1. 1st of January 2017 (or 2018?) IFRS 4 Phase II Update
IASB and FASB joint meetings – October 2012
Francesco Nagari
Deloitte Global IFRS Insurance Lead Partner
24 October 2012

2. Agenda
Highlights of decisions and education sessions from this month joint meetings
Detailed analysis of the Staff recommendations and Board discussions
Update on timetable and next steps
IFRS 4 Phase II – Webcast (October 2012)

3. Highlights Joint IASB/FASB decisions – 15 and 17 October
Agreement to use “Earned premium” presentation in the Income Statement
Agreement to use discount rate at contract inception under the PAA
Agreement the “mirroring approach” presentation for participating insurance contracts
FASB only decisions – 15 and 17 October
Acquisition costs should not be presented as an asset – alignment with IASB
Insurance liability to be shown in two lines on financial statements: best estimate and margin
IASB only decisions – 17 and 19 October
Confirmed the contract boundary for financial instruments with discretionary participating features
Final standard expected in 2014, with mandatory effective date about 3 years from then, around Deloitte Global Insurance Survey cited
Option to early adopt with requirement to restate comparatives in all cases
Specific guidance for reclassification (with limited exceptions) of financial assets under IFRS 9 on transition to IFRS 4
Require ‘hindsight’ to restate residual margin on transition
Joint IASB/FASB decisions
Agreement to use “Earned premium” presentation in the Income Statement (17 October)
The portion of the premium relating to non-claims fulfilment costs to be allocated and included in the insurance contract revenue in the periods in which the costs are expected to be released from the liability (17 October)
The amount presented as expenses are the actual costs incurred or added to the liability for incurred claims in the period (17 October)
The acquisition costs (AC) are to be recognised in the statement of comprehensive income in a way that is consistent with the proposed allocation of the residual / single margin (17 October)
IASB only decisions
Cash flows relating to AC recognised in the statement of comprehensive income over the coverage period (17 October)
FASB only decisions
Acquisition costs should not be presented as an asset (17 October)
Acquisition costs should be presented as a reduction in the margin (17 October)
Insurance liability to be shown in two lines on financial statements: best estimate and margin (17 October)
IFRS 4 Phase II – Webcast (October 2012)

4. Discount rate in the Premium Allocation Approach – paper 2D/90D
IASB and FASB Staff recommendation – Discount rate for remaining coverage period
When the liability for remaining coverage is accreted or discounted, the rate that shall be required for its measurement is the discount rate at the inception of the contract.
Staff recommendation – Discount rate for incurred claims
IASB Staff - Discount rate at the date the claim is incurred and which is subsequently locked in
FASB Staff –Discount rate at the inception of the contract and which is subsequently locked in
IFRS 4 Phase II – Webcast (October 2012)

5. Discount rate in the Premium Allocation Approach – paper 2D/90D (cont
Discussion-Discount rate for remaining coverage period
Both the IASB and FASB supported the staff recommendations of using the discount rate at the inception of the contract and it was consistent with its previous decisions
Decision
IASB vote
FASB vote
Approve Staff recommendation
Unanimous
The IASB staff presented paper 2A and its recommendation to use an earned premium presentation, “whereby premiums are allocated to periods in proportion to the value of coverage that the insurer has provided in the period, and claims are presented when incurred”.
On the other hand, the FASB staff proposes to use a premium due presentation, “whereby premiums are presented when due and an expense representing the claims, benefits and margins associated with these premiums is presented at the same time”.
The IASB started the discussion and it quickly became clear that the majority was in favour of the Staff recommendation. Although some Board members acknowledged the complexity of the approach, they believe it is a step towards consistency with other industries, as well as being a good indicator of performance. Some Board members expressed a preference for the summarised margin approach and suggested to use that if no consensus was reached on the earned premium presentation.
For reasons similar to the IASB’s, the FASB agreed that a premium earned presentation would be preferable to the “premium due”, which is what the FASB Staff was proposing. The FASB finds the premium earned to be more consistent with “revenue recognition” and a better proxy for volume. A few Board members also expressed a preference for the summarised margin approach however, understands that it does not address the need for volume information that the industry wish to see.
Both Boards voted in favour of using the premium earned presentation (IASB: 13 in favour, FASB: 5 in favour). The Chairman of the FASB asked that the method for determining the revenue not to be prescriptive.
IFRS 4 Phase II – Webcast (October 2012)

