RESPONSE TO EXPOSURE DRAFT ON APPLYING IFRS 9 FINANCIAL INSTRUMENTS WITH IFRS 4 INSURANCE CONTRACTS (PROPOSED AMENDMENTS TO IFRS 4)

A S C ACCOUNTING STANDARDS COUNCIL SINGAPORE 5 February 2016 Mr Hans Hoogervorst Chairman International Accounting Standards Board 1 st Floor 30 Cannon Street London EC4M 6XH United Kingdom (By online submission) Dear Hans RESPONSE TO EXPOSURE DRAFT ON APPLYING IFRS 9 FINANCIAL INSTRUMENTS WITH IFRS 4 INSURANCE CONTRACTS (PROPOSED AMENDMENTS TO IFRS 4) The Singapore Accounting Standards Council appreciates the opportunity to comment on the Exposure Draft on Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Proposed Amendments to IFRS 4) (the ED) issued by the International Accounting Standards Board (the IASB) in December 2015. We are generally supportive of the proposals in the ED. We believe that the ED would help to address stakeholders concerns about the additional accounting mismatches and temporary volatility in profit or loss (PL) that would arise when IFRS 9 is applied before the new Insurance Contracts (IC) Standard. Nevertheless, we have several comments, including the description of predominance under the temporary exemption from applying IFRS 9 and the level at which it is assessed. However, we disagree with the proposal to prohibit first-time adopters of IFRS from using the proposed temporary reliefs and consider that the IASB s rationale lacks persuasion. Firstly, the existing transitions for the accounting for IC and financial instruments under IFRS 1 First-time Adoption of IFRS already placed more emphasis on ensuring that first-time adopters are not disadvantaged vis-à-vis exiting IFRS preparers, instead of achieving comparability. Secondly, first-time adopters cannot be expected to avoid the accounting consequences by early applying the new IC Standard, or adopting consistent accounting policies, because of the short period between the completion of the IASB s technical deliberations on the new IC Standard and the mandatory effective date of IFRS 9. Furthermore, we firmly believe that IFRS should maintain a level playing field across capital markets to preserve its relevance and continued global acceptance, as long as the IASB recognises that jurisdictions adopt IFRS at different points in time. In Singapore, although Page 1 of 11

our financial reporting framework has been substantially aligned with IFRS, we have nonetheless committed to full convergence with IFRS that would take effect from annual reporting periods beginning on or after 1 January 2018. The proposed prohibition would place our listed domestic insurance and bancassurance companies at a significant disadvantage in comparison with their IFRS counterparts, with potentially wider implications for our capital markets and our competitive advantages as an international financial centre. Our comments on the specific questions in the ED are as follows: 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 IC Standard: (a) Users of financial statements may find it difficult to understand the additional accounting mismatches and temporary volatility that could arise in PL if IFRS 9 is applied before the new IC 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 IC Standard can be fully evaluated (paragraph BC17 BC18). (c) Two sets of major accounting changes in a short period of time could result in significant cost and effort for both preparers and users of financial statements (paragraphs BC19 BC21). The proposals in this ED are designed to address these concerns. Do you agree that the IASB should seek to address these concerns? Why or why not? We agree that the IASB should seek to address the concerns related to the different effective dates of IFRS 9 and the new IC Standard. We can particularly appreciate the concern about the additional accounting mismatches and temporary PL volatility that do not reflect economic phenomena. In reality, most entities that issue contracts within the scope of IFRS 4 (hereafter referred to as insurers) apply assetliability matching techniques to manage market risks arising from their insurance liabilities and financial assets. The accounting consequences of applying IFRS 9 before the new IC Standard might not faithfully represent the financial performance of underwriting and investment activities and the effects of economic hedging activities. In addition, we acknowledge that the classification and designations under IFRS 9 might have been different if IFRS 9 and the new IC Standard are applied at the same time. Therefore, we are heartened by the IASB s tentative decisions in the IC project to enable insurers to reassess certain aspects of the classification and designations of financial assets on initial application of the new IC Standard. Page 2 of 11

