1. © 2012 Deloitte LLP. Private and confidential Direction is getting clearer but major concerns remain on the table IFRS 4 Phase II Update IASB and FASB joint meetings – June 2012 Francesco Nagari 20 June 2012

2. © 2012 Deloitte LLP. Private and confidential 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 (June 2012)1

3. © 2012 Deloitte LLP. Private and confidential Highlights from joint IASB/FASB meetings  ‘Earned premium’ emerges as the preferred revenue recognition pattern to explore (joint education session)  Joint decision to allocate ‘clearly linked and attributable’ cash flows to unbundled components under the relevant standard  Financial instruments fair value option will be available for assets under the fair value through other comprehensive income  IASB highlights a preference to treat acquisition costs as part of the liability (IASB only education session)  FASB Chair comments on the possible disengagement from convergence on insurance  Updated technical plans support Deloitte’s prediction of Q4 2012 publication of next milestone document 2IFRS 4 Phase II - Webcast (June 2012)

4. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB education session - 12 June Measuring earned premium (volume information): papers 2B-C/84B-C Background  Staff presented three methods for measuring earned premiums (investment components): ‘Earned Premium’:premium receivable for services provided in the period (ED recommended it for PAA but not for BBA) ‘Written Premium’: for contracts initially recognised in the period expected PV of all cash inflows within contract boundary = premium, outflows and margin= expense ‘Premium Due’: premiums when revenue is expected to be receivable, corresponding increase in liability = expense (ED rejected it for BBA, later preferred)  Staff noted that there has been mixed feedback from users and prior interactions with the Insurance Working Group and a preference from constituents cannot be identified 3IFRS 4 Phase II - Webcast (June 2012)

5. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB education session - 12 June Measuring earned premium (volume information): papers 2B-C/84B-C Staff recommendation/ questions:  The Staff recommended an ‘earned premium’ basis  Concerns with operational challenges were flagged Staff questions: 1.Do the Boards find the information provided by the ‘earned premium’ approach useful? 2.Any other issues to consider in the outreach with IWG and future sessions? Discussion  Boards supported the Staff recommendation  Debate on revenue recognition versus change in insurance liability notes absence of a unanimous view Points to consider forward:  Cost/benefit  Non claims related cash flows / Acquisition costs  Unit of account 4IFRS 4 Phase II - Webcast (June 2012)

6. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 12 June Allocation of cash flows to unbundled components – paper 2A/84A Staff recommendation For those components to be unbundled: a.Measure investment cash flows (CFs) as if stand alone contract sold b.After excluding unbundled investment component’s CFs (or unbundled embedded derivative) allocate consideration, discounts or premiums to insurance, goods and services and investment components c.If more than one unbundled component, allocate CFs on a rational and consistent basis 5IFRS 4 Phase II - Webcast (June 2012)

7. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 12 June Allocation of cash flows to unbundled components – paper 2A/84A (cont.) Discussion Concerns over several items:  Conceptual nature of ‘allocation’  Conceptual basis to prevent substantially prepaid items not to be expensed (e.g. acquisition costs)  Reliability of the attribution of disbursements to components and  Reliability of the allocation of shared costs across components Despite these concerns Boards seemed supportive of the staff recommendation Decision 6IFRS 4 Phase II - Webcast (June 2012) IASBFASB In favour of Staff recommendationUnanimous

8. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 13 June Financial Instruments through OCI – refinement of eligibility criteria Background  At the May meeting the Boards approved the creation of FVOCI for eligible debt instruments  Separate business model tests for amortised cost (AC) and FVOCI debt instruments  If contractual cash flows are not solely payments of principal and interest (including credit risk)  FVTPL (residual category) Question  Do debt instruments have to pass contractual cash flow characteristics test for classification as FVOCI? Decision Both Boards agreed that to qualify for FVOCI:  Financial instruments have to pass contractual cash flow characteristics test and  Be managed within the relevant business model 7IFRS 4 Phase II - Webcast (June 2012)

9. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 13 June Financial Instruments – Fair Value Option – IASB only Background IFRS 9 currently allows fair value option on initial recognition:  For financial assets – to eliminate or significantly reduce accounting mismatch  For financial liabilities IFRS 9 carries forward the IAS 39 three criteria  to eliminate or significantly reduce accounting mismatch  if a group of financial liabilities / assets or both is measured and performance evaluated on a fair value basis  if it contains embedded derivatives requiring bifurcation, to FV the hybrid  Introduction of FVOCI as ‘default’ (if criteria are met) impacts on the application of FVO IASB Decision  To extend FVO to financial assets that would otherwise be measured at FVOCI, if doing so eliminates or significantly reduces accounting mismatch 8IFRS 4 Phase II - Webcast (June 2012)

10. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 13 June Financial Instruments – Fair Value Option (FASB) Background Current FASB guidance allows FVO  To financial assets and liabilities if the entity manages net exposure on FV basis and reports on that basis to management  To hybrid financial assets or liabilities to avoid bifurcation of embedded derivatives  Following FASB May tentative decision, hybrid financial assets will no longer be subject to bifurcation thus making the FVO only applicable to hybrid liabilities 9IFRS 4 Phase II - Webcast (June 2012)

11. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 13 June Financial Instruments – Fair Value Option (FASB) FASB Staff recommendation – in essence to more closely align with IASB For financial assets to allow irrevocable FVO on initial recognition if  it eliminates or significantly reduces a measurement or recognition inconsistency For financial liabilities to allow irrevocable FVO on initial recognition if:  it eliminates or significantly reduces a measurement or recognition inconsistency;  group of financial assets and /or liabilities is measured and performance evaluated on FV basis in accordance with a documented risk management or investment strategy;  hybrid financial liabilities contain embedded derivative that would require bifurcation otherwise 10IFRS 4 Phase II - Webcast (June 2012)

12. © 2012 Deloitte LLP. Private and confidential Details of IASB/FASB meeting 13 June Financial Instruments – Fair Value Option – FASB (continued) Discussion Concern over ‘having options’  FVO for groups of financial assets and/ or liabilities measured on FV basis – to permit or require? Decision To allow irrevocable FVO at initial recognition:  for hybrid financial liabilities unless the embedded derivative or derivatives do not otherwise require unbundling or it is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative is prohibited;  for a group of financial assets and liabilities if the entity manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) on a fair value basis and the entity provides information on that basis to the reporting entity’s management. 11IFRS 4 Phase II - Webcast (June 2012)

13. © 2012 Deloitte LLP. Private and confidential Details of IASB education session - 14 June Treatment of acquisition costs - paper 2D Background At the May joint meeting:  IASB voted to included acquisition costs (AC) within insurance liability  FASB did not vote but expressed a preference for an asset recognition although agreed to explore netting against the single margin with no impact on comprehensive income to attempt convergence with the IASB Discussion The discussion led to revisit several past decisions:  Option 1: expense AC as incurred  Option 2: recognise an asset and amortise it over the coverage period  Option 3: expense AC as incurred and release a part of residual margin to cover them with a nil effect to net income  Option 4: same as option 3 but presented net  Option 5: include the asset as a deduction from the insurance liability and amortise it over time using separate drivers from the margin (to be determined) with no revenue upfront 12IFRS 4 Phase II - Webcast (June 2012)

14. © 2012 Deloitte LLP. Private and confidential Details of IASB education session - 14 June Treatment of acquisition costs (continued) Summary of options 13IFRS 4 Phase II - Webcast (June 2012) ProsCons Option 1 – expense as incurred  Expense as it does not provide service  Simple  Upfront loss on profitable contracts  Liability is inflated Option 2 – asset  Consistent with Revenue project  Aligns with FASB preference  Easier to amortise (if straight line)  Nil initial income impact  Need to consider for onerous contract test  Separate presentation  Amortisation to be consistent with service and RM release. Option 3 – expense as incurred and release part of RM to offset it  Nil initial income impact  Avoids need to track an asset and amortise it over time  Less relevant volume information  Revenue can be recognised before coverage started Option 4 – same as option 3, but presented net  Nil initial income impact  Avoids upfront revenue  Less relevant volume information Option 5 – include DAC in insurance liability and release separately over time  Nil initial income impact  Avoids upfront revenue  Volume information is unaffected  Subsequent impact is greater than in option 3 and 4  Need to have separate amortisation driver

15. © 2012 Deloitte LLP. Private and confidential Details of IASB education session - 14 June Treatment of acquisition costs (continued) Conclusion  No decisions, as not a decision making session  The IASB asked the Staff to explore option to include an asset from AC as part of the carrying amount for the insurance liability and that it would be released over time and avoid upfront revenue  Majority of IASB members (9) supported this suggestion (even though no formal vote) 14IFRS 4 Phase II - Webcast (June 2012)

16. © 2012 Deloitte LLP. Private and confidential FASB Advisory Council - 5 June Report on insurance contracts project  As she commented on the status of the various projects FASB Chair Leslie Seidman is reported to have said to her Advisory Council that  “ FASB would now take a step back and decide how to proceed. It will decide whether to do targeted improvements to U.S. generally accepted accounting principles or move forward with a more wholesale set of changes that will not end up in a converged standard.”  “We have twice now gone back to the board table to try and resolve those differences because of a very strong desire to end up with a converged solution on insurance. I'm disappointed to report that after a couple of different attempts, we're simply not reaching converged conclusions on insurance in what I would call fundamental aspects of the proposals.” 15IFRS 4 Phase II - Webcast (June 2012)

17. © 2012 Deloitte LLP. Private and confidential Next steps and timetable  Next joint meeting expected in week of 16 July  Insurance Working Group meeting on 25 and 26 June in London  Major topics that remain to be deliberated:  Unlocking of residual margin – finalise the mechanics and unit of account  Presentation of premiums in the income statement – choose among existing options  Transition regime and effective date  Publication of next due process document is currently targeted for Q3-Q4 2012 for IASB with FASB now disclosing Q4 2012 – Deloitte expected both Boards to be towards the end of Q4-2012  Decision awaited on status of next IASB due process document  Final accounting standards should be released by the end of 2013  Deloitte expects that the mandatory effective date will not be earlier than 1 January 2016 16IFRS 4 Phase II - Webcast (June 2012)

18. © 2012 Deloitte LLP. Private and confidential Contact details Francesco Nagari Deloitte Global IFRS Insurance Leader +44 20 7303 8375 fnagari@deloitte.co.uk Link to Deloitte IFRS Insurance materials: https://www.iasplus.com/deloitte/en/projects/project47 Insurance Centre of Excellence: insurancecentreofexc@deloitte.co.uk 17IFRS 4 Phase II - Webcast (June 2012)

19. 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 OC303675 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 www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms. © 2012 Deloitte LLP. Private and confidential 18IFRS 4 Phase II - Webcast (June 2012)