6. Discount rate in the Premium Allocation Approach – paper 2D/90D (cont
Discussion-Discount rate incurred claims
A discount rate determined at the date the claim is incurred supported initially by the majority of IASB members since it results in more useful information than the rate at the inception of the contract and this rate reflects the market conditions at the time the claim was incurred
The rate at inception of contract supported by majority of FASB members since it less complex than using the rate at the date the claim was incurred
In the interest of convergence IASB chairman asked for another vote on the matter
Decision
IASB vote
FASB vote
Approve FASB Staff recommendation
Majority (13:2)
Majority (6:1)
The IASB staff presented paper 2A and its recommendation to use an earned premium presentation, “whereby premiums are allocated to periods in proportion to the value of coverage that the insurer has provided in the period, and claims are presented when incurred”.
On the other hand, the FASB staff proposes to use a premium due presentation, “whereby premiums are presented when due and an expense representing the claims, benefits and margins associated with these premiums is presented at the same time”.
The IASB started the discussion and it quickly became clear that the majority was in favour of the Staff recommendation. Although some Board members acknowledged the complexity of the approach, they believe it is a step towards consistency with other industries, as well as being a good indicator of performance. Some Board members expressed a preference for the summarised margin approach and suggested to use that if no consensus was reached on the earned premium presentation.
For reasons similar to the IASB’s, the FASB agreed that a premium earned presentation would be preferable to the “premium due”, which is what the FASB Staff was proposing. The FASB finds the premium earned to be more consistent with “revenue recognition” and a better proxy for volume. A few Board members also expressed a preference for the summarised margin approach however, understands that it does not address the need for volume information that the industry wish to see.
Both Boards voted in favour of using the premium earned presentation (IASB: 13 in favour, FASB: 5 in favour). The Chairman of the FASB asked that the method for determining the revenue not to be prescriptive.
IFRS 4 Phase II – Webcast (October 2012)

7. Participating Insurance Contracts “Mirroring Approach”– paper 2F/90F
Staff recommendation – Presentation of changes in insurance liability including changes in discount rates when the “mirroring approach” is applicable
In order to avoid accounting mismatches when using the mirroring approach for participating insurance contracts insurers should measure and present that part of the obligation that relates to the underlying items on the same basis as it measures and presents the underlying items
FASB staff recommended that in cases when “mirroring approach” is not applicable changes in discount rates should be presented in profit and loss if the underlying items on which participation is based are recorded at fair value through profit and loss
This is not an IASB issue as there are no instances when “mirroring approach” not applicable in IFRS
IFRS 4 Phase II – Webcast (October 2012)

8. Participating Insurance Contracts “Mirroring Approach” – paper 2F/90F (cont.)
Discussion
Brief discussion
Unanimous agreement with staff proposals
Members noted that the drafting of the text in the standard needs to be specific to note that the “mirroring approach” will take precedence over all other approaches including the “OCI solution”
Decision
IASB vote
FASB vote
Approve Joint Staff recommendation
Approve FASB staff recommendation
Unanimous
n/a
IFRS 4 Phase II – Webcast (October 2012)

9. Presentation in Income Statement – paper 2A/90A
IASB Staff recommendation – measure of premiums and claims
Earned premium presentation, whereby premiums are allocated to periods in proportion to the value of coverage that the insurer has provided in the period, and claims are presented when incurred
FASB Staff recommendation – measure of premiums and claims
Premium due presentation, whereby premiums are presented when due and an expense representing the claims, benefits and margins associated with these premiums is presented at the same time
IFRS 4 Phase II – Webcast (October 2012)

