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Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

ESBG comments on EFRAG’s Draft Endorsement Advice

>> See the response to the EFRAG consultation

​​​BRUSSELS, 14 December 2016 – ESBG submitted a strong response to a recent EFRAG consultation on the application of IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. A much-discussed, high-priority policy area for the EU banking industry, the issue's main sticking point for ESBG members lies in the availability of the "Temporary Exemption" from the application of IFRS 9 for predominant insurers within a bank-led group.

ESBG, who represents nearly 1000 savings and retail banks in 20 European countries, have questioned whether the amendments provided by the IASB fall short of being conducive to the European Public Good as is required for endorsement. The temporary exemption not being made available to predominant insurers within a bank-led group will clearly result in a distortion of the level playing field in the insurance industry. Those insurers within an insurance group will avail of the exemption while those in a bank-led group will not. Members have called for both EFRAG and the Commission to look at this position again to ensure a level playing field in Europe while emphasising the stance that this exemption should only be applied to insurance entities within a group as opposed to the entire group.



The guidance Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts: Amendments to IFRS 4 (the Amendments), was issued by the IASB on 12 September 2016. An Exposure Draft of the Amendments was issued on 9 December 2015. EFRAG provided its comment letter on that Exposure Draft, which ESBG contributed to, on 15 February 2016.

The objective of the Amendments is to address the concerns of insurance companies and users of their financial statements about the different effective dates of IFRS 9 Financial Instruments and the forthcoming insurance contracts Standard (IFRS 17).

The Amendments provide an optional, temporary exemption from the application of IFRS 9 for entities whose activities are predominantly insurance at the reporting entity level. They also offer an alternative approach – called the "overlay approach" – that would be available to financial conglomerates and which substantially mitigates the financial reporting-related concerns.

Set to become effective for annual periods beginning on or after 1 January 2018, the amendments aim to meet this objective by providing two alternatives, optional accounting treatments that an entity can select subject to specified eligibility criteria.  Only the alternative overlay approach is available to the entire insurance industry. The temporary exemption criterion – as designed by IASB, for example, to be applied at the reporting level entity and for entities that have predominant insurance activities – excludes insurance activities carried out within bank-led groups. Therefore, it generates distortions of competition within the insurance sector. Insurance entities will be treated differently depending on whether the entity is an insurance market player or insurance's entity within a conglomerate.

EFRAG's overall preliminary assessment is that the amendments satisfy the criteria for endorsement for use in the EU and therefore recommends their endorsement. The responses to this consultation are expected to be discussed by the EFRAG board at their meeting scheduled for January. Their endorsement advice will be finalised thereafter.

>> See the response to the EFRAG consultation

Insurance Mediation Directive; IFRS