Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts.

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1 15 February 2016 International Accounting Standards Board 30 Cannon Street, London EC4M 6XH United Kingdom Dear Sir or Madam: The Korea Accounting Standards Board (KASB) sends its comments on the Exposure Draft Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. The enclosed comments represent official positions of the KASB after extensive due process and deliberation. Please do not hesitate to contact us if you have any questions regarding our comments. You may direct your inquiries either to me (jjang@kasb.or.kr) or to Ms. Eun Kyung Kim (kimek@kasb.or.kr), Senior Technical Manager of the KASB. Best regards, Jee In Jang Chair, Korea Accounting Standards Board Cc: Se-hwan Park, Senior Director, Korea Accounting Standards Board Dae-Hyun Kim, Director, Korea Accounting Standards Board 1

2 We are pleased to comment on the Exposure Draft Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. Our comments include views from a public hearing and responses collected from the various associations. We finalized the comment letter through the due process established in the KASB. The Korea Accounting Standards Board (KASB) welcomes the continued efforts of the IASB to develop a high quality standard for insurance contracts and appreciates many positive developments during the re-deliberations of the Revised Exposure Draft, Insurance Contracts. In addition, we are very pleased to provide comments on the IASB's Exposure Draft Applying IFRS 9 with IFRS 4 addressing concerns arising from the different effective dates of IFRS 9 and the forthcoming insurance standard. We believed that the IASB needed to provide substantial measures to solve temporary accounting mismatch and volatility problems resulting from the mismatch in timing of the future insurance contracts standard and IFRS 9. However, we regret to inform you that the criteria for applying deferral approach proposed by the IASB are too restrictive, so not all insurers would be able to apply the approach and the predominance level should be alleviated. We understand that it is not an easy task to exclude some specific industries from the application scope of an accounting standard and it is not possible to seek a perfect solution, since it could cause further delay in the completion of IFRS 4 Phase II. Therefore we would like to suggest that the IASB do not present the quantitative criterion of the predominance level in the Basis of Conclusions or mitigate the level of the predominance. Exposure Draft Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts Question 1 Addressing the concerns raised Paragraphs BC9 BC21 describe the following concerns raised by some interested parties about the different effective dates of IFRS 9 and the new insurance contracts Standard: (a) Users of financial statements may find it difficult to understand the additional accounting mismatches and temporary volatility that could arise in profit or loss if IFRS 9 is applied before the new insurance contracts Standard (paragraphs BC10.BC16). (b) Some entities that issue contracts within the scope of IFRS 4 have expressed concerns about having to apply the classification and measurement requirements in IFRS 9 before the effects of the new insurance contracts Standard can be fully evaluated (paragraph BC17.BC18). (c) Two sets of major accounting changes in a short period of time could result in 2

3 significant cost and effort for both preparers and users of financial statements (paragraphs BC19.BC21). The proposals in this Exposure Draft are designed to address these concerns. Do you agree that the IASB should seek to address these concerns? Why or why not? We all agreed that the IASB should seek some measures to address the concerns described in paragraphs BC9-BC 21 as it will alleviate any negative effect that would be brought about by the misalignment of effective dates of IFRS 9 and the new insurance standard. Question 2 - Proposing both an overlay approach and a temporary exemption from applying IFRS 9 The IASB proposes to address the concerns described in paragraphs BC9 BC21 by amending IFRS 4: (a) to permit entities that issue contracts within the scope of IFRS 4 to reclassify from profit or loss to other comprehensive income some of the income or expenses arising from designated financial assets that: (i) are measured at fair value through profit or loss in their entirety applying IFRS 9 but (ii) would not have been so measured applying IAS 39 (the overlay approach ) (see paragraphs BC24 C25); (b) to provide an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 (the temporary exemption from applying IFRS 9 ) (see paragraphs BC26 C31). Do you agree that there should be both an overlay approach and a temporary exemption from applying IFRS 9? Why or why not? If you consider that only one of the proposed amendments is needed, please explain which and why. Korean constituents agree that there should be both an overlay approach and a temporary exemption from applying IFRS 9, but prefer a temporary exemption from applying IFRS 9 to address the key issues related to the misalignment of effective dates. They believe that the 3

