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ICAZ IPEC IFRS UPDATE SEMINAR

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Presentation on theme: "ICAZ IPEC IFRS UPDATE SEMINAR"— Presentation transcript:

1 ICAZ IPEC IFRS UPDATE SEMINAR
Presented by Com Anesu Daka CA(SA)(Z)

2 Outline New Insurance Standards and Amendments Highlights
IFRS 4 Insurance Contracts IFRS 17 Refresher: IFRS 7+4 Qualitative disclosures

3 Current Insurer’s balance sheet
IAS 38 Intangible Assets Intangible Assets Shareholder Equity IAS 18 Revenue DAC IFRS 4 Insurance Contracts DAC Property IAS 40 Investment Property IFRS 4 Insurance Contracts Insurance contracts Technical Provisions IAS 39 Financial instruments: Recognition and Measurement IAS 32: Financial Instruments: Presentation IAS 39 Financial instruments: Recognition and Measurement Financial Instruments Investment contracts IAS 18 Revenue IFRS 7 Financial Instruments: Disclosures IAS 39 Financial instruments: Recognition and Measurement Debt IAS 39 Financial instruments: Recognition and Measurement IAS 12 Income Taxes IAS 19 Employee Benefits Other Liabilities Cash IAS 37 Provisions, Contingent Liabilities and Contingent Assets

4 Why Change from IFRS 4 IFRS 4 was an interim standard
IFRS allowed a wide variety of accounting practices for insurance contracts Reflected more on national accounting requirements No comparability over same products and jurisdictions Global call for standardization IFRS 4 failed fair representation of some contracts

5 IFRS 4 vs IFRS 17

6 IFRS 4 vs IFRS 17

7 IFRS 4 vs IFRS 17

8 IFRS 4 vs IFRS 17

9 IFRS 17 Overview Establishes principles for the Recognition, Measurement, Presentation and Disclosure for insurance contracts issued by both primary insurer and reinsurer; Provides guidance principles on investment contracts with discretionary participation feature Supersedes IFRS 4 Effective 1 January 2021

10 Main Features of IFRS 17 Insurance contract = financial instrument + service contract Insurance contracts generate substantially variable cashflows over long periods of time

11 Main Features of IFRS 17 IFRS 17 approach

12 Main Features of IFRS 17 IFRS 17 Key Principles:
Classify a contract as an insurance contract separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts. divides the contracts into groups it will recognise and measure recognises and measures groups of insurance contracts at: a risk-adjusted present value of the future cash flows an amount representing the unearned profit in the group of contracts (the contractual service margin). Profit is recognized overtime as insurance coverage is given or entity is released from risk. Loss is recognized immediately

13 Main Features of IFRS 17 IFRS 17 Key Principles:
presents separately insurance revenue, insurance service expenses and insurance finance income or expenses; Discloses information to enable users to assess the effect of the contracts on AFS, including quantitative and qualitative information about: Amounts recognised in its AFSs Significant judgements and changes in those judgements Nature and extent of the risk from contracts

14 Main Features of IFRS 17 IFRS 17 Key Principles:
Measurement principles result in: Measurement that is consistent to IFRS 15, except updating for financial assumptions + investment contracts Liability for incurred claims consistent with IAS 37 (except where the liability includes an investment component) Option for a Simplified Approach for some contracts

15 General Model – Financial position
All insurance contracts measured as the sum of: Fulfilment cash flows Present value of probability- weighted expected cash flows Plus an explicit risk adjustment for insurance risk Contractual service margin The unearned profit from the contract Key effects New framework replaces a wide range of different accounting treatments Current measurement of liability

16 General Model – Financial performance
Changes in estimates of future cash flows If related to past coverage P/L If related to future coverage adjust unearned profit Changes in financial market assumptions (e.g. interest rates) Accounting policy choice for presentation of insurance finance expense: (i) in P/L or (ii) in P/L and OCI Key effects Changes in estimates and market prices will be reflected on a timely basis (including effects of options and guarantees) Discount rates reflect characteristics of insurance contracts—risks not matched by assets will be visible

17 Financial Performance Presentation

18 Variable fee approach Variable fee approach only when insurer shares return on specified assets Insurer’s share of return from underlying items treated as ‘variable fee’ for investment-related services Change in variable fee adjusts unearned profit Liability measurement reflects value change of those assets Key effects Reflects the investment nature of the contracts Clearly reflects the extent of asset mismatch

19 Premium allocation approach
Optional for the measurement of short term contracts: Similar outcome but no separate identification of unearned profit Discounting of liability for incurred claims not required if expected to be settled within 12 months Key effects Reduces implementation costs for simpler contracts (e.g. short- term non-life insurance contracts) Similar to current practice for some contracts

20 Insurance project Premium allocation approach
June 2013 Exposure Draft (2013 ED) 194 comment letters Expected publication of new insurance contracts Standard Re-deliberations complete in February 2016 Due Process Life Cycle review May 2016 Sweep issues November 2016 & February 2017 June 2013 May 2017 Field work June–Oct / Aug–Oct 2016 Drafting

21 Amendments to IFRS 4 Applying IFRS 9 and IFRS 17
Introduced to address concerns about the different effective dates of IFRS 9 and the new insurance contracts Standard Temp exemption from IFRS 9 Overlay approach Option for entities that are predominantly insurance Optional temporary exemption from IFRS 9 Only until 2021 Available to all entities issuing IFRS 4 contracts Allows reclassification from P&L to OCI for gains and losses Affects insurance related financial assets, i.e. discretionary features or investment contracts Both life and short-term issuing insurance contracts entities will be affected. Do they qualify for this exemptions?

