Insurance Risk

IFRS 4 replaces what had been an indirect definition of an insurance contract under IAS 32 with a positive definition based on the transfer of significant insurance risk from the policyholder to the insurer. This definition covers most motor, travel, life, annuity, medical, property, reinsurance and professional indemnity contracts. Some catastrophe bonds and weather derivatives would also qualify, as long as payments are linked to a specific climatic or other insured future event that would adversely affect the policyholder. On the other hand, policies that transfer no significant insurance risk—such as some savings and pensions plans—will be deemed financial instruments, addressed by IFRS 9, regardless of their legal form. IFRS 9 also applies to contracts that principally transfer financial risk, such as credit derivatives and some forms of financial reinsurance.

There may be some difficulty in classifying the more complex products (including certain hybrids). To facilitate this process, the IASB has explained that insurance risk will be deemed significant only if an insured event could cause an insurer to pay significant additional benefits in any scenario, apart from a scenario that lacks commercial substance. As a practical matter, reporting entities should compare the cash flows from (1) the occurrence of the insured event against (2) all other events. If the cash flows under the former are significantly larger than under the latter, significant insurance risk is present.

For example, when the insurance benefits payable upon death are significantly larger than the benefits payable upon surrender or maturity, there is significant insurance risk. The significance of the additional benefits is to be measured irrespective of the probability of the insured event, if the scenario has commercial substance. Reporting entities have to develop internal quantitative guidance to ensure the definition is applied consistently throughout the entity. To qualify as significant, the insurance risk also needs to reflect a pre-existing risk for the policyholder, rather than having arisen from the terms of the contract.

This requirement would specifically exclude from the cash flow comparison features such as waivers of early redemption penalties within investment plans or mortgages in the event of death. Since it is the contract itself that brought the charges into place, the waiver does not represent an additional benefit received for the transfer of a pre-existing insurance risk.

The application of this IFRS 4 definition may result in the redesignation of a significant fraction of existing insurance contracts as investment contracts. In other situations, the impact could be the opposite. For example, a requirement to pay benefits earlier if an insured event occurs could make a contract insurance; this means that many pure endowment contracts are likely to meet the definition of insurance. All told, insuring entities will need to set clear, consistent and justifiable contract classification criteria and rigorously apply these.

Adequacy of Insurance Liabilities

IFRS 4 imposes a liability adequacy test, which requires that at each reporting date the “insurer” must assess whether its recognised insurance liabilities are adequate, using then-current estimates of future cash flows under the outstanding insurance contracts. If as a result of that assessment it is determined that the carrying amount of insurance liabilities (less related deferred acquisition costs and related intangible assets, if appropriate—see discussion below) is insufficient given the estimated future cash flows, the full amount of such deficiency must be reported currently in earnings.

The standard defines minimum requirements for the adequacy test that is to be applied to the liability account. These minimum requirements are that:

1. The test considers the current estimates of all contractual cash flows, and of such related cash flows as claims handling costs, as well as cash flows that will result from embedded options and guarantees.
2. If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.

In situations where the insuring entity's accounting policies do not require a liability adequacy test, or provides for a test that does not meet the minimum requirements noted above, then the entity is required under IFRS 4 to:

1. Determine the carrying amount of the relevant insurance liabilities, less the carrying amount of:
   1. Any related deferred acquisition costs; and
   2. Any related intangible assets, such as those acquired in a business combination or portfolio transfer. However, related reinsurance assets are not considered because an insurer accounts for them separately.
2. Determine whether the carrying amount of the relevant net insurance liabilities is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of IAS 37. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities.

The IAS 37-based amount is the required minimum liability to be presented. Therefore, if the current carrying amount is less, the insuring entity must recognise the entire shortfall in current period earnings. The corresponding credit to this loss recognition will either decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities, or both, dependent upon the facts and circumstances.

In applying the foregoing procedures, any related reinsurance assets are not considered, because an insuring entity accounts for these separately, as noted later in this discussion.

