AASB 2016-6 - Amendments to Australian Accounting Standards – Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts - October 2016

Administered by Department of the Treasury

Legislation au F2016L01637 Not in force Legislative Instrument

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Explanatory Statement

Accounting Standard AASB 2016-6
Amendments to Australian Accounting Standards – Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts
 

 

October 2016

EXPLANATORY STATEMENT

Standard Amended by AASB 2016-6

This Standard makes amendments to Accounting Standard AASB 4 Insurance Contracts. These amendments arise from the issuance of International Financial Reporting Standard Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4) by the International Accounting Standards Board (IASB) in September 2016.

Power to Make Amendments

Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws), the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument. Accordingly, the AASB has the power to amend the Accounting Standards that are made by the AASB as legislative instruments under the Corporations Act 2001.

Main Features of AASB 2016-6

Main Requirements

This Standard amends AASB 4 Insurance Contracts to permit issuers of insurance contracts to:

(a)          choose to apply the ‘overlay approach’ that involves applying AASB 9 Financial Instruments and also applying AASB 139 Financial Instruments: Recognition and Measurement to eligible financial assets to calculate a single line item adjustment to profit or loss so that the overall impact on profit or loss is the same as if AASB 139 had been applied; or

(b)         choose to be temporarily exempt from AASB 9 when those issuers’ activities are predominantly connected with insurance, provided they make additional disclosures to enable users to make comparisons with issuers applying AASB 9.

This Standard incorporates amendments into AASB 4 that are set out in Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4) issued by the International Accounting Standards Board (IASB) in September 2016.  A key motivation for the IASB issuing the amendments to IFRS 4 is to address concerns among some stakeholders about having to implement IFRS 9 shortly before having to implement a forthcoming new IFRS on insurance contracts.  In general, those stakeholders have been concerned that IFRS 9 would require some financial assets to be measured at fair value through profit or loss that are currently measured under IAS 39 Financial Instruments: Recognition and Measurement at fair value through other comprehensive income.

AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts require financial assets backing insurance liabilities, when possible, to be measured at fair value through profit or loss.  The AASB has decided to retain these requirements until a new AASB Standard on insurance contracts (that is expected to replace AASB 4, AASB 1023 and AASB 1038) is applied.  Accordingly, the AASB expects the applicability of AASB 2016-6 to be very limited.

Application Date

This Standard applies to annual periods beginning on or after 1 January 2018.  Earlier application is not permitted.

References to Other AASB Standards

References in this Standard to the titles of other AASB Standards that are legislative instruments are to be construed as references to those other Standards as originally made and as amended from time to time and incorporate provisions of those Standards as in force from time to time.

Consultation Prior to Issuing this Standard

The AASB issued Exposure Draft ED 274 Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts in December 2015 for comment by 18 January 2016. ED 274 incorporated IASB Exposure Draft ED/2015/11 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. Two submissions were received by the AASB in respect of the proposals in ED 274. There was general support from constituents for adopting the proposal, although some concerns were raised regarding the proposed determination of predominant activity in assessing eligibility to apply the temporary exemption from applying IFRS 9. The AASB considered the comments it received in finalising AASB 2016‑6.

The AASB expects the amendments to have very limited application in Australia as they do not apply to insurance contracts subject to AASB 1023 and AASB 1038. Those Standards continue to apply until replaced by a new AASB Standard on insurance contracts. AASB 1023 and AASB 1038 already require financial assets backing insurance liabilities, when possible, to be measured at fair value through profit or loss.

A Regulation Impact Statement (RIS) has not been prepared in connection with the issue of AASB 2016-6 as the amendments made do not have a substantial direct or indirect impact on business or competition. The application of the amendments to AASB 4 is optional as they permit entities applying AASB 4 to elect to adopt different approaches to applying AASB 9 alongside AASB 4.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011

Accounting Standard AASB 2016-6
Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts

Overview of the Accounting Standard

This Standard amends AASB 4 Insurance Contracts to permit issuers of insurance contracts to:

(c)          choose to apply the ‘overlay approach’ that involves applying AASB 9 Financial Instruments and also applying AASB 139 Financial Instruments: Recognition and Measurement to eligible financial assets to calculate a single line item adjustment to profit or loss so that the overall impact on profit or loss is the same as if AASB 139 had been applied; or

(d)         choose to be temporarily exempt from AASB 9 when those issuers’ activities are predominantly connected with insurance, provided they make additional disclosures to enable users to make comparisons with issuers applying AASB 9.

