IAS/IFRSIAS/IFRS
Insurers and IAS / IFRSInsurers and IAS / IFRS
Frank Helsloot (AXA Group Belgium)Frank Helsloot (AXA Group Belgium)Luxembourg 23 February 2005Luxembourg 23 February 2005
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Table of Contents
IAS - IFRS --> some principles
Classification of Assets and Liabilities ---> some industry related
principlesConclusions
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IAS - IFRSIAS - IFRSSome principlesSome principles
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IAS / IFRS
Framework
IAS (International Accounting Standard)
SIC (Standard Interpretations Committee)
IFRS (International Financial Reporting Standard)
– Standard
– Implementation Guidance
– Basis for Conclusions
Exposure Draft (Standard in preparation)
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Some Principles
Accounting (recognition and derecognition)• economic reality prevails legal reality• activity based instead of industry based• component approach• asset / liability approach instead of deferral and matching
Presentation• in / out balance• cash flow statement• Statement of changes in equity
Measurement• amortised cost• fair value
Disclosures• detailed information• management information
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Classification of Assets and Liabilities Classification of Assets and Liabilities Some Industry Related PrinciplesSome Industry Related Principles
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ConferenceConference Classification of assets and liabilities
Financial Instruments (IAS 39 - IAS 32)– Measurement categories– Amortised Cost and Fair Value– Impairment – Embedded derivatives– Hedges– Trade date versus settlement date
Real Estate (IAS 40 and IAS 16) Insurance
– Insurance contract – Discretionary participation– IAS 39 <---> IFRS 4
Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts
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ConferenceConference Classification of assets and liabilities
Financial Instruments (IAS 39 - IAS 32)– Measurement categories – Amortised Cost and Fair Value– Impairment – Embedded derivatives– Hedges– Trade date versus settlement date
Real Estate (IAS 40 and IAS 16) Insurance
– Insurance contract – Discretionary participation– IAS 39 <---> IFRS 4
Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts
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ConferenceConference Financial Instruments: Measurement Categories
• Strict use of HTM• Limited use of FV designated (under discussion)• Derivatives and embedded derivatives are at trading
Portfolio Assets Measurement Differences FV toTrading Fair Value P/LHeld to maturity Amortised Cost -Loans originated Amortised Cost -Available for sale Fair Value EquityTrading designated Fair Value P/L
Portfolio Liabilities Measurement Differences FV toTrading Fair Value P/LAmortised Cost Amortised Cost -Trading designated Fair Value P/L
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ConferenceConference Financial Instruments: Measurement Rules
Amortised Cost: (assets and liabilities)– Add all fees and points paid or received between parties to the
contract that are an integral part of the effective interest rate (IAS 18), transaction costs and other premiums or discounts
----> Cash flow schema----> Internal administrative costs are excluded
– Calculate the Effective Interest Rate: rate that discounts the estimated future cash payments or receipts through the expected life of the financial instrument
– Carrying amount based on Effective Interest Rate– Contractual book value (cash flow based)– Changes in applications needed (IT budget!)
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ConferenceConference Measurement Rules:Amortised Cost: simpl.example
Investment or deposit: 3 year 10.000 EUR Payment of Fee: 100 EUR (front end)Rate 5%
Cash Flows Capital Interest Fee TotalYear 0: 10000 -100 9900Year 1: -500 -500Year 2: -500 -500Year 3: -10000 -500 -10500
Effective Yield: 5,36976%
IAS Book value
Liability (start)
Effective Yield
Cost (effective
yield)
Interest Payment
FeeBook value
Liability (end)
Year 0: 9900,00Year 1: 9900,00 5,37% -531,61 -500,00 -31,61 9931,61Year 2: 9931,61 5,37% -533,30 -500,00 -33,30 9964,91Year 3: 9964,91 5,37% -535,09 -500,00 -35,09 0,00
10000,00 -100,00
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ConferenceConference Financial Instruments: Measurement Rules
Fair Value: (assets and liabilities)– incorporate all embedded derivatives in the product (mortgages:
cap and floor, prepayment option,….)– changes in fair value are reported in either P/L (volatility!!) or
Equity (depends on portfolio) – deferred acquisition cost not recognised (immediately in P/L)– fair value can not be lower than amount payable on demand) – when there is no market: fair value will largely equate to a mark-
to-model system– measurement is contract by contract– either accounting or disclosures– changes in applications needed (IT budget!)