If an insuring entity's liability adequacy test meets the minimum requirements set forth above, this test is applied at the level of aggregation specified above. On the other hand, if the liability adequacy test does not meet the stipulated minimum requirements, the comparison must instead be made at the level of a portfolio of contracts that are subject to broadly similar risks and which are managed together as a single portfolio.

For purposes of comparing the recorded liability to the amount required under IAS 37, it is acceptable to reflect future investment margins only if the carrying amount of the liability also reflects those same margins. Future investment margins are defined under IFRS 4 as being employed if the discount rate used reflects the estimated return on the insuring entity's assets, or if the returns on those assets are projected at an estimated rate of return, and discounted at a different rate, with the result included in the measurement of the liability. There is a rebuttable presumption that future investment margins should not be used, however, although exceptions (see below) can exist.

Impairment Testing of Reinsurance Assets

When an insuring entity obtains reinsurance (making it the cedant), an asset is created in its financial statements. As with other assets, the reporting entity must consider whether an impairment has occurred as of the reporting date. Under IFRS 4, a reinsurance asset is impaired only when there is objective evidence that the cedant may not receive all amounts due to it under the terms of the contract, as a consequence of an event that occurred after initial recognition of the reinsurance asset, and furthermore the impact of that event is reliably measurable in terms of the amounts that the cedant will receive from the reinsurer.

When the reinsurance asset is found to be impaired, the carrying amount is adjusted downward and a loss is recognised in current period earnings for the full amount.

Selection of Accounting Principles

IFRS requires certain accounting practices to be adopted with regard to insurance contracts, but also allows other, existing procedures to remain in place under defined conditions. An insuring entity may, under provisions of IFRS 4, change accounting policies for insurance contracts only if such change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. Relevance and reliability are to be assessed by applying the criteria set forth in IAS 8.

To justify changing its accounting policies for insurance contracts, an insuring entity must demonstrate that the change brings its financial statements nearer to satisfying the criteria of IAS 8, but the change does not necessarily have to achieve full compliance with those criteria. The standard addresses changes in accounting policies in the context of current interest rates; continuation of existing reporting practices; prudence; future investment margins; and “shadow accounting.” These are discussed in the following paragraphs.

Regarding interest rates, IFRS 4 provides that an insuring entity is permitted, although it is not required, to change its accounting policies such that it remeasures designated insurance liabilities to reflect current market interest rates, and recognises changes in those liabilities in current period earnings. It may also adopt accounting policies that require other current estimates and assumptions for the designated liabilities. IFRS 4 permits an insuring entity to change its accounting policies for designated liabilities, without consistently applying those policies to all similar liabilities, as the requirements under IAS 8 would suggest. If the insuring entity designates liabilities for this policy choice, it must continue to apply current market interest rates consistently in all periods to all these liabilities until they are later eliminated.

An unusual feature of IFRS 4 is that it offers affected reporting entities the option to continue with their existing accounting policies. Specifically, an insuring entity is allowed to continue the following practices if in place prior to the effective date of IFRS 4:

1. Measuring insurance liabilities on an undiscounted basis.
2. Measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables.
3. Employing non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and intangible assets, if any) of subsidiaries, except as permitted by the above-noted interest provision. If those accounting policies are not uniform, the insuring entity may change them if the change does not make the accounting policies more diverse, and also satisfies the other requirements of the standard.

The concept of prudence, as set forth in IFRS 4, is meant to excuse an insuring entity from a need to change its accounting policies for insurance contracts in order to eliminate excessive prudence (i.e., conservatism). However, if the insuring entity already measures its insurance contracts with sufficient prudence, it is not permitted to introduce additional prudence following adoption of IFRS 4.

