European Commission Proposes “Top up” as Part of Endorsement of Amendment to IFRS 4

The draft text of the legislation endorsing IFRS 4 proposes extending the deferral of IFRS 9 to insurance entities of conglomerates.

Although the advice from the European Financial Reporting Advisory Group (EFRAG) indicated that the IASB’s amendment to IFRS 4 meets the criteria for adoption into EU law (see IFRS News here), the European Commission considers that the amendments to IFRS 4 Insurance Contracts are not sufficiently broad in scope to meet the needs of all significant insurance entities in Union. In particular, the insurance sector within a financial conglomerate would not be eligible to defer the application of IFRS 9 Financial Instruments, which could put them at a competitive disadvantage. Therefore, it proposes the insurance sector of a financial conglomerate should also be allowed to defer the application of IFRS 9 until 1 January 2021.

As deferral of the application of IFRS 9 by the insurance sector in a conglomerate would mean the application of two different accounting standards within one financial conglomerate and could create opportunities for accounting arbitrage as well as possibly lead to difficulties for investors in understanding the consolidated financial statements, the European Commission also proposes that deferral should be subject to the entity meeting all of following conditions:

• no financial instruments are transferred between the insurance sector and any other sector of the financial conglomerate other than financial instruments that are measured at fair value with changes in fair value recognised through the profit or loss account by both sectors involved in such transfers;
• the financial conglomerate states in the consolidated financial statements which insurance entities in the group are applying IAS 39; and
• disclosures required by IFRS 7 Financial Instruments: Disclosures are provided separately for the insurance sector applying IAS 39 Financial Instruments: Recognition and Measurement and for the rest of the group applying IFRS 9.

The full text of the draft legislation is available from the European Commission’s web site here.