Accounting Standard Updates

Temporary IFRS 9 Measures for Insurance Companies

The International Accounting Standards Board (IASB) met recently and agreed to propose temporary measures addressing concerns insurance companies are facing with implementation of International Financial Reporting Standard (IFRS) 9, Financial Instruments standard that was issued in July 2014. It is set to take effect on January 1, 2018.


IFRS 9 introduces a new classification and measurement categories for financial assets, along with requirements that need to be met before the various categories can be used. For insurers, the new requirements mean that certain financial assets will change classification as they move from previous accounting standards (IAS 39) to IFRS 9, with an accompanying change to the timing of recognition of gains and losses in profit and loss.

The IASB previously issued IFRS 4, Insurance Contracts, which applies, with limited exceptions, to all insurance contracts an entity issues and to reinsurance contracts it holds. The IASB issued IFRS 4 because they saw an urgent need for improved disclosures for insurance contracts and needed improvements to recognition and measurement practices. However, IFRS 4 exempts an insurer temporarily from some requirements of other IFRS requirements until completion of the second, more comprehensive phase of its insurance accounting project (Phase II).

The insurance industry has been seeking a similar exemption to adoption of IFRS 9 until the Phase II insurance standard is adopted. The industry has contended that adoption of IFRS 9 in advance of a final Phase II standard will be overly costly and result in accounting volatility in profit and loss, temporary mismatches in accounting, and general confusion for users of financial statements.

While a final IFRS 4 Phase II standard is expected to be published later this year, it is likely that IFRS 4, Phase II will have a later implementation date than the planned 2018 effective date of IFRS 9, so the IASB has been meeting to discuss the impact that may arise in the interim period between the effective dates of the two new standards.

IASB To Propose Temporary Solution

The IASB has been sympathetic to concerns of the insurance industry. Over the course of several meetings, the IASB focused on possible changes to IFRS 4 to reduce the potential for accounting issues that may arise when applying IFRS 9 rules before the release of the Phase II IFRS 4 rules. Out of the meetings a solution called the deferral approach was developed. Essentially, IFRS 4 would be amended to give entities whose business model is to predominantly issue insurance contracts the option to defer the effective date of IFRS 9 until 2021.

A second option was also agreed upon for companies to follow. The overlay approach, which provides companies the opportunity to remove from profit or loss some of the accounting mismatches and temporary volatility that could occur before the new standard is implemented. Under this approach, companies would have to calculate its insurance liabilities considering the impact of both an IAS 39 measurement and an IFRS 9 measurement as profit/loss will reflect IAS 39 to a certain extent, while shareholder’s equity will fully reflect the IFRS 9 measurement.

The IASB is expected to propose its temporary solution in the form of an exposure draft later this year.

The IASB’s insurance project continues to be fluid. Understanding how your organization may be impacted by the latest standards now will help you prepare for the eventual certainty of IFRS 9 and IFRS 4, Phase II.