The matter of future investment margins requires some explanation. Under IFRS 4 it is clearly preferred that the measurement of insurance contracts should not reflect future investment margins, but the standard does not require reporting entities to change accounting policies for insurance contracts to eliminate future investment margins. On the other hand, adopting a policy that would reflect this is presumed to be improper (the standard states that there is a rebuttable presumption that the financial statements would become less relevant and reliable if an accounting policy that reflects future investment margins in the measurement of insurance contracts is adopted, unless those margins affect the contractual payments). The standard offers two examples of accounting policies that reflect those margins. The first is using a discount rate that reflects the estimated return on the insurer's assets, while the second is projecting the returns on those assets at an estimated rate of return, discounting those projected returns at a different rate and including the result in the measurement of the liability.

IFRS 4 states that the insuring entity could possibly overcome this rebuttable presumption if the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins. As an example, it cites the situation where the existing accounting policies for insurance contracts involve excessively prudent (i.e., conservative) assumptions set at inception, and a statutory discount rate not directly referenced to market conditions, and ignore some embedded options and guarantees. This entity might make its financial statements more relevant and no less reliable by switching to a comprehensive investor-oriented basis of accounting that is widely used and involves current estimates and assumptions; a reasonable (but not excessively prudent) adjustment to reflect risk and uncertainty; measurements that reflect both the intrinsic value and time value of embedded options and guarantees; and a current market discount rate, even if that discount rate reflects the estimated return on the insuring entity's assets.

The actual ability to overcome IFRS 4's rebuttable presumption is fact dependent. Thus, in some measurement approaches, the discount rate is used to determine the present value of a future profit margin, which is then attributed to different periods using a formula. In such approaches, the discount rate affects the measurement of the liability only indirectly, and the use of a less appropriate discount rate has limited or no effect on the measurement of the liability at inception. In yet other approaches, the discount rate determines the measurement of the liability directly, and because the introduction of an asset-based discount rate has a more significant effect, it is highly unlikely that an insurer could overcome the rebuttable presumption noted above.

Finally, there is the matter of shadow accounting. According to IFRS 4, an insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. This is because, under some accounting models, realised gains or losses on an insurer's assets have a direct effect on the measurement of some or all of (1) its insurance liabilities; (2) related deferred acquisition costs; and (3) related intangible assets. IFRS 4 provides that the related adjustment to the insurance liability (or deferred acquisition costs or intangible assets) may be recognised in equity if, and only if, the unrealised gains or losses are recognised directly in equity.

Unbundling

Specific requirements pertain to unbundling of elements of insurance contracts, and dealing with embedded derivatives, options and guarantees.

Unbundling refers to the accounting for components of a contract as if they were separate contracts. Some insurance contracts consist of an insurance component and a deposit component. IFRS 4 in some cases requires the reporting entity to unbundle those components, and in other fact situations provides the entity with the option of unbundled accounting. Specifically, unbundling is required if both the following conditions are met:

1. The insuring entity can measure the deposit component (inclusive of any embedded surrender options) separately (i.e. without considering the insurance component); and
2. The insuring entity's accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.

On the other hand, unbundling is permitted, but not required, if the insuring entity can measure the deposit component separately but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.

Unbundling is actually prohibited if an insuring entity cannot measure the deposit component separately.

If unbundling is applied to a contract, the insuring entity applies IFRS 4 to the insurance component of the contract, while using IFRS 9 to account for the deposit component of that contract.

Recognition

IFRS 4 prohibits the recognition of a liability for any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the reporting date. Catastrophe and equalisation provisions are thus prohibited, because they do not reflect loss events that have already occurred and therefore recognition would be inconsistent with IAS 37. Loss recognition testing is required for losses already incurred at each date of the statement of financial position, as described above. An insurance liability (or a part of an insurance liability) is to be removed from the statement of financial position only when it is extinguished (i.e., when the obligation specified in the contract is discharged or cancelled, or expires).

In terms of display, offsetting of reinsurance assets against the related insurance liabilities is prohibited, as is offsetting of income or expense from reinsurance contracts against the expense or income from the related insurance contracts.

