Amendment to IFRS 17 on a classification overlay

Keywords: Mazars, Thailand, IFRS, IFRS 17, IFRS 9, IAS 39

23 August 2021

The problem had been discussed previously, during the amendments to IFRS 17 project in 2018. As things stand, the transition provisions for initial application of IFRS 9 stipulate that the presentation of comparative information in accordance with the new standard is optional. If an entity decides to apply IFRS 9 to comparative information, it may only do this for financial instruments that still exist at the transition date. In other words, financial assets that have been sold or that have matured prior to the transition date shall still be accounted for in accordance with IAS 39, while those that still exist shall be restated in accordance with IFRS 9.

This rule, which was initially intended to smooth transition to IFRS 9, is proving difficult to apply, as it requires entities to distinguish between financial assets and this cannot be done ahead of time. It also creates accounting mismatches with the associated insurance liabilities (particularly for assets measured at amortised cost or at fair value through profit or loss in accordance with IAS 39). Entities may also elect not to account for their assets in accordance with IFRS 9 in the comparative information, whereas comparative information on insurance liabilities must be restated in accordance with IFRS 17.

The IASB’s proposed solution (still tentative at this stage) is to amend IFRS 17 to permit the use of a “classification overlay” for initial application of IFRS 17, allowing each financial instrument that is “related to insurance contract liabilities” to be classified in the comparative information as if IFRS 9 had been applied to it (even though some of these financial instruments no longer exist at the transition date). This “classification” approach would not involve applying all the accounting provisions of IFRS 9; some of the rules, such as those on expected credit losses, would not apply.

The proposed amendment is to be published in July, with a shorter comment period of two months. This accelerated process will permit insurance companies to benefit from the amendment when preparing the comparative information for 2022, in time for initial application of IFRS 17 (and IFRS 9) at 1 January 2023.