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 PL to other comprehensive income (OCI) some of the income or expenses arising from designated financial assets that: (i) are measured at fair value through PL (FVPL) in their entirety applying IFRS 9 but (ii) would not have been so measured applying IAS 39 (the overlay approach) (see paragraphs BC24 BC25); (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 BC31). 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. Question 5 Should the overlay approach and the temporary exemption from applying IFRS 9 be optional? As explained in paragraphs BC78 BC81, the ED proposes that both the overlay 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 IC 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 IC Standard is applied? Why or why not? We support the IASB s proposal to permit both the overlay approach and the temporary exemption from applying IFRS 9. In our view, both approaches are necessary to cater for the diverse circumstances amongst insurers. On one hand, IFRS 9 should be implemented without delay because it significantly improves the accounting for financial instruments to address concerns raised in the aftermath of the global financial crisis. The overlay approach could be a welcoming transitional relief for certain entities that issue contracts within the scope of IFRS 4, such as bancassurance. Page 3 of 11

Such entities would be able to apply IFRS 9 on a timely basis, but without the temporary accounting consequences on the reporting of financial performance caused by the different effective dates of IFRS 9 and the new IC Standard. In some cases, however, the temporary exemption from applying IFRS 9 might be more justifiable. This is particularly so if the initial application of the new IC Standard is likely to result in another set of significant changes to the accounting for financial assets, which increases implementation costs and reduces understandability of financial statements. Therefore, we believe that insurers should be allowed to decide on the approach that better serves their needs, taking into consideration their specific circumstances. It follows that these approaches should be optional. Insurers should be allowed to account for financial assets and report financial performance consistently in accordance with IFRS 9, if they could explain the accounting mismatches and PL volatility by way of disclosure, or if they are not eligible for the temporary exemption from IFRS 9 but the costs of the overlay approach outweigh its benefits. On the whole, we are prepared to accept the consequences of reduced comparability over a short period of time. Furthermore, we can appreciate the proposal to permit an insurer to voluntarily discontinue using the overlay approach or the temporary exemption from applying IFRS 9. Insurers should not be prevented from reporting financial performance using the improved accounting requirements of IFRS 9, without the overlay adjustment (or even with the overlay adjustment in the case of an insurer that has previously applied the temporary exemption). This is also aligned with paragraph 22 of IFRS 4 that permits a change to the accounting policies for IC only if it makes the financial statements more relevant (and no less reliable) or more reliable (and no less relevant). We further appreciate that those insurers should stop applying the overlay approach or the temporary exemption from applying IFRS 9 only from the beginning of any subsequent annual reporting period to reduce opportunities for earnings management. Question 3 The overlay approach Paragraphs 35A 35F and BC32 BC53 describe the proposed overlay approach. (a) Paragraphs 35B and BC35 BC43 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 BC50 discuss presentation of amounts reclassified from PL 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? We are generally supportive of the IASB s proposal under (a) and (b). Page 4 of 11

Qualifying financial assets We acknowledge that the proposed criteria in paragraph 35B have the potential to capture the affected financial assets, without being overly narrow. In particular, the criterion in paragraph 35B(b) would preclude financial assets that do not give rise to additional accounting mismatches and temporary PL volatility on initial application of IFRS 9. The criterion in paragraph 35B(a) further excludes financial assets for which additional accounting mismatches and temporary PL volatility do not result from the concurrent application of IFRS 9 and IFRS 4. In addition, we appreciate the IASB s intention on designation, re-designation and dedesignation of financial assets as articulated in paragraphs BC40 and BC41 of the Basis for Conclusions on the ED (the ED BC). However, we suggest that the IASB should clearly articulate its intention in the Amendments to permit the designation of financial assets that are recognised only after the initial application of IFRS 9. The IASB should further consider clarifying that an entity, which starts issuing contracts within the scope of IFRS 4 only after it has applied IFRS 9, is permitted to prospectively apply the overlay approach to qualifying financial assets. This is because the entity would be prohibited under paragraph 35D, but might conclude differently under paragraph BC46 of the ED BC, which states that the overlay approach is targeted for entities that have not previously applied IFRS 9 in conjunction with their existing accounting under IFRS 4. Aside from the above, we note that the proposed overlay adjustment would inevitably include PL volatility arising from economic mismatches between insurance liabilities and related financial assets, which should be reflected in PL even with the application of the new IC Standard. Moreover, the basis for determining the overlay adjustment, together with designations on an asset-by-asset basis, could motivate the designation of some assets, but not others, to achieve a particular accounting outcome. Nevertheless, we are prepared to accept these proposals for the following reasons: (i) the introduction of additional criteria or adjustments would increase the complexity of the temporary relief and the extent of tracking required for designated financial assets; and (ii) the risk of earnings management through designation is mitigated by the proposals to limit re-designation and de-designation to situations involving a change in the relationship of financial assets with contracts within the scope of IFRS 4. Presentation of the overlay adjustment We appreciate that the overlay approach would provide both IFRS 9 information and the incremental effects of measuring designated financial assets at FVPL. We further agree that the presentation of the reclassified amount and the effects on individual line items in PL should be guided by the existing guidance in IAS 1 Presentation of Financial Statements. Other comments The ED suggests that an insurer should recognise re-designation or de-designation of a financial asset on the date of change in its relationship with contracts within the scope of IFRS 4. However, it is unclear when the insurer should recognise the change if it ceases to apply the overlay approach because it no longer issues contracts within the scope of IFRS 4. Page 5 of 11