Discretionary Participation Features in Insurance Contracts

Insurance contracts sometimes contain a discretionary participation feature, as well as a guaranteed element. (That is, some portion of the return to be accrued to policyholders is at the discretion of the insuring entity.) Under the provisions of IFRS 4, the issuer of such a contract may, but is not required to, recognise the guaranteed element separately from the discretionary participation feature. If the issuer does not recognise them separately, it must classify the entire contract as a liability. If, on the other hand, the issuer classifies them separately, it will classify the guaranteed element as a liability. If the entity recognises the discretionary participation feature separately from the guaranteed element, the discretionary participation feature can be classified either as a liability or as a separate component of equity; the standard does not specify how the decision should be reached. In fact, the issuer may even split that feature into liability and equity components, if a consistent accounting policy is used to determine that split.

When there is a discretionary participation feature which is reported in equity, the reporting entity is permitted to recognise all premiums received as revenue, without separating any portion that relates to the equity component. Changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability are to be reported in earnings, while changes in the part of the discretionary participation feature classified as equity are to be accounted for as an allocation of earnings, similar to how minority interest is reported.

Embedded Derivatives

If the contract contains an embedded derivative within the scope of IFRS 9, that standard must be applied to that embedded derivative.

Temporary Exemption from IFRS 9

An insurer may apply the temporary exemption from IFRS 9 if it has not previously applied any version of IFRS 9 (except for applying the requirement in IFRS 9 that the effect of changes in credit risk of a liability are recognised in other comprehensive income for financial liability designated at fair value through profit or loss) and its activities are predominantly connected with insurance, at its annual reporting date that immediately precedes 1 April 2016, or at a subsequent annual reporting date specified.

After April 1, 2016 an entity applying the temporary exception should reassess whether its activities are predominantly connected with insurance at a subsequent annual reporting date if there was a change in the entity's activities. 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 subsequent annual reporting dates before 31 December 2018 only if there was a change in the entity's activities during that annual period. The standard provides additional guidance on what constitutes a change in an entity's activities.

If an entity no longer qualifies for the temporary exemption from IFRS 9 as a result of a reassessment, then the entity is permitted to continue to apply the temporary exemption from IFRS 9 only until the end of the annual period that began immediately after that reassessment. An insurer that previously elected to apply the temporary exemption from IFRS 9 may at the beginning of any subsequent annual period irrevocably elect to apply IFRS 9.

An entity applying the temporary exception from IFRS 9 may apply the requirement in IFRS 9 that the effect of changes in credit risk of a liability are recognised in other comprehensive income for financial liability designated at fair value through profit or loss.

An insurer's activities are predominantly connected with insurance if:

1. 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, is significant compared to the total carrying amount of all its liabilities; and
2. The percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities is:
   1. Greater than 90%; or
   2. Less than or equal to 90% but greater than 80%, and the insurer does not engage in a significant activity unconnected with insurance. The standard provides further guidance on assessing whether an entity engages in significant unconnected activities.

Liabilities connected with insurance comprise:

1. Liabilities arising from contracts within the scope of IFRS 4;
2. Non-derivative investment contract liabilities measured at fair value through profit or loss applying IAS 39 (including those designated as at fair value through profit or loss to which the insurer has applied the requirements in IFRS 9 for the presentation of gains and losses); and
3. Liabilities that arise because the insurer issues, or fulfils obligations arising from, the above contracts. 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 issued that are included in the insurer's regulatory capital.

A first-time adopter of IFRS may apply the temporary exemption from IFRS 9 if it meets the criteria for applying the temporary exemption as described above.

Situations may exist where an insurer applies the temporary exceptions from IFRS 9 but its associates or joint ventures do not, or vice versa. For annual periods beginning before 1 January 2021, the entity is permitted to retain the relevant accounting policies applied by the associate or joint venture as follows:

1. The entity applies IFRS 9 but the associate or joint venture applies the temporary exemption from IFRS 9; or
2. The entity applies the temporary exemption from IFRS 9 but the associate or joint venture applies IFRS 9.

