HoldCo
Subsidiary A
Subsidiary B
Insurance activities
Banking activities
The temporary exemption is available for HoldCo’s consolidated financial statements and Subsidiary A’s
individual financial statements. However, the temporary exemption is not available for HoldCo’s separate
financial statements and Subsidiary B’s individual financial statements. In those financial statements IFRS 9
must be applied although the overlay approach may be available for designated financial assets (see 10.2
below).
Example 51.35: Determination of eligibility for the temporary exemption at
reporting entity level when the group is not eligible for the
temporary exemption
HoldCo group as a whole, HoldCo itself and Subsidiary B do not meet the criteria for the use of the temporary
exemption. Subsidiary A does meet the criteria for the use of the temporary exemption (see 10.1.1 below).
HoldCo
Subsidiary A
Subsidiary B
Insurance activities
Banking activities
HoldCo and Subsidiary B are not eligible to apply the temporary exemption and must apply IFRS 9, in
HoldCo’s case, in both its consolidated and separate financial statements. However, they may be eligible to
apply the overlay approach to designated financial assets (see 10.2 below). Subsidiary A is eligible to apply
the temporary exemption.
An insurer may apply the temporary exemption from IFRS 9 if, and only if: [IFRS 4.20B]
• it has not previously applied any version of IFRS 9, other than only the
requirements for the presentation in OCI of gains and losses attributable to changes
in the entity’s own credit risk on financial liabilities designated at fair value through
profit or loss; and
• its activities are predominantly connected with insurance (see 10.1.1 below) at its
annual reporting date that immediately precedes 1 April 2016, or at a subsequent
reporting date when reassessed (see 10.1.2 below).
An insurer applying the temporary exemption from IFRS 9 is permitted to elect to apply
only the requirements of IFRS 9 for the presentation in OCI of gains and losses
attributable to changes in an entity’s own credit risk on financial liabilities designated as
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at fair value through profit or loss. If an insurer elects to apply those requirements, it
should apply the relevant transition provisions in IFRS 9, disclose the fact that it has
applied those requirements and provide on an ongoing basis the related disclosures set
out in IFRS 7 and discussed in Chapter 50 at 4.4.2. [IFRS 4.20C].
The ability to use the temporary exemption from IFRS 9 ceases automatically in an
entity’s first accounting period beginning on or after 1 January 2021 (the date of initial
application of IFRS 17). At that time a reporting entity must apply IFRS 9 to its financial
instruments (using the associated transitional rules in the standard).
10.1.1
Activities that are predominantly connected with insurance
An insurer’s activities must be predominantly connected with insurance for the
temporary exemption from IFRS 9 to be used. An insurer’s activities are predominantly
connected with insurance if, and only if: [IFRS 4.20D]
• the carrying amount of its liabilities arising from contracts within the scope of
IFRS 4, which includes any deposit components or embedded derivatives
unbundled from insurance contracts (see 4 and 5 above), is significant compared to
the total carrying amount of all its liabilities; and
• the percentage of the total carrying amount of its liabilities connected with
insurance relative to the total carrying amount of all its liabilities is:
• greater than 90%; or
• less than or equal to 90% but greater than 80%, and the insurer does not
engage in a significant activity unconnected with insurance.
It is observed in the Basis for Conclusions that the IASB decided to require that liabilities
within the scope of IFRS 4 be significant compared to total liabilities as a condition for
use of the temporary exemption in order to prevent entities with very few such
contracts qualifying for the exemption. ‘Significant’ in this context is not quantified. The
Board acknowledges that determining significance will require judgement but decided
not to provide additional guidance on its meaning because this term is used in other
IFRSs and is already applied in practice. [IFRS 4.BC258]. For example, IAS 28 –
Investments in Associates and Joint Ventures – defines ‘significant influence’ and
provides a rebuttable presumption that a holding of 20 per cent or more of the voting
power of an investee gives the investor significant influence. [IAS 28.5].
In assessing whether an insurer engages in a significant activity unconnected with
insurance, it should consider: [IFRS 4.20F]
• only those activities from which it may earn income and incur expenses; and
• quantitative or qualitative factors (or both), including publicly available
information such as industry classification that users of financial statements apply
to the insurer.
