Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
12 February 2016Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/11Applying IFRS 9 Financial Instruments with IFRS 4 Insurance ContractsThe Hong Kong Institute of Certified Public Accountants ("HKICPA") is the only bodyauthorised by law to set and promulgate standards relating to financial reporting,auditing, and ethics for professional accountants, in Hong Kong. The HKICPAwelcomes the opportunity to provide you with our responses to the questions raised inED/2015/11.The HKICPA appreciates the IASB's efforts in considering two optional approachesthat seek to address any issues that would arise from the misalignment of effectivedates of IFRS 9 Financial Instruments and the forthcoming insurance contractsstandard.Overall, the HKICPA considers both the deferral approach and the overlay approachare necessary to address the different circumstances and operational complexities thatmay be encountered by individual entities, as there is a diverse range of entities withinsurance activities within the scope of IFRS 4.While insurers could adopt IFRS 9 based on the existing IFRS 4, in reality, the linkagebetween the assets and liabilities for an insurance business is so intertwined thatimplementation of IFRS 9 before understanding the full requirements of theforthcoming insurance contracts standard would be challenging from an operational,accounting and reporting perspective. Hence, the HKICPA believes that there is astronger argument in providing the deferral approach for insurance entities to facilitatea well-thought out, effective and efficient implementation of both IFRS 9 and theforthcoming standard.However, the HKICPA has serious concerns that the proposed criterion outlined in thedeferral approach for the eligibility, assessment and application of the predominancetest at the reporting entity level is overly quantitative. We strongly encourage the IASBto consider more principle-based eligibility criteria for the deferral approach thatincludes qualitative as well as quantitative conditions.The HKICPA broadly supports providing both the deferral approach and the overlayapproach as options for entities in applying IFRS 9 with IFRS 4.Page 2 of 13Our responses to the questions in ED/2015/11 are outlined in detail in the Appendix.If you have any questions regarding the matters raised in this letter, please contact meor Kam Leung (kamleung@hkicpa.org.hk), Associate Director of our Standard SettingDepartment.Yours sincerely,Christina NgHead of Financial Reporting, Standard Setting DepartmentEncl.APPENDIXPage 3 of 13Overview of insurance outreach conducted in Hong KongIn forming the views of the Hong Kong Institute of Certified Public Accountants("HKICPA") on ED/2015/11, the HKICPA:
(i)
issued an Invitation to Comment on ED/2015/11 on 11 December 2015. Wereceived eight comment letters from various Hong Kong associations representingbanks, lawyers and insurers, government bodies for treasury and insolvency, thetax authority, and the Hong Kong insurance regulator. The insurance regulator,the association of banks and the federation of insurers provided substantivecomments on ED/2015/11.(ii) held a roundtable discussion on 27 January 2016. The roundtable participantscomprise five major insurers, five banks or asset management companies withinsurance operations, and four large accounting firms. IASB representativesDarrell Scott and Andrea Pryde were present at the roundtable.(iii) hosted a meeting with two buy-side analysts, one from a global assetmanagement fund and the other from a large investment bank. Darrell andAndrea were present at the meeting.(iv) sought the input of its Insurance Advisory Panel, which comprises representativesfrom the Hong Kong insurance sector and technical and industry experts from thelarge accounting firms.Most of the feedback received on ED/2015/11 from our outreach outlined above havebeen incorporated in the responses to the questions below.Overall HKICPA viewsThe HKICPA considers that the forthcoming insurance contracts standard will bringabout significant improvements to the quality of financial reporting for the insurancesector as long as the standard is principle-based, understandable andimplementable. We would therefore support the IASB in utilising the extensive inputsreceived from comment letters and over two years of outreach activities since the lastexposure draft was published, and to work towards the publication of the standard assoon as possible.The HKICPA also considers IFRS 9 Financial Instruments to be a major improvementto IAS 39 Financial Instruments: Recognition and Measurement and, ideally, wouldlike all entities to apply IFRS 9 at the same time. The HKICPA has already issuedHKFRS 9 (the equivalent of IFRS 9) which will be applicable (when it becomeseffective) to all entities in Hong Kong that apply HKFRS (the equivalent of IFRS). Indoing so, we were made aware that our insurance stakeholders in Hong Kong havesignificant concerns about the possible negative implications that would arise from thedifferent effective dates of IFRS 9 and the forthcoming insurance contracts standard.APPENDIXPage 4 of 13We have considered the feedback received from our stakeholders in relation toED/2015/11 and it is evident that the impact of the accounting mismatches described inED/2015/11 affects those stakeholders that issue contracts under IFRS 4 in varyingdegrees.While insurers could adopt IFRS 9 based on the existing IFRS 4, the linkage betweenthe assets and liabilities for an insurance business is so intertwined thatimplementation of IFRS 9 before understanding the full requirements of theforthcoming insurance standard would be challenging from an operational, accountingand reporting perspective.Based on this feedback, the