Jiří Fialka
© 2003 KPMG

General comments
 ED5 is temporary solution:
Permits variety of accounting policies
Permits non-uniform accounting policies even within the group
 Resulting in:
Inconsistency between accounting policies
Incomparable financial statements
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General comments
 Phase I should not be regarded as long term standard
 Phase II should be introduced as soon as practicable
 Sunset Clause welcome as a signal about IASB commitment to issue Phase II before 2007
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General comments
 Changes in existing accounting policies must be towards policies used in phase II
 Introducing „piecemeal changes“ might lead to a risk of less reliable and less relevant financial information
Reinsurance dealt separately from insurance
 Different measurement bases for assets and liabilities
 FV of insurance assets and liabilities presented in disclosure from 31 December 2006 – how to calculate?
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Question 1 – Scope
Question: a) IFRS would not apply to: i.
Assets held to back insurance contracts ii.
Financial instruments issued by insurance entity
Proposed response: a) ED5 addresses insurance contracts not entities i.
Mismatch between measurement of assets (FV) and liabilities (local GAAP) ii.
IFRS for insurance contracts should be consistent with
IFRS for financial instruments (IAS 39)
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Question 1 – Scope II
Question: b) Weather derivatives should be brought within IAS 39 unless they meet proposed definition of insurance contract
Proposed response: b) EFRAG finds this acceptable
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Question 2 – Definition of an Insurance
Contract
Question:
 Is definition “contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event
(the insured event) adversely affects the policyholder or other beneficiary” appropriate?
Proposed response:
 If read in conjunction with related guidance in Appendix B then acceptable
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Question 3 – Embedded derivatives I
Question: a) Embedded derivative should be separated unless: i.
Meets the definition of insurance contracts ii.
Option to surrender an insurance contract for a fixed amount
Esp. required to separate and FV measured: i.
Put option or cash surrender option if surrender value is effected by the change of equity or commodity price or index ii.
Option to surrender financial instrument that is not an insurance contract b) Embedded derivatives transferring significant insurance risk but regarded as mainly financial are excluded from
IAS 39
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Question 3 – Embedded derivatives II
Proposed response:
 Final situation (Phase II)
– all embedded derivatives should be reflected at fair value, but significant implementation problems. It is now acceptable not to separate


Approach might need to be changed in Phase II (treatment host insurance as debt like contract)
Consistency should be reached with new IAS 39
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Question 3 – Embedded derivatives III
Question: c) Are specific disclosures about embedded derivatives adequate?
d) Should any other embedded derivatives be exempted from
IAS 39?
Proposed response: c) Disclosure requirements are adequate d) No others were identified
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Question 4 – Temporary exclusion from criteria in IAS 8
Question: a) For accounting periods before 1 January 2007 exempted from IAS 8: i.
Insurance contracts (incl. reinsurance contracts) ii.
Reinsurance contracts held
Proposed response: a) Potential problems can arise if final standard (Phase II) is not ready till beginning of 2007
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Question 4 – Temporary exclusion from criteria in IAS 8
Question: b) Despite the exemption, the proposal i.
Eliminates catastrophe and equalization provision ii.
Requires loss recognition test iii.
Requires keeping insurance liabilities in B/S until discharged, prohibits offsetting insurance liabilities with reinsurance assets
Proposed response: b) Generally appropriate i.
Proposed different wording ensuring, that it will effect whole business ii.
Further clarification of loss recognition test especially of
“current estimate of future loss” required
Additional guidance how to apply IAS 37 expected
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Question 5 – Changes in accounting policies
Question:
 Is appropriate that: a) Insurer must satisfy specified requirements in case of changing accounting policies b) In case of changes in accounting policies insurer can reclassify some financial assets to FV measured
Proposed response:
 Generally appropriate and acceptable (for phase I)
 Entities should not be able to use non-uniform accounting policies, only acceptable for interim period
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Question 6 – Unbundling I
Question: a) Is unbundling appropriate and feasible in specified cases?
Proposed response: a) Agree that unbundling is required only if the bundled nature obscures the proper accounting for the obligations
Suggests that unbundling solely for accounting purposes should not be required except in the case where the structure of the contract is clearly artificial
Criterion for unbundling should be that “the CF of the insurance component and the investment component do not interact” rather than proposed criterion
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Question 6 – Unbundling II
Question: b) Should unbundling be required in any other cases?
c) Is it clear when unbundling would be required?
Proposed response: b) Agree with proposed standard c) Comments are made under a) otherwise it is clear
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Question 7 - Reinsurance
Question:
 Proposed standard limits reporting anomalies when insurer buys reinsurance
Proposed response:
 Proposal is not appropriate (the detailed entire accounting for reinsurance will be addressed in phase II)
 The proposal might lead to inconsistency in reporting resulting in artificial losses at the beginning of reinsurance contracts and gains in subsequent periods