For this purpose, liabilities connected with insurance comprise: [IFRS 4.20E]
• liabilities arising from contracts within the scope of IFRS 4, which includes any
deposit components or embedded derivatives that are unbundled from insurance
contracts (see 4 and 5 above);
Insurance contracts (IFRS 4) 4353
• non-derivative investment contract liabilities measured at fair value through profit
or loss (FVPL) applying IAS 39, including those liabilities designated at fair value
through profit or loss to which the insurer has elected to apply the requirements
in IFRS 9 for the presentation of gains and losses (see 10.1 above); and
• liabilities that arise because the insurer issues, or fulfils obligations arising from, the
contracts noted in the preceding two bullet points. Examples of such liabilities
include derivatives used to mitigate risks arising from those contracts and from the
assets backing those contracts, relevant tax liabilities such as the deferred tax
liabilities for taxable temporary differences on liabilities arising from those
contracts, and debt instruments that are included in the insurer’s regulatory capital.
Although not specifically mentioned in the standard, the Basis for Conclusions states
that other connected liabilities include liabilities for salaries and other employment
benefits for the employees of the insurance activities. [IFRS 4.BC255(b)]. Employee benefit
liabilities would include, for example, defined benefit pension liabilities.
The Basis for Conclusions observes that, although non-derivative investment contract
liabilities measured at FVPL applying IAS 39 (including those designated at fair value
through profit or loss to which the insurer has applied the requirements in IFRS 9 for
the presentation in OCI of gains and losses arising from changes in the entity’s own
credit risk) do not meet the definition of an insurance contract, those investment
contracts are sold alongside similar products with significant insurance risk and are
regulated as insurance contracts in many jurisdictions. Accordingly, the IASB concluded
that insurers with significant investment contracts measured at FVPL should not be
precluded from applying the temporary exemption.
However, the IASB noted that insurers generally measure at amortised cost most non-
derivative financial liabilities that are associated with non-insurance activities and
therefore decided that such financial liabilities (i.e. non-derivative financial liabilities
associated with non-insurance liabilities measured at amortised cost) cannot be treated
as connected with insurance. [IFRS 4.BC255(a)]. In our view, this would not preclude non-
derivative financial liabilities measured at amortised cost being included within the
numerator provided such liabilities are connected with insurance. Determining whether
such liabilities measured at amortised cost are connected with insurance is a matter of
judgement based on facts and circumstances.
The 90% threshold for predominance was set to avoid ambiguity and undue effort in
determining eligibility for the temporary exemption from IFRS 9. Nevertheless, the
IASB acknowledged that an assessment based solely on this 90% threshold has
shortcomings. Accordingly, the IASB decided that when an insurer narrowly fails to
meet the threshold, the insurer is still able to qualify for the temporary exemption as
long as more than 80% of its liabilities are connected with insurance and it does not
engage in a significant activity unconnected with insurance. [IFRS 4.BC256].
When a reporting entity’s liabilities connected with insurance are greater than 80% but
less than 90% of all of its liabilities and the insurer wishes to apply the temporary
exemption, additional disclosures are required (see 10.1.5 below). A reporting entity is
not permitted to apply the temporary exemption if its liabilities connected with
insurance are less than 80% of all of its liabilities at initial assessment (see 10.1.2 below).
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The diagram below illustrates the assessment of the temporary exemption.
Additional
assessment
required
x
Additional
entage
90%
Assessment:
80%
Qualitative
Quantitative
nce perc
ina
om
Pred
Insurance liabilities, Investment contracts with DPF, IAS 39 liabilities as at FVPL
‘Other liabilities’ connected with insurance activities
Liabilities not connected with insurance activities
An example of how the predominance calculation works is illustrated below.
Example 51.36: Calculation of the predominance ratio
A reporting entity has the following liabilities at its annual reporting date that immediately precedes 1 April 2016.
CU
Insurance contract liabilities
500
Investment contract liabilities at FVPL
200
Debt issued for regulatory capital
100
Derivatives used for hedges of insurance liabilities
60
Employee benefit liabilities of insurance employees
50
Banking liabilities at amortised cost
90
Total liabilities
1,000
Predominance ratio = 91% (i.e. 500+200+100+60+50/1,000). Therefore,
the reporting entity’s liabilities are predominantly connected with
insurance activities.
10.1.2
Initial assessment and reassessment of the temporary exemption
An insurer is required to assess whether it qualifies for the temporary exemption from IFRS 9
at its annual reporting date that immediately precedes 1 April 2016. After that date: [IFRS 4.20G]
Insurance contracts (IFRS 4) 4355
• an entity that previously qualified for the temporary exemption from IFRS 9 should
reassess whether its activities are predominantly connected with insurance at a
subsequent annual reporting date if, and only if, there was a change in the entity’s
activities (as described below) during the annual period that ended on that date; and
• an entity that previously did not qualify for the temporary exemption from IFRS 9
is permitted to reassess whether its activities are predominantly connected with
insurance at a subsequent annual reporting date before 31 December 2018 if, and
only if, there was a change in the entity’s activities, as described below, during the
annual period that ended on that date.