10. Presentation in Income Statement – paper 2A/90A (cont.)
Discussion
Approach was noted as complex but consistent with commonly understood presentation thus beneficial to users
Good indicator of performance
FASB agreed with IASB on several points
Premium earned emerged as a better answer to the request for volume information
Supporters of the summarised margin accepted that it cannot answer the volume information request
Decision
IASB vote
FASB vote
Approve Staff recommendation
Majority (13:2)
Majority (5:2)
The IASB staff presented paper 2A and its recommendation to use an earned premium presentation, “whereby premiums are allocated to periods in proportion to the value of coverage that the insurer has provided in the period, and claims are presented when incurred”.
On the other hand, the FASB staff proposes to use a premium due presentation, “whereby premiums are presented when due and an expense representing the claims, benefits and margins associated with these premiums is presented at the same time”.
The IASB started the discussion and it quickly became clear that the majority was in favour of the Staff recommendation. Although some Board members acknowledged the complexity of the approach, they believe it is a step towards consistency with other industries, as well as being a good indicator of performance. Some Board members expressed a preference for the summarised margin approach and suggested to use that if no consensus was reached on the earned premium presentation.
For reasons similar to the IASB’s, the FASB agreed that a premium earned presentation would be preferable to the “premium due”, which is what the FASB Staff was proposing. The FASB finds the premium earned to be more consistent with “revenue recognition” and a better proxy for volume. A few Board members also expressed a preference for the summarised margin approach however, understands that it does not address the need for volume information that the industry wish to see.
Both Boards voted in favour of using the premium earned presentation (IASB: 13 in favour, FASB: 5 in favour). The Chairman of the FASB asked that the method for determining the revenue not to be prescriptive.
IFRS 4 Phase II – Webcast (October 2012)

11. Presentation in Income Statement – paper 2B/90B
Staff recommendation – non-claims fulfilment costs
In an earned premium presentation:
Non-claims fulfillment costs are defined as additional costs that an insurer expects to incur in fulfilling a portfolio of insurance contracts.
The amounts presented as expenses should be the actual costs incurred or added to the liability for incurred claims in the period.
A portion of the premium should be allocated to cover non-claims fulfillment costs;
The premium allocated to cover these costs is proposed to be included in insurance contract revenue in the periods in which the costs are expected to be released from the liability of remaining coverage;
Accompanying application guidance:
Staff proposed that the guidance acknowledges that simpler procedures may produce results that are not materially different in some circumstances and allows them
IFRS 4 Phase II – Webcast (October 2012)

12. Presentation in Income Statement – paper 2B/90B (cont.)
Discussion
Brief discussion followed
All generally agreed with Staff proposals
The Boards voted not to answer to the second question on application guidance
Decision
IASB vote
FASB vote
Approve Staff recommendation
Majority (14:1)
Unanimous
IFRS 4 Phase II – Webcast (October 2012)

13. Presentation in Income Statement – paper 2C/90C
IASB Staff recommendation – acquisition costs (AC)
Cash flows relating to AC should be recognised over the coverage period
FASB Staff recommendation – acquisition costs (AC)
AC should be treated as part of the insurance liability, and deducted from the margin, and
They should be either separately presented on the statement of financial position or included in the roll forward as part of the disclosures
Joint Staff recommendation – acquisition costs (AC)
AC should be recognised in a way that is consistent with the proposed allocation of the residual / single margin
IFRS 4 Phase II – Webcast (October 2012)

14. Presentation in Income Statement – paper 2C/90C (cont.)
Discussion
The IASB reconfirmed agreement with Staff
The FASB agreed that AC should not be recognised as an asset and moved on the IASB position where they are treated as a reduction of the margin
The FASB would like to see the insurance liability in two lines:
Best estimate cash flows
Margin net of AC
Decision
IASB vote
FASB vote
IASB Staff recommendation
Majority (14:1)
n/a
FASB Staff recommendation
AC part of liability
Margin separately presented
Unanimous
Majority (5:2)
Joint Staff recommendation
The IASB reconfirmed their agreement with the Staff and 14 members voted in favour of its proposal. The FASB is proposing that acquisition costs be treated as part of the insurance liability and recognised as part of the margin and, either separately presented on the statement of financial position or included in the roll forward as part of the disclosures. The FASB agreed that the acquisition costs should not be recognised as an asset and that it should be a reduction of the margin. Five members of the FASB were in favour of showing the insurance liability in two lines on the financial statement: one for the best estimate and one for the margin net of acquisition costs. To close the meeting, both Boards unanimously agreed with the Staffs’ proposal that the acquisition costs should be recognised in the statement of comprehensive income in a way that is consistent with the proposed allocation of the residual margin / single margin.
IFRS 4 Phase II – Webcast (October 2012)