We recommend that the IASB should require the insurer to recognise the change at the beginning of the next annual reporting period in both cases. This approach would achieve a pragmatic balance of reflecting changes in the relationship between financial assets and contacts within the scope of IFRS 4, and reducing opportunities for earnings management through the timing of such changes. It would further result in an alignment of the timing at which mandatory cessation is recognised between the overlay approach and the temporary exemption from applying IFRS 9, and with the concepts underlying IFRS 9 for reclassifications of financial assets. Question 4 The temporary exemption from applying IFRS 9 As described in paragraphs 20A and BC58 BC60 the ED 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 BC66, the ED 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 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 BC57 explains 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? Eligibility based on predominant activity We agree with the proposed basis for determining eligibility under (a). We consider it important for IFRS 9 to be implemented without delay. It follows that we appreciate restricting the temporary exemption to insurers that are most affected by the different effective dates between IFRS 9 and the new IC Standard, and describing predominance as a very high threshold. Page 6 of 11

Describing predominance We support describing predominance by reference to items on the statement of financial position, and liabilities in particular. We agree that the statement of financial position would provide a more stable basis for assessment, and that liabilities vis-à-vis other elements are more likely to directly reflect the nature of an insurer s activities. However, we are concerned that the proposed description of predominance might not capture the intended population of the most affected insurers for the following reasons: (a) (b) (c) It is insufficiently robust to cater for the different types of insurance activity and the different approaches to managing risks related to contracts within the scope of IFRS 4. For example, the level of liabilities arising from contracts within the scope of IFRS 4 relative to total liabilities is likely to differ between general insurance activity and life insurance activity due to the duration of contracts as well as the timing of premiums and claims. Insurers that use derivatives to hedge market risks arising from contracts within the scope of IFRS 4 could have relatively more liabilities that are outside the scope of IFRS 4 as compared to insurers that do not hedge those risks. It considers all other liabilities to be unrelated to the activity related to the issuance of contracts within the scope of IFRS 4. However, some of those liabilities provide general funding to all activities of an insurer, including the insurance activity. Other liabilities, such as tax and employee benefit liabilities, could directly reflect insurance activity as much as any other activities. It does not adjust for one-off charges that do not directly reflect the nature of an insurer s predominant activity, but yet affecting the predominance conclusion. This is of particular concern because the predominance assessment is made at a point in time date when the insurer is otherwise required to initially apply IFRS 9 and not based on historical data. Accordingly, we recommend that the IASB should refine the proposed description of predominance as follows: (a) (b) To better reflect the activities typically undertaken by insurers by: (i) Including in the numerator liabilities that are related to the activity of issuing contracts within the scope of IFRS 4, but are accounted for applying IFRS 9; and (ii) Excluding liabilities that are within the scope of IAS 12 Income Taxes and IAS 19 Employee Benefits from both numerator and denominator; and To adjust for one-off charges, with supporting disclosures. Assessing predominance We disagree that predominance should be assessed at the reporting level in all circumstances. In most circumstances, we support assessing predominance at the reporting entity level. A reporting entity that fails the predominance assessment would hold financial instruments that are related to more than insignificant non-insurance activities. For such entities, we consider the overlay approach to be more effective because it better balances the need for improved Page 7 of 11