This Standard incorporates amendments into AASB 4 that are set out in Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4) issued by the International Accounting Standards Board (IASB) in September 2016.  A key motivation for the IASB issuing the amendments to IFRS 4 is to address concerns among some stakeholders about having to implement IFRS 9 shortly before having to implement a forthcoming new IFRS on insurance contracts.  In general, those stakeholders have been concerned that IFRS 9 would require some financial assets to be measured at fair value through profit or loss that are currently measured under IAS 39 Financial Instruments: Recognition and Measurement at fair value through other comprehensive income.

AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts require financial assets backing insurance liabilities, when possible, to be measured at fair value through profit or loss.  The AASB has decided to retain these requirements until a new AASB Standard on insurance contracts (that is expected to replace AASB 4, AASB 1023 and AASB 1038) is applied.  Accordingly, the AASB expects the applicability of AASB 2016-6 to be very limited.

Human Rights Implications

This Standard is issued by the AASB in furtherance of the objective of facilitating the Australian economy. It does not diminish or limit any of the applicable human rights or freedoms, and thus does not raise any human rights issues.

Conclusion

This Standard is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 

Overview

Accounting Standard AASB 2016-6, enacted in October 2016, was introduced to address the need to align Australian accounting standards with international practices while accommodating the unique requirements of the Australian insurance market. This standard was issued by the Australian Accounting Standards Board (AASB) under the authority granted by the Corporations Act 2001, aiming to provide flexibility to issuers of insurance contracts in the application of AASB 9 Financial Instruments alongside AASB 4 Insurance Contracts. The primary objective of AASB 2016-6 is to offer alternatives to the standard accounting treatment of financial instruments within insurance contracts, thereby responding to stakeholder concerns regarding the simultaneous implementation of new international standards and addressing the transitional impact on the insurance sector.

Scope and Application

The Accounting Standard AASB 2016-6 applies to issuers of insurance contracts in Australia, providing them with options in how they apply certain accounting standards in relation to financial instruments. Specifically, the Standard amends AASB 4 Insurance Contracts to allow insurers to either apply an ‘overlay approach’ which involves applying both AASB 9 Financial Instruments and AASB 139 Financial Instruments: Recognition and Measurement to calculate a single line item adjustment to profit or loss, or to be temporarily exempt from AASB 9 if their activities are predominantly connected with insurance, provided they make additional disclosures. The Standard incorporates amendments from the International Accounting Standards Board’s Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts issued in September 2016. The amendments apply to annual periods beginning on or after 1 January 2018, with earlier application not permitted. However, the AASB expects the applicability of AASB 2016-6 to be very limited as it does not apply to insurance contracts subject to AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts, which already require financial assets backing insurance liabilities to be measured at fair value through profit or loss.

Key Provisions

The Accounting Standard AASB 2016-6, as outlined in the explanatory statement, amends the Accounting Standard AASB 4 Insurance Contracts to introduce flexibility in how issuers of insurance contracts apply certain accounting standards. Specifically, issuers of insurance contracts can choose to apply the 'overlay approach' as described in section (a) of the standard. This approach involves applying AASB 9 Financial Instruments while also applying AASB 139 Financial Instruments: Recognition and Measurement to eligible financial assets to ensure that the overall impact on profit or loss matches what would be observed if AASB 139 had been applied in isolation. Alternatively, as detailed in section (b), issuers can opt for a temporary exemption from AASB 9 if their activities are predominantly connected with insurance, provided they make additional disclosures to enable users to compare their financial statements with those of issuers applying AASB 9. In terms of obligations, issuers of insurance contracts who choose to apply the 'overlay approach' must ensure that they correctly apply both AASB 9 and AASB 139 to the relevant financial assets and present the necessary adjustments to profit or loss. Those who opt for the temporary exemption must still comply with all other relevant accounting standards but must additionally provide the specified disclosures to assist users in making meaningful comparisons with other issuers. These requirements are set out in the main operative sections of the standard, which provide clear guidance on how the amendments should be implemented. For breaches of the requirements set out in AASB 2016-6, the implications would typically involve non-compliance with the accounting standards, which could lead to financial reporting issues and potential regulatory scrutiny. While the explanatory statement does not detail specific penalties for breaches of this standard, such non-compliance could result in investigations by regulatory bodies, and in severe cases, sanctions could be imposed under the Corporations Act 2001. The maximum penalties for corporate offences under this Act can include substantial fines and, in some cases, imprisonment for directors found guilty of breaches. However, these would be applied in the context of broader corporate governance and financial reporting laws rather than specifically for breaches of AASB 2016-6 alone.

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