15. Changes since ED impacting on FI with DPF
Financial instruments with discretionary participating features (FI with DPF) – Paper 10A
Share features with insurance
In scope of IFRS 4 if issued by an insurer
FI with DPF
Insurance contract boundary
Allocation of residual margin
Unbundling
Changes since ED impacting on FI with DPF
FI with DPFs share features with insurance contracts.
IASB includes in the scope of IFRS 4 those FI with DPFs issued by an insurer (not defined)
Changes from the ED likely to affect FI with DPF:
Contract boundary
Allocation of residual margin
IFRS 4 Phase II – Webcast (October 2012)

16. Insurance contract boundary
Financial instruments with discretionary participating features (FI with DPF) – Paper 10A (cont.)
Insurance contract boundary
“the point at which the contract no longer confers substantive rights on the policyholder”
Proposed contract boundary for FI with DPFs
“…the point at which the contract no longer confers substantive rights on the contract holder.
This occurs when the contract holder no longer has a contractual right to receive benefits arising from the discretionary participating feature in that contract, or the premiums charged confer upon the contract holder substantially the same benefits as those that are available, on the same terms, to those that are not yet contract holders.”
IFRS 4 Phase II – Webcast (October 2012)

17. Financial instruments with discretionary participating features (FI with DPF) – Paper 10A (cont.)
Initial recognition of FI with DPFs
Insurer should recognise FI with DPFs ‘when, and only when the entity becomes party to the contractual provisions of the instrument’ (based on IFRS 9: 3.1.1)
Consistent with recognition of insurance contract at beginning of coverage
Propose no more adaptations, especially for unbundling and residual margin release
Residual margin current tentative decision – proposal to apply equally to FI with DPF
Release residual margin to profit or loss in a way that best reflects the pattern of services provided
Proposal to apply unbundling decisions equally to FI with DPF
Unbundle distinct investment components and account under IFRS 9
Disaggregate non-distinct investment components for presentation purposes
Decision
IASB Vote
Approve Staff recommendation
Unanimous
IFRS 4 Phase II – Webcast (October 2012)

18. Transition (papers 10B-10E) – Key Points
Staff expects to publish final IFRS in 2014
Expect IFRS 9 mandatory effective date to remain for periods beginning on or after 1/1/2015
Transitional issues and interaction between IFRS 9 and IFRS 4
Staff expect to publish final IFRS in 2014
IFRS 9 Hedge Accounting mandatory effective date expected to be periods beginning on or after 1/01/2015
IFRS 9 and IFRS 4 effective dates will likely not align
Transitional issues and interaction between IFRS 9 and IFRS 4 on transition
IFRS 4 Phase II – Webcast (October 2012)

19. Paper 10C – Redesignation and Reclassification of Financial Assets
Staff recommendation
With the expectation that IFRS 9 is adopted before IFRS 4 the latter should require an insurer on adoption of IFRS 4 to follow reclassification guidance in IFRS 9, except:
(a) to allow designation of eligible financial assets as FVTPL to eliminate or significantly reduce new accounting mismatches created by applying IFRS 4;
(b) to require revoking of previous FVTPL designations (moving assets to FVOCI and AC) where as a result of IFRS 4 there is no longer accounting mismatch; and
(c) following earlier application of IFRS 9, to permit the use of FVOCI for some or all equity instruments that are not held for trading, or revoke a previous election.
Discussion
Definition of ‘insurer’. Staff will change to ‘entity applying insurance standard’
Clarification that change in business model post adoption of IFRS 9 is treated prospectively
Decision
IASB vote
Approve Staff recommendation
Unanimous
IFRS 4 Phase II – Webcast (October 2012)