HKICPA concluded that the proposed temporaryexemption to defer IFRS 9 ("deferral approach") would be necessary for insuranceentities to facilitate a well-thought out, effective and efficient implementation of bothIFRS 9 and the forthcoming new insurance contracts standard. We also consider thatit would be appropriate to permit the deferral approach to be applied by entities belowthe reporting entity level. In addition, the eligibility criteria should be principle-basedand should consider a wide-range of factors.The HKICPA also considers the overlay approach may be helpful for standaloneentities within a banking or asset management group, that do not qualify for thedeferral approach, but nonetheless issue insurance contracts.In light of the above considerations, on balance, we are more inclined to supportproviding, as options in applying IFRS 9 with IFRS 4, both the deferral approach andoverlay approach.The HKICPA also considers that the proposed presentation and disclosurerequirements would be able to assist the users of financial statements in the interim.While we do encourage the IASB to take into consideration the suggestions inQuestions 2, 3 and 4, we believe that this should be balanced with the generalprinciple outlined in IAS 1 Presentation of Financial Statements that permits entities todetermine the presentation that is most relevant to an understanding of the entity'sfinancial performance.APPENDIXPage 5 of 13Summary of responses to questions in ED/2015/11Summary of outreach feedback on Question 1All of our respondents agree that the IASB should address the concerns outlined inparagraphs BC9 – BC21 of ED/2015/11 as it will help avoid any negative implicationsthat would be caused by the misalignment of the effective dates of IFRS 9 and of theforthcoming new insurance contracts standard. This is consistent with the view of theHKICPA.APPENDIXPage 6 of 13Summary of outreach feedback on Question 2Most, if not all, of our respondents agree that both an overlay approach and a deferralapproach should be permitted to address the concerns in paragraphs BC9 – BC21 ofED/2015/11. Both approaches are necessary to address the different circumstancesand operational complexities that may be encountered as there is a diverse range ofentities with insurance activities within the scope of IFRS 4. This is consistent with theview of the HKICPA.Respondents from the insurance sector and practitioners were particularly in favor ofthe deferral approach over the overlay approach. The banking and asset managementsectors with insurance operations noted that both options would be useful particularlyin situations where the parent and subsidiaries have different activities (e.g. where theparent is within the banking sector and regulated as a bank, and the subsidiary iswithin the insurance sector and regulated as an insurer). In this case, the subsidiary,while having to apply IFRS 9 for the purpose of consolidated financial statements, willstill have the option when preparing its separate IFRS financial statements of applyingthe overlay approach to be more consistent with its parent, or applying the deferralapproach for simplicity in its standalone accounts.These respondents consider that both the overlay approach and deferral approachwould lead to additional costs. However, they think that these additional costs wouldbe justified if using either approaches would help them better explain their financialinformation as a result of the misalignment of the effective dates.The analysts commented that the ideal situation is for both standards to be applied atthe same time to minimize any accounting mismatch between assets and liabilities.However, given the circumstances, they can support, and understand the need for,both approaches considering the diverse range of business segments within areporting entity. If the IASB were to proceed with the overlay approach, the analystsrequest that the IASB standardizes the presentation format and the description of keyitems under both approaches to ease any further reporting incomparability.APPENDIXPage 7 of 13Summary of outreach feedback on Question 3Those who may be likely to apply the overlay approach in Hong Kong are banks orasset management companies with insurance operations (collectively, "bankingsector"). These entities told us that they are still evaluating the impact and effect of theoverlay approach and no firm decision has been made yet for its use, in the event itbecomes part of IFRS 4. Some insurance entities and some practitioners commentedthat they do not believe that the overlay approach provides a practical solution as itsdrawbacks relating to increased implementation costs ahead of assessing the fullimplications of the forthcoming insurance contracts standard would outweigh anybenefits from reduced accounting mismatches or lowered temporary volatility.The HKICPA acknowledges that while insurers could adopt IFRS 9 based on theexisting IFRS 4 by using the overlay approach, in reality, the linkage between theassets and liabilities for an insurance business is so intertwined that implementation ofIFRS 9 before understanding the full requirements of the forthcoming insurancecontracts standard would be challenging from an operational, accounting and reportingperspective. Hence, the HKICPA believes that there is a stronger argument inproviding the deferral approach for insurance entities to facilitate a well-thought out,effective and efficient implementation of both IFRS 9 and the forthcoming standard.(a) Eligibility of assets for the overlay approachThe analysts and practitioners generally agreed with the IASB proposals relating to theeligibility of assets for the overlay approach.Respondents from the banking sector generally agreed with the proposal in paragraph35B(a) of ED/2015/11 to designate assets to which the overlay approach can beapplied, but recommended:
(i)
refining the eligibility requirements for the determination of qualified financialassets designated as relating to contracts that are within the scope of IFRS 4. AAPPENDIXPage 8 of 13financial asset does not usually have a one-to-one relationship with an insurancecontract, so the value of the asset may not be exactly equal to the insuranceliability. Therefore, there may be an opportunity for entities applying the overlayapproach to deliberately designate a greater value of assets associated with theinsurance contract than it would be justified under a more precise designationbasis.(ii) adding substantiation requirements for financial assets transferred betweeninsurance and non-insurance business segments so that it is challenging forentities to change the designation of their financial assets to achieve a favorableaccounting outcome.To this point, some practitioners are of the view that refining the eligibility requirementsfor the determination of qualified financial assets would be impractical. This is becausesurplus assets are often held to meet regulatory or rating agency requirements, overand above those held to directly support contracts in the scope of IFRS 4 .Furthermore, some practitioners emphasized that the current proposed requirementsare already adequate and that there is no need to add further substantiationrequirements for the transfer of financial assets between business segments.The HKICPA did not receive any comments on the proposal in paragraph 35B(b) ofED/2015/11, but we believe that this is a sensible requirement for eligibility.(b) Presentation for amounts reclassified from profit or loss to other comprehensiveincomeMost, if not all, of our respondents generally agreed with the proposed presentation ofthe reclassified amounts.The analysts emphasized that the IASB should standardize the presentation formatand the description of key items. They also urge that the presentation of thereclassification on the face of the Statement of Comprehensive Income should besimple and, if possible, presented as a one line item. Details relating to thereclassification should be provided in the notes.APPENDIXPage 9 of 13Summary of outreach feedback on Question 4Entities that are likely to qualify for the use of the deferral approach are those whosemain business, as a single entity and/or as a group, is to issue contracts within thescope of IFRS 4. We understand that some group reporting entities whose mainbusiness is issuing insurance policies (including those that are investment-linkedand/or unit-linked) may not qualify for the deferral approach because of the 75% hurdleimplied by the predominance test.All respondents emphasized that the IASB should consider more principle-basedeligibility criteria for the deferral approach that includes quantitative as well asqualitative conditions.The HKICPA agrees with its respondents that the eligibility and assessment of thedeferral approach at the reporting entity level should be principle-based with qualitativeconsiderations included. This is so that each company can make an accurateassessment of predominance within the diverse range of circumstances specific toindividual entities. While we consider that entities which are regulated by a localinsurance regulator could be regarded as a sensible qualitative factor as it would alignthe regulatory and accounting identification of insurers, we also acknowledge thatadding this as a qualitative factor would not solve the accounting mis-match thatED/2015/11 is trying to address.APPENDIXPage 10 of 13Overall, the HKICPA strongly encourages the IASB to consider more principle-basedeligibility criteria for the deferral approach that includes qualitative as well asquantitative conditions. We are aware that the larger accounting firms as well as someinsurance entities will be providing some alternative approaches in response toQuestions 4(a) to 4(c) below, as well as quantitative and qualitative factors for theIASB’s consideration. We have not formed a view on any of those alternativeapproaches yet.(a) Eligibility for the deferral approach based on IFRS 4 definition of insurancecontractsThe Hong Kong insurance regulator, some insurance entities and some practitionerscommented that there are a number of insurers in Hong Kong that issue investment-linked and/or unit-linked insurance policies which may not qualify as insurancecontracts liabilities under IFRS 4. However, these entities are subject to the sameinsurance regulation as 'pure' insurance entities. They therefore would not be opposedto expanding the eligibility of entities applying the deferral approach to all entities thatare regulated by the insurance regulator in Hong Kong. For example, this would meanthat in applying the predominance test to a consolidated group, all liabilities from legalentities regulated as insurers should qualify (not only those liabilities relating tocontracts within the scope of IFRS 4). In this case, liabilities from banking or othernon-insurance subsidiaries within the group would continue to be excluded from thenumerator of the liabilities test. Similarly, the analysts we reached out to alsoemphasized the need to align the regulatory and accounting identification of insurers.However, some practitioners emphasized that regulation by a local insurance regulatorshould not be a qualitative factor. This is because insurance liabilities related toinvestment-linked contracts are already measured at fair value through profit or lossand do not cause the accounting mis-match that ED/2015/11 is trying to address.