22 Any questions? . .

23 Qualitative disclosures
IFRS 4/17 & IFRS 7

24 2012 Research Findings Presentation & disclosures issues identified:
Not all insurers carried out annual actuarial valuations (no annual liability adequacy tests-IFRS 4.15)- (Zimbabwe regulation requires 3 year cycle- divergence from IFRS and best practices) Valuation methods & valuation assumptions are not disclosed Regulatory Disclosure of whether the insurer meets the SCR and MCR are not done. Effect of changes in actuarial assumptions. Financial + Insurance risk management disclosures NB: it is was also observed that RSA and most leading insurance industry presented a signed statutory actuary’s report in the annual financial statement of the insurer.

25 IFRS 7 & IFRS 4 Compliance Issues
No disclosures for Insurance qualitative disclosures in group accounts Disclosure not reflective of entity practices (illustrative accounts) Inadequate identification and disclosure of concentration risk Failure to identify all risk affecting the business: Credit, Liquidity, Market only No disclosure of “Claims Development” Inadequate disclosure of material assumptions Significant judgements disclosure

26 Current Insurer’s balance sheet
IAS 38 Intangible Assets Intangible Assets Shareholder Equity IAS 18/IFRS 15 Revenue DAC IFRS 4/17 Insurance Contracts DAC Property IAS 40 Investment Property IFRS 4 /17 Insurance Contracts Insurance contracts Technical Provisions IAS 39/IFRS9 Financial instruments: Recognition and Measurement IAS 32: Financial Instruments: Presentation IAS 39/IFRS9 Financial instruments: Recognition and Measurement Financial Instruments Investment contracts IAS 18/IFRS15 Revenue IFRS 7 Financial Instruments: Disclosures IAS 39/IFRS9 Financial instruments: Recognition and Measurement Debt IAS 39 Financial instruments: Recognition and Measurement IAS 12 Income Taxes IAS 19 Employee Benefits Other Liabilities Cash IAS 37 Provisions, Contingent Liabilities and Contingent Assets

27 Insurer’s Investments Vs Liabilities
IFRS 7 disclosures IFRS 4/17 disclosures

28 IFRS 4/IFRS 17 disclosures

29 Two key categories of disclosures
Explanation of recognised amounts Nature and extent of risks arising from insurance contracts

30 Explanation of recognised amounts –Para 36
These covers Presentation & Disclosure: Accounting policies for insurance contracts and related assets, liabilities, income and expense (para 37(a)) Recognised amounts in the AFS (para 37(b)) Assumptions: Process used to determine the assumptions with greatest effect on recognized amounts + quantified disclosure of those assumptions (para 37(c)) Effect of changes in assumption used to measure insurance assets and liabilities (para 37(d)) Reconciliation of the changes in insurance liabilities, reinsurance assets and DAC

31 Nature and extent of risks arising from insurance contracts- Para 38
Disclose objectives, policies and processes the methods used to manage those risks (para 39(a)) Infor about INSURANCE RISK (before and after mitigation with reinsurance): Sensitivity to insurance risk (show impact on P&L and Equity) (para 39(c)(i) and 39A) Concentration (description of how it is determined, type o insured even, geography, currency, etc) (para 39(c)(ii)) Claims Development (actual claims vs previous estimates) (para 39(c)(ii)) Information about credit risk, liquidity and market risk as per IFRS 7 Embedded values

32 IFRS 17 Presentation and Disclosure

33 Additional disclosures in IFRS 17
Level of detail vs understanding Guidance on transition amounts Significant judgements in applying IFRS 17 Yield Curve or range of Yield Curves Effect of the regulatory frameworks in which it operates, e.g. MCR

34 Any questions? . .

35 IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES

36 Overview of IFRS 7 adds certain new disclosures about financial instruments to those currently required by IAS 32; and puts all of those financial instruments disclosures together in a new standard on Financial Instruments: Disclosures. The remaining parts of IAS 32 deal only with financial instruments presentation matters.

