset 12:22.120 --> 12:25.680 In line with the requirements of IAS 8 12:25.680 --> 12:29.600 Accounting Policies, Changes in Accounting Estimates and Errors 12:29.600 --> 12:32.880 the use of hindsight is not permitted 12:32.880 --> 12:36.280 To comply with these requirements, entities that perform 12:36.280 --> 12:42.400 a parallel run of IFRS 9 alongside IAS 39 could leverage 12:42.400 --> 12:45.800 from the pre-analysis they perform in preparation 12:45.800 --> 12:48.520 for the transition to IFRS 9 12:48.520 --> 12:53.200 Essentially, entities will classify financial assets 12:53.200 --> 12:58.320 based on how they expect those financial assets to be classified 12:58.320 --> 13:03.880 on initial application of IFRS 9 assuming that such financial assets 13:03.880 --> 13:09.720 continue to be recognised at the date of the initial application of IFRS 9 13:09.720 --> 13:15.280 To avoid the risk of using hindsight entities could begin collecting 13:15.280 --> 13:23.240 the relevant information to apply the classification overlay on a real time basis 13:23.240 --> 13:27.400 The proposed amendment to IFRS 17 does not change 13:27.400 --> 13:31.800 the transition requirements in IFRS 9 13:31.800 --> 13:35.880 As such, even though entities apply the classification overlay 13:35.880 --> 13:40.400 in the comparative period, these entities are still required to 13:40.400 --> 13:43.520 comply with the IFRS 9 transition requirements 13:43.520 --> 13:47.000 when initially applying IFRS 9 13:47.000 --> 13:51.240 This means that entities will be required to perform 13:51.240 --> 13:54.640 the assessments relating to business model 13:54.640 --> 13:57.680 contractual cash flow characteristics test 13:57.680 --> 14:01.800 and apply the expected credit loss impairment model 14:01.800 --> 14:05.160 based on facts and circumstances existing at the date 14:05.160 --> 14:09.840 of the initial application of IFRS 9 for financial assets 14:09.840 --> 14:14.520 that continue to be recognised at that date 14:14.520 --> 14:19.400 This concludes my discussion on the key features of the proposed amendment 14:19.400 --> 14:24.440 I now hand you over to Francesco who will discuss key observations 14:24.440 --> 14:29.320 and related Deloitte position as set out in the Deloitte's comment letter 14:29.320 --> 14:33.880 on the exposure draft 14:33.880 --> 14:35.800 Thank you Liza 14:35.800 --> 14:37.280 The key message at this point is to share 14:37.280 --> 14:40.960 that Deloitte is supportive of this amendment 14:40.960 --> 14:45.680 but we have a few areas where we believe the improvement can be enhanced 14:45.680 --> 14:48.360 The first one is our recommendation to align the scope of 14:48.360 --> 14:51.680 the classification overlay with the pre-existing scope 14:51.680 --> 14:55.600 that allowed the temporary exemption from the application of IFRS 9 14:55.600 --> 14:59.640 We believe this change would offer substantial operational benefits 14:59.640 --> 15:04.200 while it would not compromise the intellectual integrity of the amendment 15:04.200 --> 15:07.520 The second key recommendation is on the use of the expected credit loss 15:07.520 --> 15:10.400 impairment approach and to make it a policy choice 15:10.400 --> 15:13.840 to ensure consistency and comparability 15:13.840 --> 15:16.680 The third recommendation is to moderately expand 15:16.680 --> 15:20.000 the disclosure requirements to ensure that a clear explanation 15:20.000 --> 15:27.200 is added to the notes on why and how the classification overlay was adopted 15:27.200 --> 15:29.960 Let me now take you through each of these three recommendations 15:29.960 --> 15:33.240 in a bit more detail 15:33.240 --> 15:35.000 With regards to the scope alignment 15:35.000 --> 15:37.120 we observe that the amendment is developed 15:37.120 --> 15:39.640 within the context of the temporary exemption 15:39.640 --> 15:41.680 and it would be operationally less complex 15:41.680 --> 15:45.800 if the reporting entities were allowed to apply the classification overlay 15:45.800 --> 15:50.800 to all the assets for which the exemption has applied since 2018 15:50.800 --> 15:53.320 rather than to force them to differentiate between 15:53.320 --> 15:58.880 those that are connected with insurance contracts and those that are not 15:58.880 --> 16:03.440 The ED noted that this concept of "unconnected" financial asset 16:03.440 --> 16:06.160 has already been used in the standard 16:06.160 --> 16:09.240 This is true and it applies to those reporting entities 16:09.240 --> 16:11.440 that have already adopted IFRS 9 16:11.440 --> 16:15.360 and would then get a "fresh start" classification of their assets 16:15.360 --> 16:18.440 when IFRS 17 is effective 16:18.440 --> 16:21.920 Deloitte knows that only a very few reporting entities 16:21.920 --> 16:24.680 with significant insurance contracts in their financial statements 16:24.680 --> 16:27.360 have already adopted IFRS 9 16:27.360 --> 16:30.880 They would also not be subject to the same pressure on disclosing 16:30.880 --> 16:36.280 the effects of IFRS 9 and IFRS 17 in their 