(b) Assessment of the predominance test hurdleRespondents who were in favor of the deferral approach generally support thepredominance assessment by way of a liabilities test as described in paragraph 20Cand BC62 – BC66 of ED/2015/11. However, as commented in the overall response toQuestion 4, all respondents and the HKICPA believe that the IASB should considermore principle-based eligibility criteria for the deferral approach.In addition, respondents from the banking sector commented that if the IASB has nointention to provide a specific quantitative threshold in the predominant assessment,the IASB should remove the example in paragraph BC65 (i.e. the 75% hurdle) to allowfor a more principle-based application of the predominance test. If it is the IASB’sintention to require a specific quantitative threshold, the example should be included inthe main content of the Standard. The HKICPA agrees with this suggestion.APPENDIXPage 11 of 13With respect to the liabilities test, the majority of respondents questioned whether it isappropriate for the denominator to be the entity's total liabilities. Some of them gaveexamples of liabilities which are not fully representative of the underlying businessoperations. For example:
(i)
debt financing is more representative of the entity's funding and capitalstructure, and not indicative of its business operations, and(ii)
pension obligations and tax obligations which are also not indicative of theentity's business activities.The analysts agreed that considering an entity's liabilities would be a good startingpoint for the predominance test but did not agree nor disagree with using total liabilitiesas the denominator.(c) The predominance test at the reporting entity levelIn general, our respondent's preference is to apply the predominance test below thereporting entity level. If the IASB proceeds in its proposal to apply the predominancetest at the reporting entity level, then our respondents see merit in reconsidering thequantitative threshold and to add qualitative factors for consideration when assessingpredominance. As mentioned above in the overall response to Question 4, allrespondents and the HKICPA would prefer a principle-based application of thepredominance test.Respondents from the insurance sector (particularly those that are subsidiaries of largemultinational insurers) are in favor of the deferral approach on a reporting entity level.This is mainly to eliminate the additional operational and reporting complexities andcosts.Respondents from the banking sector consider that the predominance test should beperformed below the reporting entity level as it would more accurately reflect the truesubstance of their operations. Under the current proposals, an insurance subsidiaryheld by a banking parent entity will have to prepare another set of financial statementsunder IFRS 9 for its parent's consolidated financial statements, regardless of whether itchooses to apply the deferral approach at the stand-alone level for simplicity.Therefore, it makes choosing the deferral approach a moot point for the subsidiary andindirectly increases implementation costs and efforts for that subsidiary as compared toits peers in the industry sector. These respondents also commented that if the IASB'skey concern with applying the predominance test below the reporting entity levelrelates to the possibility of manipulating the deferral and managing earnings bytransferring assets between related parties within a group, this could be addressed byadding restrictions and requirements for asset reclassifications among related parties.APPENDIXPage 12 of 13The analysts agreed with using a liability test as the general approach to assesspredominance. They also broadly agreed with applying the predominance test at thereporting entity level and think that the proposed disclosures under the deferralapproach would be an improvement from disclosures currently provided.The analysts further commented that, in an ideal situation, the financial statements ofinsurers should be highly comparable and consistent. However, the analystsacknowledge the difficulty for entities to move from IAS 39 to IFRS 9 withoutunderstanding the full implications of the forthcoming insurance contracts standards tobe issued. Given this misalignment in effective dates, they commented that for theinterim period they would not be opposed to a group entity consisting of 50% insuranceoperations and 50% banking/asset management operations applying the deferralapproach at the reporting entity level.The analysts re-emphasized that clear and effective communication about theimplications arising from the misalignment in effective dates to users of financialstatements should be required in financial reports.Summary of outreach feedback on Question 5(a) Optional approachesThe majority of our respondents including our insurance regulator supports providingthe overlay and deferral approaches as optional so that companies can assess whichapproach is a better fit for their circumstances. The HKICPA agrees with this proposal.APPENDIXPage 13 of 13(b) Timing of approachesNo major issue was raised surrounding the proposal to allow entities to stop applyingthe overlay or deferral approaches from the beginning of any annual reporting periodbefore the new insurance contracts standard is applied. The HKICPA also does nottake any issue.Summary of outreach feedback on Question 6Some of our respondents do not support having an expiry date on the deferralapproach for the time being. These respondents would prefer that the expiry date isset when the forthcoming insurance standard is issued.Other respondents commented that the IASB could address this issue by clarifying inthe draft standard or the amendments to IFRS 4 that the IASB will revisit the timing ofthe sunset clause if the issuance of the forthcoming insurance contracts standard isdelayed. The HKICPA would support this approach.
