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? . .