20. Paper 10D Transition – Ancillary Issues
Treatment of changes in estimates of cash flows before the date of transition
Current tentative decisions:
Prospective unlocking of residual margin for changes in estimates
Experience adjustments in Profit and loss
Release residual margin based on pattern of service provided
Staff recommendation – to require ‘hindsight’ in order to reduce complexity
Insurers shall estimate residual margin ‘assuming that all changes in estimates of cash flows between initial recognition and the beginning of the earliest period presented were already known at initial recognition’
Decision
IASB Vote
Approve Staff recommendation
Unanimous
IFRS 4 Phase II – Webcast (October 2012)

21. Paper 10D Transition – Ancillary Issues (cont.)
First time adoption of IFRS 4
Staff recommend same transitional requirement on first adoption as for those already applying IFRS
Redesignation of investment property and PPE assets under IAS 40 and IAS 16
IAS 40 and IAS 16 contain options to designate at FV or cost
Both standards allow to switch between cost and FV via IAS 8
Staff recommend no additional explicit guidance
Decision
IASB Vote
Approve Staff recommendation for first time adopters
Unanimous
Approve Staff recommendation to not include guidance for redesignation of IP and PPE under IAS 40 and IAS 16
IFRS 4 Phase II – Webcast (October 2012)

22. Paper 10E Transition – Effective date, comparative financial statements and early application
Staff expect to publish final IFRS in 2014
ED Respondents asked for period between publication of final IFRS and mandatory effective date to be:
2-3 years (Asia-Oceania, Europe, two thirds of North American insurers);
>3 years (especially entities in jurisdictions applying IFRS for the first time)
Deloitte Global IFRS Insurance Survey (conducted by Economist Intelligence Unit) cited by the Staff
Of 200 senior finance executives of insurers around the world:
Most believe it would take several years to implement
49% expect 3 years, 21% expect 4 years
IFRS 4 Phase II – Webcast (October 2012)

23. Paper 10E Transition – Effective date, comparative financial statements and early application – (cont.)
Summary of Staff recommendation
Minimum of 3 full years between publication of final IFRS and mandatory effective date
Restatement of comparative on transition
Option to early adopt
Option to not restate comparatives on early adoption was deleted by the Staff
Staff expect the final standard to be mandatory effective by 2018, based on their recommendation.
IFRS 4 Phase II – Webcast (October 2012)

24. Paper 10E Transition – Effective date, comparative financial statements and early application – (cont.)
Discussion
Lack of alignment with IFRS 9 was a common negative observation
One member proposed to prohibit early adoption to avoid non-comparability and uncertainty around the reasons for early or late adoption
Many, including the IASB Chairman want IFRS available as soon as possible
Chairman remarked on market pressure to early adopt, must allow even if it reduces comparability. Although the current lack of international comparability now mitigates the relative damage
IASB requested to remove ‘minimum of 3 full years’ and give indication instead that they would ‘allow for substantial period of time of approximately 3 years’ and aim for a target 1/1/2017 effective date
Decision
IASB Vote
Agree with the Staff recommendation
(including change of words indicating period of time approximately 3 years and requirement to restate comparatives on early adoption)
12:2
IFRS 4 Phase II – Webcast (October 2012)

25. Next steps and timetable
Next joint meeting expected in the week commencing on 19 November
Major topics that remain to be deliberated:
- Unlocking of the residual margin
- Mechanics of the OCI solution
The decisions of the IASB confirm Deloitte’s expectations of a Mandatory effective date of the new IFRS of 2017
The risk for a slippage of the completion timetable makes 2018 as the second most likely scenario for adoption
IFRS 4 Phase II – Webcast (October 2012)

26. Contact details
Francesco Nagari Deloitte Global IFRS Insurance Leader Link to Deloitte IFRS Insurance materials: Insurance Centre of Excellence:
IFRS 4 Phase II – Webcast (October 2012)

27. This document is confidential and prepared solely for your information
This document is confidential and prepared solely for your information. Therefore you should not, without our prior written consent, refer to or use our name or this document for any other purpose, disclose them or refer to them in any prospectus or other document, or make them available or communicate them to any other party. No other party is entitled to rely on our document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document.
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein, whose member firms are legally separate and independent entities. Please see for a detailed description of the legal structure of DTT and its member firms.
IFRS 4 Phase II – Webcast (October 2012)
© 2012 Deloitte LLP. Private and confidential 26