IASB Exposure Draft ED/2015/11 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
下载原件Page 1 of 13Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
12 February 2016Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/11Applying IFRS 9 Financial Instruments with IFRS 4 Insurance ContractsThe Hong Kong Institute of Certified Public Accountants ("HKICPA") is the only bodyauthorised by law to set and promulgate standards relating to financial reporting,auditing, and ethics for professional accountants, in Hong Kong. The HKICPAwelcomes the opportunity to provide you with our responses to the questions raised inED/2015/11.The HKICPA appreciates the IASB's efforts in considering two optional approachesthat seek to address any issues that would arise from the misalignment of effectivedates of IFRS 9 Financial Instruments and the forthcoming insurance contractsstandard.Overall, the HKICPA considers both the deferral approach and the overlay approachare necessary to address the different circumstances and operational complexities thatmay be encountered by individual entities, as there is a diverse range of entities withinsurance activities within the scope of IFRS 4.While insurers could adopt IFRS 9 based on the existing IFRS 4, in reality, the linkagebetween the assets and liabilities for an insurance business is so intertwined thatimplementation of IFRS 9 before understanding the full requirements of theforthcoming insurance contracts standard would be challenging from an operational,accounting and reporting perspective. Hence, the HKICPA believes that there is astronger argument in providing the deferral approach for insurance entities to facilitatea well-thought out, effective and efficient implementation of both IFRS 9 and theforthcoming standard.However, the HKICPA has serious concerns that the proposed criterion outlined in thedeferral approach for the eligibility, assessment and application of the predominancetest at the reporting entity level is overly quantitative. We strongly encourage the IASBto consider more principle-based eligibility criteria for the deferral approach thatincludes qualitative as well as quantitative conditions.The HKICPA broadly supports providing both the deferral approach and the overlayapproach as options for entities in applying IFRS 9 with IFRS 4.Page 2 of 13Our responses to the questions in ED/2015/11 are outlined in detail in the Appendix.If you have any questions regarding the matters raised in this letter, please contact meor Kam Leung (kamleung@hkicpa.org.hk), Associate Director of our Standard SettingDepartment.Yours sincerely,Christina NgHead of Financial Reporting, Standard Setting DepartmentEncl.APPENDIXPage 3 of 13Overview of insurance outreach conducted in Hong KongIn forming the views of the Hong Kong Institute of Certified Public Accountants("HKICPA") on ED/2015/11, the HKICPA:
(i)
issued an Invitation to Comment on ED/2015/11 on 11 December 2015. Wereceived eight comment letters from various Hong Kong associations representingbanks, lawyers and insurers, government bodies for treasury and insolvency, thetax authority, and the Hong Kong insurance regulator. The insurance regulator,the association of banks and the federation of insurers provided substantivecomments on ED/2015/11.(ii) held a roundtable discussion on 27 January 2016. The roundtable participantscomprise five major insurers, five banks or asset management companies withinsurance operations, and four large accounting firms. IASB representativesDarrell Scott and Andrea Pryde were present at the roundtable.(iii) hosted a meeting with two buy-side analysts, one from a global assetmanagement fund and the other from a large investment bank. Darrell andAndrea were present at the meeting.(iv) sought the input of its Insurance Advisory Panel, which comprises representativesfrom the Hong Kong insurance sector and technical and industry experts from thelarge accounting firms.Most of the feedback received on ED/2015/11 from our outreach outlined above havebeen incorporated in the responses to the questions below.Overall HKICPA viewsThe HKICPA considers that the forthcoming insurance contracts standard will bringabout significant improvements to the quality of financial reporting for the insurancesector as long as the standard is principle-based, understandable andimplementable. We would therefore support the IASB in utilising the extensive inputsreceived from comment letters and over two years of outreach activities since the lastexposure draft was published, and to work towards the publication of the standard assoon as possible.The HKICPA also considers IFRS 9 Financial Instruments to be a major improvementto IAS 39 Financial Instruments: Recognition and Measurement and, ideally, wouldlike all entities to apply IFRS 9 at the same time. The HKICPA has already issuedHKFRS 9 (the equivalent of IFRS 9) which will be applicable (when it becomeseffective) to all entities in Hong Kong that apply HKFRS (the equivalent of IFRS). Indoing so, we were made aware that our insurance stakeholders in Hong Kong havesignificant concerns about the possible negative implications that