2022 financial statements 16:36.280 --> 16:39.160 under the requirements of IAS 8 16:39.160 --> 16:40.960 Given all these considerations 16:40.960 --> 16:45.400 we believe our recommendation should be seen as a genuine improvement 16:45.400 --> 16:49.400 in favour of both users and preparers as it would make it easier 16:49.400 --> 16:53.320 to apply the classification overlay and the resulting reporting quality 16:53.320 --> 16:56.640 is bound to benefit from that 16:56.640 --> 16:59.920 Our second recommendation is to tighten the framework 16:59.920 --> 17:03.360 for the application of the expected credit loss impairment 17:03.360 --> 17:06.520 This is one of the most demanding requirements from IFRS 9 17:06.520 --> 17:09.480 and one that investors would pay particular attention 17:09.480 --> 17:13.240 when insurers calculate the new impairment losses for the first time 17:13.240 --> 17:16.440 Because of this importance we recommend that entities are required 17:16.440 --> 17:20.400 to make the decision to restate their comparative impairment losses 17:20.400 --> 17:25.520 from a policy stand point instead of an instrument by instrument basis 17:25.520 --> 17:28.880 The latter approach is something we believe one can infer 17:28.880 --> 17:33.640 from the text of the ED and we decided to recommend that such ambiguity 17:33.640 --> 17:38.880 is solved by making it clear that the decision should be at a policy level 17:38.880 --> 17:41.880 i.e. all assets or none 17:41.880 --> 17:45.600 The benefit of this clarity is a greater comparability among those entities 17:45.600 --> 17:48.320 which have chosen the full restatement of their comparatives 17:48.320 --> 17:51.920 both among themselves and in their own financial statements 17:51.920 --> 17:55.960 in terms of impairment losses reported in 2023 17:55.960 --> 18:02.160 and in the restated comparative period 2022 18:02.160 --> 18:04.960 Our third key recommendation is to introduce 18:04.960 --> 18:08.400 a moderate amount of additional disclosures 18:08.400 --> 18:11.800 What we recommend is entirely qualitative but 18:11.800 --> 18:15.560 we believe, quite useful and important for investors to know 18:15.560 --> 18:20.160 We said that it would be better if entities were required to explain 18:20.160 --> 18:23.600 the reason why they may have used the classification overlay 18:23.600 --> 18:27.400 and how they have applied it to their financial assets 18:27.400 --> 18:30.800 For example, because they wanted to reduce an accounting mismatch 18:30.800 --> 18:34.480 what the mismatch was and whether this meant to apply 18:34.480 --> 18:39.560 the classification overlay to all financial assets or only some of them 18:39.560 --> 18:42.680 In the latter case it would be good to explain what the basis 18:42.680 --> 18:47.000 to pick certain assets only was for that entity 18:47.000 --> 18:50.520 We believe these qualitative disclosures would benefit users 18:50.520 --> 18:55.480 and would require a very modest cost for preparers to implement 18:55.480 --> 18:57.360 With the comment period now closed 18:57.360 --> 19:01.120 the IASB Staff will be reading the various comment letters received 19:01.120 --> 19:05.320 and then table the final draft of the amendment to IFRS 17 19:05.320 --> 19:09.440 to one of the board meetings in the last quarter of 2021 19:09.440 --> 19:12.560 The plan of the IASB is to complete this project 19:12.560 --> 19:18.840 and publish the amended text of IFRS 17 before the end of 2021 19:18.840 --> 19:21.120 We have now reached the end of this webcast 19:21.120 --> 19:23.200 and wish to thank you for downloading it 19:23.200 --> 19:25.720 We hope that you found it informative 19:25.720 --> 19:29.960 If you did, please share the replay link with your professional network 19:29.960 --> 19:35.920 Any questions please reach me at my contact details noted at top of the page 19:35.920 --> 19:38.960 and if you like to stay up to date with IFRS 17 19:38.960 --> 19:42.200 there is no better way to do that than by following Deloitte 19:42.200 --> 19:46.680 in our regular social media activity on IFRS 17 19:46.680 --> 19:51.920 The replay link for this webcast and all the future episodes will be made 19:51.920 --> 20:01.360 available in our dedicated IFRS 17 website at www.deloitte.com/i2ii 20:01.360 --> 20:02.640 and in IASPIus 20:02.640 --> 20:07.240 Finally, if you need to consult IFRS pronouncements 20:07.240 --> 20:09.640 and Deloitte official guidance and interpretations 20:09.640 --> 20:12.680 I would recommend considering to subscribe to DART 20:12.680 --> 20:16.920 our global accounting research tool which gives you 20:16.920 --> 20:19.800 full access to the text of IFRS 17 20:19.800 --> 20:22.920 and all of the other IASB pronouncements combined with access to 20:22.920 --> 20:26.520 Deloitte official IFRS guidance 20:26.520 --> 20:30.640 With that I would like to thank you once again for downloading this webcast 20:30.640 --> 20:32.240 and I look forward to talking to you again 20:32.240 --> 20:35.400 in the next episode of the series 20:35.400 --> 20:36.840 Goodbye