An entity may apply the requirements separately for each associate or joint venture.

When an entity uses the equity method to account for its investment in an associate or joint venture:

1. IFRS 9 shall continue to be applied, if it was previously applied in the financial statements used to apply the equity method to that associate or joint venture (after reflecting any adjustments made by the entity).
2. IFRS 9 might be subsequently applied, if the temporary exemption from IFRS 9 was previously applied in the financial statements used to apply the equity method to that associate or joint venture (after reflecting any adjustments made by the entity).

An entity may apply the requirements above separately for each associate or joint venture.

Disclosures about the temporary exemption from IFRS 9

The disclosure objective for an insurer that elects to apply the temporary exemption from IFRS 9 is to disclose information to enable users of financial statements:

1. To understand how the insurer qualified for the temporary exemption; and
2. To compare insurers applying the temporary exemption with entities applying IFRS 9.

To achieve this disclosure objective, an insurer shall disclose:

1. The fact that it is applying the temporary exemption from IFRS 9 and how the insurer concluded that it qualified for the temporary exemption from IFRS 9, including:
   1. If the carrying amount of its liabilities arising from contracts within the scope of this IFRS was less than or equal to 90% of the total carrying amount of all its liabilities, the nature and carrying amounts of the liabilities connected with insurance that are not liabilities arising from contracts within the scope of this IFRS;
   2. If the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was less than or equal to 90% but greater than 80%, how the insurer determined that it did not engage in a significant activity unconnected with insurance, including what information it considered; and
   3. If the insurer qualified for the temporary exemption from IFRS 9 on the basis of a reassessment:
      1. The reason for the reassessment;
      2. The date on which the relevant change in its activities occurred; and
      3. A detailed explanation of the change in its activities and a qualitative description of the effect of that change on the insurer's financial statements.
2. If an entity concludes that its activities are no longer predominantly connected with insurance, the following information in each reporting period before it begins to apply IFRS 9:
   1. The fact that it no longer qualifies for the temporary exemption from IFRS 9;
   2. The date on which the relevant change in its activities occurred and a detailed explanation of the change in its activities; and
   3. A qualitative description of the effect of that change on the entity's financial statements.
3. To comply, the fair value at the end of the reporting period and the amount of change in the fair value during that period for the following two groups of financial assets separately:
   1. Financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, excluding any financial asset that meets the definition of held for trading in IFRS 9, or that is managed and whose performance is evaluated on a fair value basis;
   2. All financial assets other than those specified in paragraph 3.a. above; that is, any financial asset:
      1. With contractual terms that do not give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding;
      2. That meets the definition of held for trading in IFRS 9; or
      3. That is managed and whose performance is evaluated on a fair value basis.
4. When disclosing the information in point 3., the insurer:
   1. May deem the carrying amount of the financial asset measured applying IAS 39 to be a reasonable approximation of its fair value if the insurer is not required to disclose its fair value applying IFRS 7 (e.g., short-term trade receivables); and
   2. Shall consider the level of detail necessary to enable users of financial statements to understand the characteristics of the financial assets.
5. Information about the credit risk exposure, including significant credit risk concentrations inherent in the financial assets. At a minimum, an insurer shall disclose the following information for those financial assets at the end of the reporting period:
   1. By credit risk rating grades as defined in IFRS 7, the carrying amounts applying IAS 39 (in the case of financial assets measured at amortised cost, before adjusting for any impairment allowances).
   2. For the financial assets that do not have low credit risk at the end of the reporting period, the fair value and the carrying amount applying IAS 39 (in the case of financial assets measured at amortised cost, before adjusting for any impairment allowances). IFRS 9 provides the relevant requirements for assessing whether the credit risk on a financial instrument is considered low.
6. Information about where a user of financial statements can obtain any publicly available IFRS 9 information that relates to an entity within the group that is not provided in the group's consolidated financial statements for the relevant reporting period. For example, such IFRS 9 information could be obtained from the publicly available individual or separate financial statements of an entity within the group that has applied IFRS 9.
7. The fact that an entity elected to apply the exemption from uniform accounting policy requirements in IAS 28 for associates and joint ventures.
8. If an entity applied the temporary exemption from IFRS 9 when accounting for its investment in an associate or joint venture using the equity method, the following, in addition to the information required by IFRS 12, Disclosure of Interests in Other Entities:
   1. The information described in the disclosure paragraphs above for each associate or joint venture that is material to the entity. The amounts disclosed shall be those included in the IFRS financial statements of the associate or joint venture after reflecting any adjustments made by the entity when using the equity method, rather than the entity's share of those amounts.
   2. The quantitative information described above in aggregate for all individually immaterial associates or joint ventures. The aggregate amounts:
      1. Disclosed shall be the entity's share of those amounts; and
      2. For associates shall be disclosed separately from the aggregate amounts disclosed for joint ventures.