would arise from thedifferent effective dates of IFRS 9 and the forthcoming insurance contracts standard.APPENDIXPage 4 of 13We have considered the feedback received from our stakeholders in relation toED/2015/11 and it is evident that the impact of the accounting mismatches described inED/2015/11 affects those stakeholders that issue contracts under IFRS 4 in varyingdegrees.While insurers could adopt IFRS 9 based on the existing IFRS 4, the linkage betweenthe assets and liabilities for an insurance business is so intertwined thatimplementation of IFRS 9 before understanding the full requirements of theforthcoming insurance standard would be challenging from an operational, accountingand reporting perspective.Based on this feedback, the HKICPA concluded that the proposed temporaryexemption to defer IFRS 9 ("deferral approach") would be necessary for insuranceentities to facilitate a well-thought out, effective and efficient implementation of bothIFRS 9 and the forthcoming new insurance contracts standard. We also consider thatit would be appropriate to permit the deferral approach to be applied by entities belowthe reporting entity level. In addition, the eligibility criteria should be principle-basedand should consider a wide-range of factors.The HKICPA also considers the overlay approach may be helpful for standaloneentities within a banking or asset management group, that do not qualify for thedeferral approach, but nonetheless issue insurance contracts.In light of the above considerations, on balance, we are more inclined to supportproviding, as options in applying IFRS 9 with IFRS 4, both the deferral approach andoverlay approach.The HKICPA also considers that the proposed presentation and disclosurerequirements would be able to assist the users of financial statements in the interim.While we do encourage the IASB to take into consideration the suggestions inQuestions 2, 3 and 4, we believe that this should be balanced with the generalprinciple outlined in IAS 1 Presentation of Financial Statements that permits entities todetermine the presentation that is most relevant to an understanding of the entity'sfinancial performance.APPENDIXPage 5 of 13Summary of responses to questions in ED/2015/11Summary of outreach feedback on Question 1All of our respondents agree that the IASB should address the concerns outlined inparagraphs BC9 – BC21 of ED/2015/11 as it will help avoid any negative implicationsthat would be caused by the misalignment of the effective dates of IFRS 9 and of theforthcoming new insurance contracts standard. This is consistent with the view of theHKICPA.APPENDIXPage 6 of 13Summary of outreach feedback on Question 2Most, if not all, of our respondents agree that both an overlay approach and a deferralapproach should be permitted to address the concerns in paragraphs BC9 – BC21 ofED/2015/11. Both approaches are necessary to address the different circumstancesand operational complexities that may be encountered as there is a diverse range ofentities with insurance activities within the scope of IFRS 4. This is consistent with theview of the HKICPA.Respondents from the insurance sector and practitioners were particularly in favor ofthe deferral approach over the overlay approach. The banking and asset managementsectors with insurance operations noted that both options would be useful particularlyin situations where the parent and subsidiaries have different activities (e.g. where theparent is within the banking sector and regulated as a bank, and the subsidiary iswithin the insurance sector and regulated as an insurer). In this case, the subsidiary,while having to apply IFRS 9 for the purpose of consolidated financial statements, willstill have the option when preparing its separate IFRS financial statements of applyingthe overlay approach to be more consistent with its parent, or applying the deferralapproach for simplicity in its standalone accounts.These respondents consider that both the overlay approach and deferral approachwould lead to additional costs. However, they think that these additional costs wouldbe justified if using either approaches would help them better explain their financialinformation as a result of the misalignment of the effective dates.The analysts commented that the ideal situation is for both standards to be applied atthe same time to minimize any accounting mismatch between assets and liabilities.However, given the circumstances, they can support, and understand the need for,both approaches considering the diverse range of business segments within areporting entity. If the IASB were to proceed with the overlay approach, the analystsrequest that the IASB standardizes the presentation format and the description of keyitems under both approaches to ease any further reporting incomparability.APPENDIXPage 7 of 13Summary of outreach feedback on Question 3Those who may be likely to apply the overlay approach in Hong Kong are banks orasset management companies with insurance operations (collectively, "bankingsector"). These entities told us that they are still evaluating the impact and effect of theoverlay approach and no firm