Recommended that whole reinsurance accounting should be addressed in phase II
Financial reinsurance should be treated as financial transaction rather than insurance transaction
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Question 8 – Insurance contracts acquired in a business combination
Question:
 IAS 22 requires to measure at fair value of assets acquired and liabilities assumed in a business combination.
Proposals permits split of the fair value to: a) Liability measured in accordance with insurer’s accounting policies b) Intangible asset excluded from IAS 36 and IAS 38 measured consistently with the related insurance liability
Proposed response:
 Confirmation whether intangible asset can be recognized in case of general insurance
 Clarify whether open or closed book approach is more appropriate
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Question 9 – Discretionary participation features
Question:
 Discretionary participation features in insurance contracts or financial instruments are briefly addressed in ED5
(deeper addressing is expected in phase II)
Proposed response:
 Acceptable as interim solution
 Unallocated surplus (unrealised gains and losses) related to participating business should be regarded as constructive obligation
 Investment contracts with both discretionary and fixed element will continue in current accounting policies which is not consistent with other investment contracts – needs further guidance, if premium recognition continues
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Question 10 – Disclosure of the fair value of insurance assets and insurance liabilities
Question:
 Insurance assets and liabilities should be presented in disclosure from 31 December 2006
Proposed response:
 Unreasonable to require fair value of insurance liabilities when FV rules not set down yet, might lead to different interpretations and non-comparability
 Many insurers already provide such information on a voluntary bases
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Question 11 – Other disclosures I
Question: a) Requirement about the amounts in the insurer’s financial statements that arise from insurance contracts and the amount, timing and uncertainty of future CF from insurance contracts
Proposed response: a) The requirements are appropriate
Certain requirements are too broad and if not read closely with the Implementation Guidance can be interpreted as too burdensome
Rewording of proposed IFRS towards the Implementation
Guidance suggested
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Question 11 – Other disclosures II
Question: b) Disclosures are framed as high level requirements with explanation in Implementation Guidance c) Insurer would not need to disclose information about claims development that occurred earlier than five years before the first applying of proposed IFRS
Proposed response: b) This approach is appropriate c) No changes should be made
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Question 12 – Financial Guarantees
Question:
 Transferor of a non-financial asset or liability should apply
IAS 39 to financial guarantee given to the transferee in connection with the transfer
Proposed response:
 Agree
Makes proposed standard applicable also to credit insurers and banks issuing financial guarantees meeting definition of insurance contract
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Question 13 – Other comments
Mismatch – Measurement basis for insurance assets and liabilities
 ED 5 is interacting with IAS 39 and creating measurement mismatch for insurance contracts as
 Insurance liabilities are measured under existing accounting principles (usually amortized costs)
 Assets backing theses liabilities are measured in market value (in most cases available-for-sale basis)
 This results in volatility in equity even in case of perfect match of assets and liabilities
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Question 13 – Other comments
Mismatch – Measurement basis for insurance assets and liabilities
Proposed solution:
 Very restricted relaxation of the tainting rules that constrain the held-to-maturity category in IAS 39
 Limited to Phase I
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Question 13 – Other comments
Deferred acquisition cost
 Treatment of DAC for insurance and investment contracts should be harmonized otherwise might lead to the need of significant system changes implementation
 Proposed amendment of IAS 39 to amortize costs directly attributed to the sale of the contract in line with revenue recognition to be consistent for all contracts and standards
(IAS 18)
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Question 13 – Other comments
Definition of an Insurance Contract
 Case where death benefit exceeds the surrender amount is too wide (IG Example 1.2) and should be referred to surrenders where the penalty is in excess of the recovery of outstanding acquisition costs
 Pure Endowment should be treated as insurance contract
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Discussion
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