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SPECIAL ALERT - KEY INSURANCE ACCOUNTING DEVELOPMENTS
During March, the IASB continued its redeliberations on the June 2013 re-exposure draft of Insurance Contracts, as described in the March edition of IFRS - Insurance Newsletter, which is available for download below. This month the IASB reached some important decisions on changes in the proposals after considering the many comments received during the public consultation process:
- Optional use of Other Comprehensive Income (OCI) - The IASB re-exposure draft had proposed the mandatory use of a "two-sided OCI solution", to isolate the effects of interest rate volatility on both investments in debt securities and insurance contract liabilities, and present these in OCI rather than in profit and loss. Many respondents advocated that this should be optional, since substantial mismatches would still arise where an insurer uses equities and other investments other than debt securities to support insurance liabilities, and that fair value through P&L could provide a better representation of results in these cases. Other respondents observed that the use of OCI adds considerable complexity due to the need to track and calculate locked-in discount rates. As a result, the IASB has decided to make the use of OCI optional, as an accounting policy choice.
- Unlocking of the contractual service margin (CSM) - The IASB re-exposure draft had proposed that the CSM would be adjusted ("unlocked") for changes in estimates of cash flows for future coverage and services under insurance contracts, reducing the potential for volatility of income measurement as a result of ongoing remeasurements of best estimates. Some respondents advocated that it would be more consistent to give the same treatment to re-estimations of risk margins related to future coverage and services. After some debate the board agreed to broaden the application of "unlocking" to include the risk margin, although it was observed by some that this would result in added complexity.
It is also worth noting that Canadian insurers have been accustomed to reflecting remeasurements of both best estimates of cash flows and actuarial provisions for adverse deviation in reported income, so that these "unlocking" provisions would introduce a greater degree of "smoothing" of income than we have been accustomed to in Canada.
- Treatment of previously recognized losses - The re-exposure draft provided that a loss would be recognized in income due to unfavourable changes in estimates, once the contractual service margin (CSM) has been exhausted. Furthermore, favourable changes in estimates were to be reflected by adding to the CSM. While this approach is simpler and would not require any tracking of past losses recognized, many respondents disagreed with this prospective-only approach. The IASB has now agreed to change the proposals to require that favourable changes in estimates would be recognized in profit and loss to the extent that they represent the reversal of previous losses recognized in profit an loss, and any remaining amount would be added to the CSM.
These decisions represent important progress in resolving issues raised in the consultation process. Many will welcome the specific decisions by the IASB, and many will also welcome the fact that the IASB has demonstrated a willingness to listen and make changes in the proposed standard. Deliberations are to continue in April, focusing on presentation issues and developing an approach to redeliberating other issues on which the IASB had not requested feedback in the latest round of consultations. We will keep you posted.