The Overlay Approach

An insurer is permitted to apply the overlay approach to designated financial assets. An insurer that applies the overlay approach shall:

1. Reclassify between profit or loss and other comprehensive income an amount that results in the profit or loss at the end of the reporting period for the designated financial assets being the same as if the insurer had applied IAS 39 to the designated financial assets. Accordingly, the amount reclassified is equal to the difference between:
   1. The amount reported in profit or loss for the designated financial assets applying IFRS 9; and
   2. The amount that would have been reported in profit or loss for the designated financial assets if the insurer had applied IAS 39.
2. Apply all other applicable IFRS to its financial instruments.

An insurer may elect to apply the overlay approach only when it first applies IFRS 9. An insurer may also apply the overlay approach if the temporary exception from IFRS 9 is no longer available because the insurers' activities are no longer predominantly connected with insurance.

An insurer shall present the amount reclassified between profit or loss and other comprehensive income applying the overlay approach:

1. In profit or loss as a separate line item; and
2. In other comprehensive income as a separate component of other comprehensive income.

A financial asset is eligible for designation for the overlay approach if the following criteria are met:

1. It is measured at fair value through profit or loss applying IFRS 9 but would not have been measured at fair value through profit or loss in its entirety applying IAS 39; and
2. It is not held in respect of an activity that is unconnected with contracts within the scope of IFRS 4. Examples of financial assets that would not be eligible for the overlay approach are those assets held in respect of banking activities or financial assets held in funds relating to investment contracts that are outside the scope of IFRS 4.

An insurer may designate an eligible financial asset for the overlay approach when it elects to apply the overlay approach. An insurer is permitted to designate eligible financial assets for the overlay approach on an instrument-by-instrument basis. Subsequently, it may designate an eligible financial asset for the overlay approach when:

1. That asset is initially recognised; or
2. That asset is held in respect of an activity that connected with contracts within the scope of this IFRS 4 for the first time.

When relevant, for the purposes of applying the overlay approach to a newly designated financial asset in point 2., above:

1. Its fair value at the date of designation shall be its new amortised cost carrying amount; and
2. The effective interest rate shall be determined based on its fair value at the date of designation.

An entity shall continue to apply the overlay approach to a designated financial asset until that financial asset is derecognised. However, an entity:

1. Shall de-designate a financial asset when the financial asset is no longer held in respect of an activity that is connected with contracts within the scope of IFRS 4. For example, a financial asset will no longer meet that criterion when an entity transfers that asset so that it is held in respect of its banking activities or when an entity ceases to be an insurer.
2. May, at the beginning of any annual period, stop applying the overlay approach to all designated financial assets. An entity that elects to stop applying the overlay approach shall apply IAS 8 to account for the change in accounting policy.

When an entity de-designates a financial asset, it shall reclassify from accumulated other comprehensive income to profit or loss as a reclassification adjustment any balance relating to that financial asset.

