IFRS 17. New Accounting Perspective. KPMG Advisory (China) November 2017

Transcription

1 IFRS 17 New Accounting Perspective KPMG Advisory (China) November 2017

2 Background & overview

3 Background & overview Milestones 2001 IFRS4: IASB initiation 2004 IFRS4: release 2010 IFRS 4 Phase II: 1 st ED 1/1/2021 IFRS 17: effective May 2017 IFRS 17: release 2013 IFRS 4 Phase II: 2 nd ED IFRS 17 is effective for annual periods beginning on or after 1 January A company can choose to apply IFRS 17 before that date but only if it also applies IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. IFRS 17 includes several transition reliefs to assist a company in applying IFRS 17 for the first time o Optional fair value approach or modified retrospective approach o Permit reclassifications for financial assets under IFRS 9 based on facts and circumstances that exist when IFRS 17 first applied 3

4 Background & overview Objective The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. IFRS 17 s general measurement model (or Building Block Approach (BBA)) is based on a fulfilment objective and uses current assumptions It introduces a single, revenue recognition principle to reflect services provided And is modified for certain contracts The ways in which analysts interpret and compare companies will change. Increased transparency will give users more insight into an insurer s financial health than ever before. - Joachim Kölschbach KPMG s global IFRS insurance leader 4

5 Scope

6 Scope Insurance contracts Definition of an insurance contract consistent with IFRS 4 Insurance contracts, including reinsurance contracts, that the entity issues and reinsurance contracts that the entity holds Investment contracts that the entity issues with a DPF provided that the entity also issues insurance contracts Certain financial guarantees Apply to all insurance contracts rather than insurance entities A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. No quantitative guidance for assessing the significance of insurance risk. An entity shall assess the significance of insurance risk contract by contract. Scope exclusions Scope exclusions in IFRS 4 carried forward Additional scope exclusions added: residual value guarantees provided by a manufacturer, dealer or retailer; certain fixed-fee service contracts (Note: this scope exclusion is permitted as the application of IFRS 15 Revenue from Contracts with Customers is optional via an accounting policy choice) 6

7 Scope Insurance risk vs. financial risk A contract that exposes the issuer to financial risk without significant insurance risk would not be an insurance contract under IFRS17. The specified uncertain future event that is covered by an insurance contract creates insurance risk. Insurance risk is any risk, other than financial risk, transferred from the holder to the issuer of a contract. The following table includes examples of insurance risk and financial risk. Risks such as: death or survival injury illness disability Insurance risk loss of property due to damage or theft failure of a debtor to make a payment when it is due a possible change in a non-financial variable that is specific to a party to the contract Financial risk The risk of a possible future change in one or more of: interest rates financial instrumentprices commodity prices currency exchange rates indices of prices or rates credit ratings or credit indices any other variable, except for a non- financial variable that is specific to a party to thecontract Contracts covering weather events or earthquakes that cause damage to an asset of the insured party can meet the definition of an insurance contract Contracts covering such damage in a particular region e.g. weather or catastrophe indices are not specific to a party to the contract, so they do not meet the definition 7

8 Scope Separating non-insurance components The separation of certain components from an insurance contract will be required. Separating components is prohibited if not required. Insurance component Distinct goods and services Non-distinct investment component Embedded derivatives (not closely related) Distinct investment components Measured under the insurance standard Measured under the insurance standard, but excluded from the aggregate premium and claims Measured under the financial instruments standard Measured under the revenue recognition standard IFRS17 includes guidance on distinct investment components and distinct goods and services 8

9 Aggregation, recognition, derecognition

10 Aggregation, recognition, derecognition Level of aggregation Portfolio identification Exemption Any onerous contracts at inception should be grouped separately from those that are not onerous at inception. Measure insurance contracts not onerous at inception by dividing the portfolio into at least 2 different groups: o A group of contracts that have no significant possibility of becoming onerous; and o A group of other profitable contracts In addition, a group of contracts cannot include contracts issued more than one year apart. If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity s practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity may include those contracts in the same group. For example, in some jurisdictions, local regulations may prohibit a company from charging different premiums to policyholders because of a specific characteristic (for example, gender, age, race or location of residence). These regulations may prevent companies from pricing a contract to reflect the risk of a particular policyholder based on that characteristic. In these circumstances, IFRS 17 allows such contracts to be included in the same group. Impact Apply to both short-term and long-term contracts Less costly than contract by contract accounting Favourable and unfavourable changes in estimates from the individual contracts in the group of contracts are offset, and only net change in estimates that is adjusted in the contractual service margin of the group or recognised in profit or loss 10

