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BASIS FOR CONCLUSIONS ON IFRS 4 ISSUES RELATED TO IAS 39: International Financial Reporting Standards (IFRS) is the accounting standard used in over 100 countries, although not the United States. As the global economy expands, the U.S. is considering a convergence with IFRS to achieve a uniform international accounting standard. The shift to a single standard is likely for publicly-held companies in the near future. Although the goal of convergence is to achieve uniform financial reporting standards worldwide, the transition to IFRS will not be without conflicts. One major difference between IFRS and generally accepted accounting principles (GAAP) in the U.S. is how details are treated.

When it comes to details, the entire guidance for IFRS fits into a single book roughly two inches thick. The GAAP rules fill three volumes totaling over eight inches. GAAP provides much more in the way of rules, restrictions, interpretations and exceptions than IFRS, which is principles-based.

Of interest to many prospective users of IFRS is the tax impact of this international change. The concepts that need to be addressed initially include tax accounting methods, FASB Interpretation No. (FIN) 48 and IAS 12. Many more topics will eventually require consideration, but information is gradually unfolding during this investigative process involved with convergence.

Once book accounting methods are changed, the impact on tax accounting methods requires consideration. For example, in cases in which book and tax methods are currently the same, if IFRS changes the book treatment, what happens to the existing tax method? How do you continue to use historical tax methods? Should tax conform to book methods? Will a request for a change in accounting method be necessary, requiring filing Form 3115? Will information be available to compute book/tax differences? Which method is acceptable for tax purposes? The answers to these questions will have a major impact on the preparation of tax returns.

Once these questions are answered on a federal level, all states imposing a corporate level tax may have their own interpretation of acceptable reporting methods. Multistate corporations may be faced with many adjustments to be made on a state and local level that could exceed the complication at the federal level.

To date, some of the differences in accounting methods noted include the disallowance of the last-in-first-out (LIFO) inventory method, valuations of property, plant and equipment for depreciation purposes, purchase price accounting and capitalization methods. As many differences also impact revenue recognition, FASB is attempting to consolidate the current 25 different industry-specific rules into one general standard, in anticipation of the convergence to IFRS.


As most taxing jurisdictions around the world are not currently planning to adopt IFRS, companies in transition to the proposed worldwide standards will generally be impacted by the measurement and recognition of deferred taxes. Due to the significant tax consequences involved, any planned business combinations or major initiatives or products should be thoroughly reviewed in light of the anticipated changes presented by a convergence with IFRS standards. All tax planning strategies should be evaluated for consistency with the new rules before implementation.

As the Securities and Exchange Commission (SEC) continues to advance on its “Roadmap” to convergence, expect more guidance to be available as the convergence process continues.

BASIS FOR CONCLUSIONS ON IFRS 4 ISSUES RELATED TO IAS 39: The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts. In particular, this IFRS requires:

  1. limited improvements to accounting by insurers for insurance contracts.
  2. disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.


An entity shall apply this IFRS to:

  1. insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
  2. financial instruments that it issues with a discretionary participation feature (see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires disclosure about financial instruments, including financial instruments that contain such features.

This IFRS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 and IFRS 9 Financial Instruments), except in the transitional.

An entity shall not apply this IFRS to:

  1. product warranties issued directly by a manufacturer, dealer or retailer .
  2. employers’ assets and liabilities under employee benefit plans  and retirement benefit obligations reported by defined benefit retirement plans .
  3. contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item , as well as a lessee’s residual value guarantee embedded in a finance lease.
  4. financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.
  5. contingent consideration payable or receivable in a business combination .
  6. direct insurance contracts that the entity holds. However, a decant shall apply this IFRS to reinsurance contracts that it holds.

For ease of reference, this IFRS describes any entity that issues an insurance contract as an insurer, whether or not the issuer is regarded as an insurer for legal or supervisory purposes.

A reinsurance contract is a type of insurance contract. Accordingly, all references in this IFRS to insurance contracts also apply to reinsurance contracts.


Embedded derivatives

IFRS 9 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. IFRS 9 applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract.

As an exception to the requirements in IFRS 9, an insurer need not separate, and measure at fair value, a policyholder’s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability.

However, the requirements in IFRS 9 do apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract. Furthermore, those requirements also apply if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).

applies equally to options to surrender a financial instrument containing a discretionary participation feature.


Unbundling of deposit components

Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:

  1. unbundling is required if both the following conditions are met:
    1. the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).
    2. the insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.
  2. unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) 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. (c) unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).

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