accounting and temporary relief for financial instruments related to the insurance activity. It also preserves the comparability of information on all financial instruments of the entity. From the cost perspective, the entity would not be far better off than it would have been applying the overlay approach because of the need to maintain systems to support the disclosures of certain IFRS 9-type information under the temporary exemption. However, we are particularly concerned that the proposal would effectively preclude the application of the temporary exemption by a reporting entity whose predominant activity is to issue contracts within the scope of IFRS 4, if it is part of a group that undertakes significant other activities. The proposal to prohibit the group from applying the temporary exemption would require the reporting entity to produce IFRS 9 information for consolidation purposes. We believe that the reporting entity should not be disadvantaged simply because it is part of a group that undertakes significant other activities. This concern is also true for equityaccounted investees whose predominant activity is to issue contracts within the scope of IFRS 4, since IAS 28 Investments in Associates and Joint Ventures requires the use of uniform accounting policies by both the investor and its equity-accounted investees. In fact, the practical difficulty in unwinding the accounting applied by equity-accounted investees has been acknowledged, when the IASB amended IAS 28 to permit an investor that is not an investment entity to retain the fair value measurement applied by its investment entity equityaccounted investees to their interests in subsidiaries. We therefore recommend that the IASB should permit, and in such circumstance only, the group or investor not to unwind the accounting under the temporary exemption applied by group entities or equity-accounted investees whose predominant activity is to issue contracts within the scope of IFRS 4. In our view, the understandability of financial statements is not necessarily reduced even if the group or investor applies IAS 39 to financial instruments related to the insurance activity and IFRS 9 to financial instruments related to other activities. IFRS 9 already requires the use of different accounting for financial assets held within different business models. Moreover, each business model is likely to generate cash flows independently from others. Therefore, the quality of IFRS 9 information on financial assets held within other business models is unlikely to be affected by a continuation of the current accounting for financial assets held within a business model of predominantly issuing contracts within the scope of IFRS 4, with accompanying disclosures required by IFRS 7 Financial Instruments: Disclosures. That said, we acknowledge the IASB s concerns opportunities for earnings management and additional complexity in accounting requirements arising from transfers between group entities whose predominant activity is to issue contracts within IFRS 4 and others. We recommend that the IASB should prohibit reclassification for such transfers, which is aligned with the strict reclassification principles in IFRS 9. Although it potentially results in different measurement for similar assets held for similar purposes, this is a compromise already accepted in IFRS 9 as a balance between the objectives of providing relevant information, preserving comparability and preventing earnings management. Page 8 of 11

Question 6 Expiry date for the temporary exemption from applying IFRS 9 Paragraphs 20A and BC77 propose that the temporary exemption from applying IFRS 9 should expire at the start of annual reporting periods beginning on or after 1 January 2021. 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? In our view, it is neither necessary nor appropriate for the temporary exemption to have a specific expiry date. We reiterate our view, in our comment letter on the Request for Views on 2015 Agenda Consultation, that the IASB should place high priority on completing the IC project within the current planned timeframe. On the basis that the temporary exemption would be applied for a short period of time, we firmly believe that it should be permitted so long as the concurrent application of IFRS 9 and IFRS 4 would be otherwise required. A specific expiry date is both arbitrary and unnecessary since the temporary exemption would naturally expire on initial application of the new IC Standard. Furthermore, we suggest that the IASB should consider prohibiting both approaches, at such time when the finalisation of the new IC Standard is expected to take beyond a reasonable timeframe. Foremost, the delay in the implementation of IFRS 9, and the use of OCI that does not provide more relevant information in PL, should not continue indefinitely. Besides, the additional disclosures under each approach over the subsequent few annual reporting periods would likely help users of financial statements to better understand the accounting consequences that would result when those approaches are no longer applied. This would warrant greater focus to be placed on ensuring comparability, amongst insurers and with other entities holding financial instruments. Other comments We disagree with the proposal to prohibit first-time adopters of IFRS from using the overlay approach or the temporary exemption from applying IFRS 9. In particular, we are not convinced by the IASB s rationale in paragraph BC82 of the ED BC for the following reasons: (a) We note that paragraph E1 of IFRS 1 already exempts a first-time adopter that applies IFRS before 1 January 2019 from restating comparative information in accordance with IFRS 9. The IASB has placed more emphasis on ensuring that first-time adopters are not disadvantaged vis-à-vis exiting IFRS preparers in the implementation of IFRS 9, instead of adhering to the concepts in IFRS 1 on the use of current version of IFRS to achieve inter-period comparability in the first IFRS financial statements. We further note that both first-time adopters and existing IFRS preparers are largely permitted to continue their existing accounting for IC under IFRS 1 and IFRS 4. It follows that insurers that are first-time adopters should not be disadvantaged as compared with Page 9 of 11

