Page 74 - MC14326 all pages

70 | The South African Insurance Industry Survey 2016
An entity is required to calculate the predominance ratio, to determine if it
qualifies, using the carrying amounts of the liabilities reported for the annual
reporting period that ended between 1 April 2015 and 31 March 2016. For
example, for a reporting period that ends on 31 December, the assessment
will be done on the statement of financial position as at 31 December 2015.
By doing this assessment before the effective date of IFRS 9, entities can
determine early if they would qualify for the deferral approach. If they do not
qualify, they can start their IFRS 9 conversion project in time.
Would South African insurers be able to apply the deferral approach?
In our view, some insurers may qualify based on the insurance and related
liabilities included in the separate financial statements.
A group would not qualify if the consolidated financial statements include
subsidiaries with predominant insurance activities as well as subsidiaries with
significant activities that are unrelated to insurance, e.g. banking activities.
Although the insurance subsidiary may qualify for the deferral in its separate
financial statements, it may not be cost effective to apply as the group would
not meet the required threshold and would be required to apply IFRS 9 from
the effective date.
Overlay approach
Entities will apply IFRS 9 for year-ends commencing on or after 1 January
2018.
The overlay approach, if elected, should be applied to financial assets that
meet both the following criteria:
–– The entity designates the financial assets as relating to contracts that are in
the scope of IFRS 4; and
–– The financial assets are classified at FVTPL under IFRS 9 and would not
have been classified at FVTPL under IAS 39, i.e. were previously (or would
have been) measured at amortised cost or classified as available-for-sale.
Financial assets relating to contracts within the scope of IFRS 4 should
include financial assets that an entity holds to fund the settlement of liabilities A business model assessment is required for financial assets that meet
arising from an expected level of claims and expenses, and additional/surplus
assets that an entity holds for regulatory compliance, credit rating or its own
(internal) capital requirements.
An entity should recognise, as an adjustment to other comprehensive income
(OCI), an amount equal to the difference between the amounts recognised in
profit or loss under IFRS 9 and under IAS 39.
For example, an entity has equity instruments classified as an available-for-
sale investment in terms of IAS 39. The fair value gain recognised for the year
ended 31 December 2018 is R5 000. In terms of IFRS 9 this financial asset
will be measured at FVPL and R5 000 will be recognised in profit or loss. If
the overlay approach is applied, an adjustment of R5 000 (as a separate line
item) will be made to profit or loss and R5 000 will be recognised in OCI.
The effect of this adjustment is that profit or loss is not impacted by the
volatility of fair value gains or losses on the financial instruments. The overlay
approach can be applied until the new insurance contracts standard is
effective.
It can be applied in the separate and consolidated financial statements. In
the consolidated financial statements the designated financial assets related
to insurance contracts could be held by one legal entity but the insurance
contracts could be issued by a different legal entity. For example, in the
consolidated financial statements, the reporting entity (i.e. holding company)
that issues contracts in the scope of IFRS 4 may have a subsidiary that holds
and manages financial instruments that relate to the entity’s IFRS 4 contracts.
Would South African insurers apply the overlay approach?
The adoption of this approach requires IFRS 9 and IAS 39 to be applied to
financial assets relating to contracts within the scope of IFRS 4. Generally,
we do not believe insurers would be following this approach as it may not be
cost effective and many insurers currently account for their financial assets as
at fair value through profit or loss.
IFRS 9 conversion project
For insurers that do not elect or do not qualify to apply the deferral or overlay
approach, IFRS 9 has to be applied for year-ends commencing on or after 1
January 2018.
Insurers should perform a comprehensive review of financial assets to
ensure that they are appropriately classified and measured in accordance
with IFRS 9.
the SPPI criterion - i.e. where the contractual terms of the financial asset
give rise, on specified dates, to cash flows that are Solely Payments of
Principal and Interest. Financial assets that do not meet the SPPI criterion are
classified as at FVPL, irrespective of the business model in which they are
held – except for investments in equity instruments, for which an entity may
elect to present gains or losses in OCI (FVOCI).