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Impairment
Type of financial asset Basis for Impairment P/L charge reversibleAmortised Cost Recoverable amount Yes
Available for sale Equity securities Market amount No Debt securities Recoverable amount Yes
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ConferenceConference Financial Instruments: Derivatives
Definition of a derivative: 3 characteristics:– its value changes in response to the change in a specified ‘underlying’
• interest rate• security price• foreign exchange rate• index of prices or rates• credit rating
– it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors
– it is settled at a future date
Can be contained explicit (guaranteed interest rate) or even implicit (prepayment option) in a contract: ---> embedded derivative
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ConferenceConference Financial Instruments: Embedded derivatives
Identification of embedded derivatives in – Assets:
• Financial instruments IAS 39
– Liabilities:• Insurance investments IAS 39• Insurance contracts
Test for separation – no separation
• if feature does not meet the definition of derivative• if host at fair value (trading or trading designated)• if closely related • feature meets definition of insurance contract
Measurement at Fair value
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Financial Instruments: Hedges
Fair-value hedges Cash-flow hedges Hedges of a Net Investment in a Foreign
Operation Portfolio hedge of interest rate risk Hedge Disclosures Effectiveness test Alternative: ? Use of ‘Fair Value through P/L
designated’ portfolio
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ConferenceConference Financial Instruments: Trade date versus Settlement date
Assets: Trade date or Settlement date accounting– no difference on impact on P/L by purchases– difference on impact on P/L by sale (immediate
recognition of P/L by trade date)– trade date will increase assets
Liabilities: Settlement date
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ConferenceConference Classification of assets and liabilities
Financial Instruments (IAS 39 - IAS 32)– Measurement categories – Amortised Cost and Fair Value– Impairment – Embedded derivatives– Hedges– Trade date versus settlement date
Real Estate (IAS 40 and IAS 16) Insurance
– Insurance contract – Discretionary participation– IAS 39 <---> IFRS 4
Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts
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Real Estate
IAS 40: Investment property– Either Cost or Fair Value for all investment property
• Cost depreciation based on its useful life (IAS 16): – split of the property in separate items – residual value
• Fair Value: volatility ?• Impact on P/L
IAS 16: Property, Plant and Equipment– Cost model (benchmark) or Revaluation model
(alternative treatment, positive valuation = equity)– When an item is revaluated: entire class should be
revaluated
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ConferenceConference Classification of assets and liabilities
Financial Instruments (IAS 39 - IAS 32)– Measurement categories – Amortised Cost and Fair Value– Impairment – Embedded derivatives– Hedges– Trade date versus settlement date
Real Estate (IAS 40 and IAS 16) Insurance
– Insurance contract – Discretionary participation– IAS 39 <---> IFRS 4
Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts
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Insurance Contracts
Definitions:– Insurance contract:
• A contract under which one party (the insurer) accepts significant insurance risk (other than financial risk from another party) (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (whether an insured event will occur, when it will occur or how much the insures will need to pay if it occurs) (the insured event) adversely affects the policyholder.
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Insurance ContractsDefinitions:
– Discretionary participation: • A contractual right to receive, as a supplement to guaranteed
benefits, additional benefits:– (a) that are likely to be a significant portion of the total contractual benefits;
– (b) whose amount or timing is contractually at the discretion of the issuer; and
– (c) that are contractually based on:
• (i) the performance of a specified pool of contracts or a specified type of contract;
• (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or
• (iii) the profit or loss of the company, fund or other entity that issues the contract.
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Insurance Risk
Investment Contract Insurance Contract
Discretionary Participation
IFRS 4
IFRS 4
IFRS 4
IAS 32
IAS 39
IAS 32
Measurement / Accounting
Disclosures / Presentation
Yes
Yes
No
No
Insurance Contracts
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Insurance Contracts
Phase 1:– Investments:
• See IAS 39 - IAS 32: Financial Instruments– Amortised Cost– Fair Value
– Insurance contracts: • Phase 1: Local GAAP• Embedded derivatives (IAS 39)
Phase 2: 2007?
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ConferenceConference Classification of assets and liabilities
Financial Instruments (IAS 39 - IAS 32)– Measurement categories – Amortised Cost and Fair Value– Impairment – Embedded derivatives– Hedges– Trade date versus settlement date
Real Estate (IAS 40 and IAS 16) Insurance
– Insurance contract – Discretionary participation– IAS 39 <---> IFRS 4
Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts
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ConferenceConference Comparison Local GAAP versus IAS
(simplified) Assets
Local IAS Changes in FV
Trading and (emb) derivatives Fair Value Trading P/LCost (hedging) Trading P/L
Trading P/LTreasury
Premium/discount
AFS EquityFair Value P/L
Investments HTM (debt / equity based) AFS Equity
Fair Value P/L
Loans Cost Loans and receivables
Fair Value P/L
Real estate (IAS 40) Cost CostFair Value P/L
Premium/discount
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ConferenceConference Comparison Local GAAP versus IAS(simplified)
LiabilitiesLocal IAS Changes in FV
Trading and (emb) derivatives Fair Value Trading P/LCost (hedging) Trading P/L
Deposits Cost Amortised CostFair Value P/L
Investment Contracts Reserve Phase 1: Fair Value P/L (Insurance IAS 39) Phase 1: Amortised Cost
Insurance Contracts (Life) Reserve Phase 1: Local GAAPPhase 2: FV ? P/L ?
Insurance Contracts (Non Life) Reserve Phase 1: Local GAAPPhase 2: FV ? P/L ?
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ConclusionsConclusions
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Conclusions
How to manage classification of assets and liabilities on Opening Balance IFRS ?– Define strategy about volatility in P/L and in Equity– Use of ‘Fair Value designated through P/L’ (under
discussion)– Use of hedge accounting (under discussion)
How to manage P/L and Equity under IFRS?– Phase 1– Phase 1 2
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Thank you for your attention
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