European Financial Reporting Advisory Group Issues Comment Letter on IASB’s Revised Exposure Draft on Insurance Contracts

The International Accounting Standards Board (IASB) published a revised Exposure Draft on Insurance Contracts on June 20, 2013, to replace the original publication in July of 2010. In response, the European Financial Reporting Advisory Group (EFRAG) has issued a comment letter. The key points of the letter are summarized as follows:

EFRAG supports most of the changes in the revised Exposure Draft on Insurance Contracts. They did, however, make note of a few concerns. In particular, EFRAG is concerned that other standards of classification and measurement, when combined with the IASB’s proposals in the Exposure Draft, will not decrease the number of accounting mismatches. They fear the proposal would encourage insurance performance reporting to be split across OCI and profit and loss.

EFRAG also makes mention of a lack of acknowledgement for models of insurance activities for businesses that are oriented toward long-term investment. According the EFRAG, IASB has not accounted for liability-driven model, where the use of fair value through OCI regarding asset-liability management matching stable liabilities would not convey relevant information. These assets, per EFRAG, should be presented in profit or loss returns, gains and losses on realization, and impairment losses - which provide the primary indicator of performance.

They also voiced several concerns on the new proposed measurement and presentation exception. In particular, EFRAG proposes that ‘mirroring’ should start from the liabilities side as opposed the assets side, and that the scope of the exception should be wider. They believe the proposal will cause some insurance liability to be measured on a basis that is different from the present basis and that if changes in the discount rate are reflected partly in other comprehensive income, and partly in profit or loss, financial statements could become difficult to understand and compare.

EFRAG is considering countering with their own alternative proposal for a measurement and presentation exception. Meanwhile, to support IASB, they will work with industry leaders in France, Germany, Italy, and the United Kingdome as well as the IASB tobeing field testing the ED.