2023 IFRS® Interpretations Committee Agenda Decisions

• Financial instruments
• Insurance contracts

• Employee benefits

Guarantee over a derivative contract (IFRS 9, Financial Instruments)

Tentative: March 2023

Is a guarantee written over a derivative contract accounted for as a financial guarantee contract or a derivative?

In the fact pattern discussed by the IFRS IC, a company provides a guarantee over a derivative contract between two third parties by promising to reimburse the holder of the guarantee for the actual loss, up to the close-out amount, suffered in the event of a default by the other party. The close-out amount is determined based on a valuation of the remaining contractual cash flows of the derivative prior to default.

The IFRS IC tentatively decided not to address this question because it has neither widespread effects nor a material effect on those affected. In our view,  under IFRS Accounting Standards, a guarantee written over a derivative contract can be accounted for as a derivative. It can also be accounted for as a financial guarantee contract if it compensates the holder solely for losses arising from the debtor’s failure to make a payment when it is due and not for losses arising from market risk.

Under US GAAP, a guarantee written over a derivative contract is accounted for as a derivative because it does not meet the financial guarantee contracts scope exception.

Premiums receivable from an intermediary (IFRS 17, Insurance Contracts, and IFRS 9)

Tentative: March 2023

Does an insurer apply the requirements in IFRS 17 or IFRS 9 to premiums receivable from an intermediary?

In the fact pattern discussed by the IFRS IC, an intermediary acts as a link between an insurer and a policyholder to arrange an insurance contract between them. The insurer is obliged to provide insurance contract services, and the policyholder discharges its obligation to pay premiums once the policyholder pays in cash the premiums to the intermediary. However, the insurer will receive the premiums in cash from the intermediary at a later date. If the intermediary fails to pay the premiums to the insurer, the insurer does not have the right to recover the premiums from the policyholder or to cancel the insurance contract.

Under IFRS 17, an insurer includes in the measurement of a group of insurance contracts an estimate of all the future cash flows within the boundary of each contract in the group, including premiums receivable. However, IFRS 17 is silent on when future cash flows within the boundary of an insurance contract are removed from the measurement of a group of insurance contracts.

The IFRS IC tentatively concluded that in the fact pattern considered two views are acceptable as to when the insurer removes the premiums from the measurement of a group of insurance contracts:

1. when the cash flows are recovered or settled in cash (applying IFRS 17)—i.e. when the intermediary pays the insurer; or
2. when the cash flows are recognized as an asset or a liability (applying IFRS 9)—i.e. when the policyholder pays the intermediary.

Under both views, information about the credit risk that arises from the premiums receivable from an intermediary should be disclosed in accordance with the applicable standard.

Under US GAAP, there is no equivalent to the IFRS 17 measurement model for insurance contracts. Therefore, differences from IFRS Accounting Standards may arise in practice.

Homes and home loans provided to employees (IAS 19, Employee Benefits, and IFRS 9)

Tentative: March 2023

How does a company account for employee home ownership plans and employee home loans?

The IFRS IC considered two fact patterns.

1. A company provides its employee with a house that the company owns.  The employee pays for the house through salary deductions. The employee would forfeit the house and recover the payroll deductions, if they leave employment within the first five years of the arrangement. After five years, the employee may choose to either forfeit the house and recover the salary deduction or keep the house and pay the outstanding balance.
2. A company provides its employee with a loan to buy a house the company does not own. The loan is typically interest free and repaid by the employee through salary deductions. If the employee leaves employment at any point, the outstanding balance of the loan becomes repayable.

The IFRS IC tentatively decided not to address this question because it has neither widespread effects nor a material effect on those affected.

Under US GAAP, a company would have to evaluate the facts and circumstances to determine if there are compensatory elements that require recognition.