existing IFRS insurers in the reporting of IFRS 9 information alongside IC information. Furthermore, the consequence of reduced comparability amongst insurers is a shortterm compromise in exchange for addressing specific concerns that is contained within a particular industry. Hence, there is no compelling reason why it can be accepted for existing IFRS preparers, but not first-time adopters when comparability of the accounting for IC is already not achieved under IFRS 4. (b) (c) We believe that first-time adopters cannot be expected to avoid additional accounting mismatches and temporary PL volatility by early applying, or adopting accounting policies that are consistent with, the new IC Standard. Firstly, the IASB acknowledged in paragraph BC37 of the ED BC that insurers cannot be expected to know whether volatility is temporary without fully assessing the effect of the new IC Standard. This concern is as relevant for a first-time adopter that is required to develop accounting policies for IC in anticipation of the yet-to-be-published new IC Standard. It is unreasonable to expect that the first-time adopter is able to implement the new IC Standard, or adopt accounting policies that are consistent with the new IC Standard, by the time it initially applies IFRS 9, if the IASB has concluded that existing IFRS preparers should be allowed an implementation period of approximately three years from the publication of the new IC Standard. Moreover, the first-time adopter effectively has less time to implement IFRS 9 than existing IFRS preparers since it cannot conclude on its classification and designation assessment before the technical deliberation on the new IC Standard is completed. It also risks having two sets of significant accounting changes for both IC and financial instruments once on transition to IFRS and another on initial application of the new IC Standard. We believe that first-time adopters should decide for themselves whether to apply the temporary reliefs based on the specifics of their circumstances. A first-time adopter should not be precluded if, for example, it concludes that the benefit of enhanced understandability of its financial statements would outweigh the cost of concurrently producing IAS 39 and IFRS 9 information, or the cost of initially applying IAS 39 on transition to IFRS and subsequently applying IFRS 9 on initial application of the new IC Standard. This may be the case if the entity s previous accounting requirements for financial instruments are substantially aligned with those of IAS 39 and the entity could produce IAS 39 information on a retrospective basis without the use of hindsight. Specifically in Singapore, domestic companies that are listed on our local stock exchange would apply a new IFRS-identical financial reporting framework for annual reporting periods beginning on or after 1 January 2018. Those listed domestic companies, which have been applying a national financial reporting framework that is substantially aligned with IFRS, share the concerns about the accounting consequences that would arise from the concurrent application of IFRS 9 and IFRS 4 on transition to IFRS. In addition, they may conclude that the application of the overlay approach or the temporary exemption is both possible without the use of hindsight and justifiable on cost-benefit grounds. We therefore urge the IASB to make avail of the overlay approach and the temporary exemption to first-time adopters. Otherwise, first-time adopters could only look to the alignment of effective dates between first-time adoption of IFRS and the new IC Standard to address their concerns. Page 10 of 11

We hope that our comments will contribute to the IASB s deliberation on the ED. Should you require any further clarification, please contact our project manager Siok Mun Leong at Leong_Siok_Mun@asc.gov.sg. Yours faithfully Suat Cheng Goh Technical Director Singapore Accounting Standards Council Page 11 of 11