11 Aggregation, recognition, derecognition Recognition An insurance contract would be recognised from the earliest of: the beginning of the coverage period; the date on which the first payment from the policyholder becomes due; and if applicable, the date on which facts and circumstances indicate that the portfolio of insurance contracts to which the contract belongs is onerous. In the absence of a contractual due date, the first payment from the policyholder would be deemed to be due once it has been received. Onerous contract consideration Recognise Bound by terms of contract Coverage begins / premium due 1 November 31 December 1 January 11

12 Aggregation, recognition, derecognition Derecognition and contract modifications Derecognition Contract modifications An insurance contract (or part of it) would be derecognised when it is extinguished i.e. when the obligation specified in the insurance contract is discharged or cancelled or expires. If an entity buys reinsurance, it shall derecognise the ceded contract(s) if, and only if, the mentioned contract(s) are extinguished. When a contract is derecognised from a group, the CSM for the group would be adjusted to reflect the coverage units that are derecognised. An insurance contract would be derecognised and a new contract would be recognised, if the contract is amended in a way that would have resulted in a different assessment of the following items at the inception of the contract (substantial modification): owhether the contract is in the scope of the standard; owhether to use the premium-allocation approach to account for the insurance contract; owhether the modified contract would be included in a different portfolio of insurance contracts; or owhether the addition of a component to the contract would have been separated if it had been present at inception. 12

13 Measurement

14 Measurement Building block approach (BBA) Building blocks Fulfilment cash flows Risk-adjusted present value of future cash flows e.g. premiums, claims Contractual service margin (CSM) Represents unearned profit results in no gain on initial recognition Future cash flows In- flows Out- flows 2 Discounting 3 Risk adjustment 4 CSM Net cash outflows result in no CSM a loss is recognised immediately 14

15 Measurement Building block 1: Future cash flows Examples of cash flows within the boundary of a contract Premiums - Transaction-based taxes and levies + Claims and benefits payable to policyholders (including IBNR) + Payments by insurer in a fiduciary capacity to meet tax obligations incurred by policyholders + Directly attributable costs of selling, underwriting, and initiating of contracts that can be allocated to the portfolio (acquisition costs) * + Claims handling costs + Cash flows that will result from options and guarantees embedded in the contract + Costs of servicing the contract (policy administration & maintenance) + Salvage and subrogation - Payments that provide current or future policyholders with a share in returns from underlying items (e.g. pool of assets) + Fixed and variable overheads (e.g. accounting, human resources, IT, building depreciation) * + Contractual benefits paid in kind + + Indicates a cash outflow / Indicates a cash inflow * Directly attributable to fulfilling the portfolio of insurance contracts and allocated using methods that are: (1) systematic and rational, and applied consistently to all costs that have similar characteristics; and (2) in a way that ensures that the allocated costs do not exceed the costs incurred. 15

16 Measurement Building block 2: Time value of money Example bottom-up and top-down approach Financial instrument yield of 5.25% (based on actual assets held or a reference portfolio) Either a top-down or a bottom-up approach may be used to determine an appropriate discount rate. In theory, both approaches should result in the same discount rate. However, in practice, differences are expected. Top-down approach: 3.35% Bottom-up approach: 3.50% Market risk premium for expected credit losses (1%) Market risk premium for unexpected credit losses (.9%) illiquid risk free yield curve Liquidity premium (.5%) Risk-free rate (3%) No specific method prescribed. Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity. 16

17 Measurement Building block 3: Risk adjustment (1/2) The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise from non-financial risk Entity specific measure of the compensation to make the entity indifferent between: fulfilling a liability that has a range of possible outcomes arising from non-financial risk; and fulfilling a liability that will generate fixed cash flows with the same expected present value. Re-measured each reporting period (1) Contract fulfilment (2) Fixed liability 50% chance 50% chance 100% chance Pay 90 Pay 110 Pay 100 Expected value is to pay 100 Fixed liability pays 100 Given the variability in the outcomes, an entity would be likely to require more consideration to fulfil the obligation for the contract than to settle the obligation by paying a fixed amount. 17

18 Measurement Building block 3: Risk adjustment (2/2) No prescribed estimation technique(s) used to determine the risk adjustment for nonfinancial risk. However, to reflect the compensation the entity would require for bearing the non-financial risk. Characteristics of underlying risks Low frequency and high severity risks such as catastrophe losses Long-duration contracts Wide probability distributions Little known about trends and current estimates Emerging claims experience increases uncertainty regarding estimates Risk adjustment Higher High frequency, low severity losses Short-duration contracts Narrow probability distributions More known about trends and current estimates Emerging claims experience reduces uncertainty regarding estimates Lower 18