decision has been made yet for its use, in the event itbecomes part of IFRS 4. Some insurance entities and some practitioners commentedthat they do not believe that the overlay approach provides a practical solution as itsdrawbacks relating to increased implementation costs ahead of assessing the fullimplications of the forthcoming insurance contracts standard would outweigh anybenefits from reduced accounting mismatches or lowered temporary volatility.The HKICPA acknowledges that while insurers could adopt IFRS 9 based on theexisting IFRS 4 by using the overlay approach, in reality, the linkage between theassets and liabilities for an insurance business is so intertwined that implementation ofIFRS 9 before understanding the full requirements of the forthcoming insurancecontracts standard would be challenging from an operational, accounting and reportingperspective. Hence, the HKICPA believes that there is a stronger argument inproviding the deferral approach for insurance entities to facilitate a well-thought out,effective and efficient implementation of both IFRS 9 and the forthcoming standard.(a) Eligibility of assets for the overlay approachThe analysts and practitioners generally agreed with the IASB proposals relating to theeligibility of assets for the overlay approach.Respondents from the banking sector generally agreed with the proposal in paragraph35B(a) of ED/2015/11 to designate assets to which the overlay approach can beapplied, but recommended:
(i)
refining the eligibility requirements for the determination of qualified financialassets designated as relating to contracts that are within the scope of IFRS 4. AAPPENDIXPage 8 of 13financial asset does not usually have a one-to-one relationship with an insurancecontract, so the value of the asset may not be exactly equal to the insuranceliability. Therefore, there may be an opportunity for entities applying the overlayapproach to deliberately designate a greater value of assets associated with theinsurance contract than it would be justified under a more precise designationbasis.(ii) adding substantiation requirements for financial assets transferred betweeninsurance and non-insurance business segments so that it is challenging forentities to change the designation of their financial assets to achieve a favorableaccounting outcome.To this point, some practitioners are of the view that refining the eligibility requirementsfor the determination of qualified financial assets would be impractical. This is becausesurplus assets are often held to meet regulatory or rating agency requirements, overand above those held to directly support contracts in the scope of IFRS 4 .Furthermore, some practitioners emphasized that the current proposed requirementsare already adequate and that there is no need to add further substantiationrequirements for the transfer of financial assets between business segments.The HKICPA did not receive any comments on the proposal in paragraph 35B(b) ofED/2015/11, but we believe that this is a sensible requirement for eligibility.(b) Presentation for amounts reclassified from profit or loss to other comprehensiveincomeMost, if not all, of our respondents generally agreed with the proposed presentation ofthe reclassified amounts.The analysts emphasized that the IASB should standardize the presentation formatand the description of key items. They also urge that the presentation of thereclassification on the face of the Statement of Comprehensive Income should besimple and, if possible, presented as a one line item. Details relating to thereclassification should be provided in the notes.APPENDIXPage 9 of 13Summary of outreach feedback on Question 4Entities that are likely to qualify for the use of the deferral approach are those whosemain business, as a single entity and/or as a group, is to issue contracts within thescope of IFRS 4. We understand that some group reporting entities whose mainbusiness is issuing insurance policies (including those that are investment-linkedand/or unit-linked) may not qualify for the deferral approach because of the 75% hurdleimplied by the predominance test.All respondents emphasized that the IASB should consider more principle-basedeligibility criteria for the deferral approach that includes quantitative as well asqualitative conditions.The HKICPA agrees with its respondents that the eligibility and assessment of thedeferral approach at the reporting entity level should be principle-based with qualitativeconsiderations included. This is so that each company can make an accurateassessment of predominance within the diverse range of circumstances specific toindividual entities. While we consider that entities which are regulated by a localinsurance regulator could be regarded as a sensible qualitative factor as it would alignthe regulatory and accounting identification of insurers, we also acknowledge thatadding this as a qualitative factor would not solve the accounting mis-match thatED/2015/11 is trying to address.APPENDIXPage 10 of 13Overall, the HKICPA strongly encourages the IASB to consider more principle-basedeligibility criteria for the deferral approach that includes qualitative as well asquantitative conditions. We are aware that the larger accounting firms as well as someinsurance entities will be providing some alternative approaches in response toQuestions 4(a) to 4(c) below, as well as quantitative and qualitative factors for theIASB’s consideration. We have not formed a view on any of those alternativeapproaches yet.