The initial assessment date is prior to the issuance of the amendments to IFRS 4 that
introduced the temporary exemption from IFRS 9. The Basis for Conclusions explains
that this date was selected in response to feedback from respondents who told the IASB
that entities would need to perform the assessment earlier than the application date of
IFRS 9 because they would need adequate time to implement IFRS 9 if they did not
qualify for the temporary exemption. [IFRS 4.BC264].
A reassessment of the predominance criteria is triggered by a change in activities not a
change in the predominance ratio. Therefore, an entity whose predominance ratio, say,
fell below 80% at the end of a subsequent reporting period (or rose above 80% in a
subsequent reporting period) would not reassess its ability to use the temporary exemption
unless this was accompanied by a change in its activities. The IASB considered that a
change merely in the level of an entity’s insurance liabilities relative to its total liabilities
over time would not trigger a reassessment because such a change, in the absence of other
events, would be unlikely to indicate a change in the entity’s activities. [IFRS 4.BC265].
The Basis for Conclusions clarifies that an entity’s financial statements reflect the effect
of a change in its activities only after the change has been completed. Therefore, an
entity performs the reassessment using the carrying amounts of its liabilities at the
annual reporting date immediately following the completion of the change in its
activities. For example, an entity would reassess whether its activities are
predominantly connected with insurance at the annual reporting date immediately
following the completion of an acquisition. [IFRS 4.BC266].
A change in an entity’s activities that would result in a reassessment is a change that: [IFRS 4.20H]
• is determined by the entity’s senior management as a result of internal or
external changes;
• is significant to the entity’s operations; and
• is demonstrable to external parties.
Accordingly, such a change occurs only when the entity begins or ceases to perform an
activity that is significant to its operations or significantly changes the magnitude of one
of its activities; for example, when the entity has acquired, disposed of or terminated a
business line.
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The IASB expects a change in an entity’s activities that would result in reassessment to
occur very infrequently. The following are examples of changes that would not result in
a reassessment: [IFRS 4.20I]
• a change in the entity’s funding structure that in itself does not affect the activities
from which the entity earns income and incurs expenses; and
• the entity’s plan to sell a business line, even if the assets and liabilities are classified
/>
as held for sale applying IFRS 5. A plan to sell a business activity could change the
entity’s activities and give rise to a reassessment in the future but has yet to affect
the liabilities recognised on its balance sheet. This means that a disposal must have
completed for it to trigger a reassessment.
If an entity no longer qualifies for the temporary exemption from IFRS 9 as a result of
reassessment, then the entity is permitted to continue to apply IAS 39 only until the end
of the annual period that began immediately after that reassessment. Nevertheless, the
entity must apply IFRS 9 for annual periods beginning on or after 1 January 2021. This
is illustrated in the following example. [IFRS 4.20J].
Example 51.37: Discontinuation of the temporary exemption
A reporting entity has a 31 December reporting date and qualifies for the temporary exemption in its annual
reporting period ending 31 December 2015 (i.e. its reporting period immediately preceding 1 April 2016).
Following a reassessment, after a change in its activities, the reporting entity determines that it no longer
qualifies for the temporary exemption from IFRS 9 at the end of its annual reporting period ending
31 December 2018. As a result, it is permitted to continue using the temporary exemption from IFRS 9 only
until 31 December 2019. For the 31 December 2020 financial statements, the entity can either apply IFRS 9
or apply IFRS 9 with the overlay approach.
When an entity, having previously qualified for the temporary exemption, concludes
that its activities are no longer predominantly connected with insurance, additional
disclosures are required – see 10.1.5.A below.
An insurer that previously elected to apply the temporary exemption from IFRS 9 may
always, at the beginning of any subsequent annual period, irrevocably elect to apply IFRS 9
rather than IAS 39. [IFRS 4.20K]. The transitional requirements of IFRS 9 would apply in
those circumstances. An insurer ceasing to use the temporary exemption may also elect to
use the overlay approach in the first reporting period in which it applies IFRS 9.
10.1.3 First-time
adopters
A first-time adopter, as defined in IFRS 1 – First-time Adoption of International Financial
Reporting Standards, may apply the temporary exemption if, and only if, it meets the criteria
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 862