Challenges for banks
impacted by IFRS 17

Laure Guegan, Ernst & Young et Associes and Kevin Griffith, Ernst & Young LLP

Laure framed the discussion by asking the audience to what extent they expected IFRS 17 to impact their business.

Laure reflected on the significance of insurance liabilities across the European banking sector by comparing the proportion of their balance sheet comprising insurance liabilities for a sample of European banks, excluding associates or joint ventures. She observed that based on the sample in the study, it appears more common for banks to adopt a mixed business model of banking and significant insurance operations in France, Belgium and the Nordics compared to their other European and British counterparts.

Next, Kevin emphasised that IFRS 17 represents a complete overhaul of accounting for insurance contracts. It requires significant changes to processes, data and systems. IFRS 17 marks the first time that all insurance contracts will follow the same accounting guidance as opposed to grandfathered local Generally Accepted Accounting Practices (GAAP) used under the existing standard (IFRS 4 Insurance Contracts).

Kevin went on to remind the audience that the proposed effective date is 1 January 2021 and unlike IFRS 9, the standard will require comparatives to be restated unless the preparer can prove that it is impracticable to do so.

On 14 November 2018, the IASB tentatively decided to defer the effective date for IFRS 17, so that it is effective for annual periods beginning on or after 1 January 2022. The IASB also elected to defer the expiry date for the temporary exemption to IFRS 9 in IFRS 4 to 2022.

Kevin explained that entities may have some relief for managing the transition to IFRS 9 and IFRS 17 with two options available:

  • A temporary exemption or deferral for up to three years until 2021 whereby eligible entities may delay the implementation date of IFRS 9 if their activities are ‘predominantly’ related to insurance. Predominance is assessed by calculating the ratio of insurance-related liabilities to total liabilities with the threshold for direct qualification being 90%. Based on the EU version of the exemption (commonly referred to as the EU ‘top-up’), this assessment is made at legal entity level. This allows bank-assurers to apply the exemption at the level of the legal insurance entities even if the bank, in its entirety, does not meet the predominance test.

  • An overlay approach will allow an entity to remove the effects of accounting mismatches when applying IFRS 9 in full by introducing a line item in profit or loss which temporarily transfers the effect of mismatches to OCI. Financial assets qualifying for the overlay approach could include surplus financial assets that an entity holds for the purposes of regulatory requirements or internal capital objectives. Even if using the overlay approach, if an insurer initially applies IFRS 9 before IFRS 17, they will be allowed (but not required) to reassess the business model for classifying and measuring financial assets under IFRS 9 when adopting IFRS 17.

Kevin then looked at how these application methods are being applied across Europe.

Laure emphasised that whilst both relief options are helpful, there remains significant quantitative and qualitative disclosure requirements that will be dependent on investment in new systems and processes to prepare.

Kevin then discussed the latest developments and commented on the industry-wide response to IFRS 17. Most notably, the EFRAG has not yet issued its endorsement advice regarding the new standard due to concerns that the new standard is operationally difficult to implement by the effective date. Kevin stated that the IASB held an educational session in October to consider making amendments to the standard to address some of the concerns voiced in the industry. Twenty-five issues have been raised by the industry. The IASB staff identified, based on defined criteria, seven issues for further consideration, including a potential scope change for IFRS 17 where certain credit products may be removed from the scope of IFRS 17 if they transfer insurance risk but where the primary purpose is the provision of credit.

Finally, Kevin informed the audience about the important role of the IFRS 17 Transition Resource Group (TRG) which comprises fifteen insurance experts and three observers. The objective is to discuss implementation issue papers prepared by the IASB staff from constituent submissions.

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