19 Measurement Building block 4: Contractual service margin (CSM) Fulfilment cash flows less than zero Expected cash inflows Expected cash out flows Discounting Risk adjustment Contractual service margin Fulfilment cash flows greater than zero Discounting Risk adjustment Loss Expected cash inflows Expected cash out flows Note: for a group of reinsurance contracts held there is no unearned profit but instead a net cost or net gain on purchasing the reinsurance. 19

20 Measurement Premium allocation approach (PAA) (1/3) A measurement approach for some short-duration contracts which is a similar approach to some current practices for non-life contracts. * The use of the PAA permits not discounting the claims liability if those cash flows are expected to be paid or received in 1 year or less. 20

21 Measurement Premium allocation approach (PAA) (2/3) Initial measurement of liability for remaining coverage Liability for remaining coverage = Initial premium - Directly attributable acquisition costs + Loss component Similar in many ways to current practice for non-life contracts At contract inception, if an entity expects that the time between the entity providing each part of the coverage and the premium that relates to that coverage being due will be one year or less, then the liability for the remaining coverage would not need to be adjusted for the time value of money. For contracts with a coverage period of one year or less, all acquisition cash flows may be recognised as an expense when incurred. 21

22 Measurement Premium allocation approach (PAA) (3/3) Subsequent measurement of liability for remaining coverage Previous carrying amount + + Interest accretion Premium received in period Revenue recognised for coverage Change in loss component Adjust the carrying amount for changes to current market discount rates for incurred claims Recognise revenue on the basis of passage of time or If the expected risk pattern differs from this, the expected timing of incurred claims and benefits Prospective updates to the allocation method are permitted 22

23 Measurement Variable fee approach Applicable to insurance contracts with direct participation features The approach considers the variable fee associated with direct participating contracts Underlying items related to policyholder participation The underlying items can be held or referenced Obligation to policyholder Should assist entities in reducing accounting mismatches and volatility Fee for service The building blocks still apply An entity would adjust the CSM for changes in the estimate of variable fees for future services, including changes in market variables that impact future services Release pattern of CSM consistent with general model Cannot be applied to reinsurance contracts issued or held 23

24 Measurement Reinsurance contracts held The BBA and PAA still apply, with modifications The reinsurance contract held is accounted for separately from the underlying direct contract Reinsurance gain or loss is recognised as reinsurance services are received 24

25 Presentation & disclosures

26 Presentation & disclosures Presentation An entity presents separately: Groups of insurance contracts that are in an asset position; and Groups of insurance contracts that are in a liability position Reinsurance contract assets/liabilities would be presented separately from insurance contract assets/liabilities Investment components are excluded from insurance revenue and service expenses Entities can choose to present the effect of changes in discount rates and other financial risks in profit or loss or OCI to reduce volatility 26

27 Presentation & disclosures Disclosures New key disclosures Amounts recognised Significant judgements Nature and extent of risks Additional reconciliations as a result of the new measurement model in tabular format, including components of changes Inputs used to determine revenue recognised in the period Effect of the insurance contracts initially recognised in the period An analysis of total interest expense Additional transition disclosures More detailed disclosures of methods and processes for estimating inputs Effect of changes in the methods and inputs, together with an explanation of the reason for each change (IFRS 4 requires to disclosure the effect of changes in assumptions) Disclosure of confidence level to which the risk adjustment corresponds Disclosure of the yield curves used to discount cash flows that do not depend on returns from underlying items Quantitative information about effect on profit or loss and equity of contracts sensitivities to insurance risk (IFRS 4 includes an option to provide qualitative or quantitative information). Reconciliation of disclosures about claims development with the carrying amounts of insurance liabilities For liquidity risk, amounts payable on demand, highlighting the relationship between these amounts and carrying amounts of related contracts Regulatory requirements 27

28 Impact on insurers

29 Impact on insurers Impact on insurers IFRS17 does not distinguish life insurers and non-life insurers All the rules regarding level of aggregation, recognition, measurement, derecognition, contract modifications, presentation, disclosures apply to all insurance contracts The major simplification for non-life insurers is PAA measurement model. However, concerns may arise for many insurers in qualifying for PAA for certain long term contracts, hence the cost/benefit of running both BBA and PAA at the same time for different portfolios Profitability patterns Volatility of financial results and equity Level of transparency about profit drivers Equity levels The magnitude of the accounting change for life and non-life insurers will be different 29

30 Impact on insurers Get ready HKFRS and China GAAP convergence to IFRS17? Fundamental operational challenges lie ahead and there isn t much time You need to Effective date Complete an initial assessment Review your contracts Plan your accounting policy decisions Determine your needs for systems, processes and resources 30

31 kpmg.com/cn/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative The KPMG name and logo are registered trademarks or trademarks of KPMG International. Document Classification: KPMG Confidential