If an entity stops using the overlay approach applying by election or because it is no longer an insurer, it shall not subsequently apply the overlay approach. An insurer that has elected to apply the overlay approach but has no eligible financial assets may subsequently apply the overlay approach when it has eligible financial assets.

Disclosures About the Overlay Approach

The disclosure objective is that an insurer that applies the overlay approach shall disclose information to enable users of financial statements to understand:

1. How the total amount reclassified between profit or loss and other comprehensive income in the reporting period is calculated; and
2. The effect of that reclassification on the financial statements.

To achieve the disclosure objective, an insurer shall disclose:

1. The fact that it is applying the overlay approach.
2. The carrying amount at the end of the reporting period of financial assets to which the insurer applies the overlay approach by class of financial asset.
3. The basis for designating financial assets for the overlay approach, including an explanation of any designated financial assets that are held outside the legal entity that issues contracts within the scope of this IFRS.
4. An explanation of the total amount reclassified between profit or loss and other comprehensive income in the reporting period in a way that enables users of financial statements to understand how that amount is derived, including:
   1. The amount reported in profit or loss for the designated financial assets applying IFRS 9; and
   2. The amount that would have been reported in profit or loss for the designated financial assets if the insurer had applied IAS 39.
5. The effect of the reclassification between profit or loss and other comprehensive income on each affected line item in profit or loss.
6. If during the reporting period the insurer has changed the designation of financial assets:
   1. The amount reclassified between profit or loss and other comprehensive income in the reporting period relating to newly designated financial assets applying the overlay approach;
   2. The amount that would have been reclassified between profit or loss and other comprehensive income in the reporting period if the financial assets had not been de-designated; and
   3. The amount reclassified in the reporting period to profit or loss from accumulated other comprehensive income for financial assets that have been de-designated.

If an entity applied the overlay approach when accounting for its investment in an associate or joint venture using the equity method, the entity shall disclose the following, in addition to the information required by IFRS 12:

1. The information described above for each associate or joint venture that is material to the entity. The amounts disclosed shall be those included in the IFRS financial statements of the associate or joint venture after reflecting any adjustments made by the entity when using the equity method, rather than the entity's share of those amounts.
2. The quantitative information described above, and the effect of the reclassification on profit or loss and other comprehensive income in aggregate for all individually immaterial associates or joint ventures. The aggregate amounts:
   1. Disclosed shall be the entity's share of those amounts; and
   2. For associates shall be disclosed separately from the aggregate amounts disclosed for joint ventures.

Interaction with Other Requirements

Reclassifying an amount between profit or loss and other comprehensive income applying the overlay approach may have consequential effects for including other amounts in other comprehensive income, such as income taxes. An insurer shall apply the relevant IFRS, such as IAS 12, Income Taxes, to determine any such consequential effects.

If a first-time adopter elects to apply the overlay approach, it shall restate comparative information to reflect the overlay approach if, and only if, it restates comparative information to comply with IFRS 9.

Temporary Exemption from IFRS 9

The temporary exemption from IFRS 9, is for annual periods beginning on or after 1 January 2018. An entity that discloses the information required for this temporary exemption from IFRS 9 shall use the transitional provisions in IFRS 9 that are relevant to making the assessments required for those disclosures. The date of initial application for that purpose shall be deemed to be the beginning of the first annual period beginning on or after 1 January 2018.

The Overlay Approach

An entity shall apply the amendments, which permit insurers to apply the overlay approach to designated financial assets, when it first applies IFRS 9. An entity that elects to apply the overlay approach shall:

1. Apply that approach retrospectively to designated financial assets on transition to IFRS 9. Accordingly, for example, the entity shall recognise as an adjustment to the opening balance of accumulated other comprehensive income an amount equal to the difference between the fair value of the designated financial assets determined applying IFRS 9 and their carrying amount determined applying IAS 39.
2. Restate comparative information to reflect the overlay approach if, and only if, the entity restates comparative information applying IFRS 9.