37 Disclosure Requirements of IFRS 7
IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39 measurement categories. Certain other disclosures are required by class of financial instrument. For those disclosures an entity must group its financial instruments into classes of similar instruments as appropriate to the nature of the information presented. [IFRS 7.6] The two main categories of disclosures required by IFRS 7 are: information about the significance of financial instruments. information about the nature and extent of risks arising from financial instruments

38 Information about the significance of financial instruments
Balance Sheet disclosures Disclose the significance of financial instruments for an entity's financial position and performance. [IFRS 7.7] This includes disclosures for each of the following categories: [IFRS 7.8] financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition held-to-maturity investments loans and receivables available-for-sale assets

39 Information about the significance of financial instruments, continued……
Balance Sheet disclosures financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition financial liabilities measured at amortised cost

40 Information about the significance of financial instruments, continued……
Other balance sheet-related disclosures: special disclosures about financial assets and financial liabilities designated to be measured at fair value through profit and loss, including disclosures about credit risk and market risk, changes in fair values attributable to these risks and the methods of measurement.[IFRS ] reclassifications of financial instruments from one category to another (e.g. from fair value to amortised cost or vice versa) [IFRS A] disclosures about derecognitions, including transfers of financial assets for which derecogntion accounting is not permitted by IAS 39 [IFRS 7.13] information about financial assets pledged as collateral and about financial or non-financial assets held as collateral [IFRS ]

41 Information about the significance of financial instruments, continued……
Other balance sheet-related disclosures: reconciliation of the allowance account for credit losses (provision bad debts/credit losses) by class of financial assets[IFRS 7.16] information about compound financial instruments with multiple embedded derivatives [IFRS 7.17] breaches of terms of loan agreements [IFRS ]

42 Information about the significance of financial instruments, continued……
Income Statement and Equity Items of income, expense, gains, and losses, with separate disclosure of gains and losses from: [IFRS 7.20(a)] financial assets measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition. held-to-maturity investments. loans and receivables. available-for-sale assets. financial liabilities measured at fair value through profit and loss, showing separately those held for trading and those designated at initial recognition. financial liabilities measured at amortised cost.

43 Information about the significance of financial instruments, continued……
Other Income statement related disclosures total interest income and total interest expense for those financial instruments that are not measured at fair value through profit and loss [IFRS 7.20(b)] fee income and expense [IFRS 7.20(c)] amount of impairment losses by class of financial assets [IFRS 7.20(e)] interest income on impaired financial assets [IFRS 7.20(d)]

44 Other Disclosures accounting policies for financial instruments [IFRS 7.21] Initial recognition (regular way purchases) Classification Measurement (Initial and Subsequent) Derecognition Significant judgements and estimation (if any) NB:Hedge accounting disclosure requirement were skipped as they are deemed to be irrelevant.

45 Other Disclosures information about the fair values of each class of financial asset and financial liability, along with: [IFRS ] – Apply IFRS13 comparable carrying amounts description of how fair value was determined the level of inputs used in determining fair value reconciliations of movements between levels of fair value measurement hierarchy additional disclosures for financial instruments whose fair value is determined using level 3 inputs including impacts on profit and loss, other comprehensive income and sensitivity analysis information if fair value cannot be reliably measured

46 The Fair value hierarchy disclosure
The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input significant to the overall fair value (IFRS 7.27A-27B): Level 1 - quoted prices for similar instruments Level 2 - directly observable market inputs other than Level 1 inputs Level 3 - inputs not based on observable market data Note that disclosure of fair values is not required when: the carrying amount is a reasonable approximation of fair value, such as short- term trade receivables and payables, or; for instruments whose fair value cannot be measured reliably. [IFRS 7.29(a)]

47 The Fair value hierarchy disclosure - Explained
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Refer to IFRS 13 Example 15

48 Nature and extent of exposure to risks arising from financial instruments
This entails disclosure of: Qualitative disclosures [IFRS 7.33] Quantitative disclosures Disclosure of exposure to Credit, Liquidity & Market Risk

49 Qualitative disclosures [IFRS 7.33]
The qualitative disclosures describe: risk exposures for each type of financial instrument management's objectives, policies, and processes for managing those risks changes from the prior period

50 Quantitative disclosures
The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity's key management personnel. These disclosures include: [IFRS 7.34] summary quantitative data about exposure to each risk at the reporting date disclosures about credit risk, liquidity risk, and market risk and how these risks are managed as further described below concentrations of risk

51 Credit Risk Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation. [IFRS 7. Appendix A] Disclosures about credit risk include: [IFRS ] maximum amount of exposure (before deducting the value of collateral), description of collateral, information about credit quality of financial assets that are neither past due nor impaired, and information about credit quality of financial assets whose terms have been renegotiated [IFRS 7.36] for financial assets that are past due or impaired, analytical disclosures are required [IFRS 7.37] information about collateral or other credit enhancements obtained or called [IFRS 7.38]

52 Liquidity Risk Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities. [IFRS 7. Appendix A] Disclosures about liquidity risk include: [IFRS 7.39] a maturity analysis of financial liabilities description of approach to risk management

53 Market Risk [IFRS ] Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk, equity price and other price risks. [IFRS 7. Appendix A] Disclosures about market risk include: a sensitivity analysis of each type of market risk to which the entity is exposed additional information if the sensitivity analysis is not representative of the entity's risk exposure (for example because exposures during the year were different to exposures at year-end). IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-risk for management purposes that reflects interdependencies of more than one component of market risk (for instance, interest risk and foreign currency risk combined), it may disclose that analysis instead of a separate sensitivity analysis for each type of market risk

54 Any questions? . .


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