4 overlay approach proposed by the IASB is necessary to solve the accounting volatility in profit or loss for the insurers that are unable to meet the predominance criteria. However implementing the overlay approach would request for insurers to operate the two systems in parallel, so would result in significant incremental operational efforts and costs. Korean constituents believe that a temporary exemption from applying IFRS 9 for insurers is the most effective way to address all the concerns. Question 3 - The overlay approach Paragraphs 35A 5F and BC32 C53 describe the proposed overlay approach. (a) Paragraphs 35B and BC35 C43 describe the assets to which the overlay approach can be applied. Do you agree that the assets described (and only those assets) should be eligible for the overlay approach? Why or why not? If not, what do you propose instead and why? (b) Paragraphs 35C and BC48 C50 discuss presentation of amounts reclassified from profit or loss to other comprehensive income applying the overlay approach. Do you agree with the proposed approach to presentation? Why or why not? If not, what do you propose instead and why? (c) Do you have any further comments on the overlay approach? Korean constituents generally agree. Question 4-The temporary exemption from applying IFRS 9 As described in paragraphs 20A and BC58.BC60 the Exposure Draft proposes that only entities whose predominant activity is issuing contracts within the scope of IFRS 4 can qualify for the temporary exemption from applying IFRS 9. (a) Do you agree that eligibility for the temporary exemption from applying IFRS 9 should be based on whether the entity s predominant activity is issuing contracts within the scope of IFRS 4? Why or why not? If not, what do you propose instead and why? As described in paragraphs 20C and BC62 C66, the Exposure Draft proposes that an entity would determine whether its predominant activity is issuing contracts within the scope of IFRS 4 by comparing the carrying amount of its liabilities arising from contracts within the scope of IFRS 4 with the total carrying amount of its liabilities (including liabilities arising 4

5 from contracts within the scope of IFRS 4). (b) Do you agree that an entity should assess its predominant activity in this way? Why or why not? If you believe predominance should be assessed differently, please describe the approach you would propose and why. Paragraphs BC55 C57 explain the IASB s proposal that an entity would assess the predominant activity of the reporting entity as a whole (ie assessment at the reporting entity level). (c) Do you agree with the proposal that an entity would assess its predominant activity at the reporting entity level? Why or why not? If not, what do you propose instead and why? Korean constituents strongly support the temporary exemption from applying IFRS 9 and agree with the proposal that an entity should assess its predominant activity at the reporting entity level. However they believe that the eligibility for the temporary exemption should be revised, as the predominance level is too restrictive and not all insurers would be able to apply it as the measure to address the key concerns described in the Exposure Draft. Some constituents suggest that the IASB include the predominance criteria in the Basis of Conclusions stating that insurance activities are predominant when insurance liabilities comprise over 50% of the total liabilities. In addition, other constituents believe that insurers should be deemed to meet the predominance test, provided that they only operate insurance activities. They think that it would be difficult for users to understand why these insurers are not qualified to apply the temporary exemption. Some of our constituents indicated the meaning of liabilities arising from contracts within the scope of IFRS 4 was not clear. They think that if liabilities are related to insurance activities, those should be included in the insurance liabilities when assessing the predominance level. Question 5-Should the overlay approach and the temporary exemption from applying IFRS 9 be optional? As explained in paragraphs BC78 BC81, the Exposure Draft proposes that both the overlay 5

6 approach and the temporary exemption from applying IFRS 9 would be optional for entities that qualify. Consistently with this approach, paragraphs BC45 and BC76 explain that an entity would be permitted to stop applying those approaches before the new insurance contracts Standard is applied. (a) Do you agree with the proposal that the overlay approach and the temporary exemption from applying IFRS 9 should be optional? Why or why not? (b) Do you agree with the proposal to allow entities to stop applying the overlay approach or the temporary exemption from applying IFRS 9 from the beginning of any annual reporting period before the new insurance contracts Standards is applied? Why or why not? We agree that the overlay approach and the temporary exemption from applying IFRS 9 should be optional. In addition, we agree with the proposal that allows entities to stop applying the overlay approach or the temporary exemption from applying IFRS 9 from the beginning of any annual reporting period before the new insurance contracts Standard is applied. Question 6 Paragraphs 20A and BC77 propose that the temporary exemption from applying IFRS 9 hould expire at the start of annual reporting periods beginning on or after 1 January Do you agree that the temporary exemption should have an expiry date? Why or why not? Do you agree with the proposed expiry date of annual reporting periods beginning on or after 1 January 2021? If not, what expiry date would you propose and why? We believe that the expiry date of the temporary exemption from applying IFRS 9 should be set at the effective date of the new insurance standard. 6