(a) Eligibility for the deferral approach based on IFRS 4 definition of insurancecontractsThe Hong Kong insurance regulator, some insurance entities and some practitionerscommented that there are a number of insurers in Hong Kong that issue investment-linked and/or unit-linked insurance policies which may not qualify as insurancecontracts liabilities under IFRS 4. However, these entities are subject to the sameinsurance regulation as 'pure' insurance entities. They therefore would not be opposedto expanding the eligibility of entities applying the deferral approach to all entities thatare regulated by the insurance regulator in Hong Kong. For example, this would meanthat in applying the predominance test to a consolidated group, all liabilities from legalentities regulated as insurers should qualify (not only those liabilities relating tocontracts within the scope of IFRS 4). In this case, liabilities from banking or othernon-insurance subsidiaries within the group would continue to be excluded from thenumerator of the liabilities test. Similarly, the analysts we reached out to alsoemphasized the need to align the regulatory and accounting identification of insurers.However, some practitioners emphasized that regulation by a local insurance regulatorshould not be a qualitative factor. This is because insurance liabilities related toinvestment-linked contracts are already measured at fair value through profit or lossand do not cause the accounting mis-match that ED/2015/11 is trying to address.(b) Assessment of the predominance test hurdleRespondents who were in favor of the deferral approach generally support thepredominance assessment by way of a liabilities test as described in paragraph 20Cand BC62 – BC66 of ED/2015/11. However, as commented in the overall response toQuestion 4, all respondents and the HKICPA believe that the IASB should considermore principle-based eligibility criteria for the deferral approach.In addition, respondents from the banking sector commented that if the IASB has nointention to provide a specific quantitative threshold in the predominant assessment,the IASB should remove the example in paragraph BC65 (i.e. the 75% hurdle) to allowfor a more principle-based application of the predominance test. If it is the IASB’sintention to require a specific quantitative threshold, the example should be included inthe main content of the Standard. The HKICPA agrees with this suggestion.APPENDIXPage 11 of 13With respect to the liabilities test, the majority of respondents questioned whether it isappropriate for the denominator to be the entity's total liabilities. Some of them gaveexamples of liabilities which are not fully representative of the underlying businessoperations. For example:
(i)
debt financing is more representative of the entity's funding and capitalstructure, and not indicative of its business operations, and(ii)
pension obligations and tax obligations which are also not indicative of theentity's business activities.The analysts agreed that considering an entity's liabilities would be a good startingpoint for the predominance test but did not agree nor disagree with using total liabilitiesas the denominator.(c) The predominance test at the reporting entity levelIn general, our respondent's preference is to apply the predominance test below thereporting entity level. If the IASB proceeds in its proposal to apply the predominancetest at the reporting entity level, then our respondents see merit in reconsidering thequantitative threshold and to add qualitative factors for consideration when assessingpredominance. As mentioned above in the overall response to Question 4, allrespondents and the HKICPA would prefer a principle-based application of thepredominance test.Respondents from the insurance sector (particularly those that are subsidiaries of largemultinational insurers) are in favor of the deferral approach on a reporting entity level.This is mainly to eliminate the additional operational and reporting complexities andcosts.Respondents from the banking sector consider that the predominance test should beperformed below the reporting entity level as it would more accurately reflect the truesubstance of their operations. Under the current proposals, an insurance subsidiaryheld by a banking parent entity will have to prepare another set of financial statementsunder IFRS 9 for its parent's consolidated financial statements, regardless of whether itchooses to apply the deferral approach at the stand-alone level for simplicity.Therefore, it makes choosing the deferral approach a moot point for the subsidiary andindirectly increases implementation costs and efforts for that subsidiary as compared toits peers in the industry sector. These respondents also commented that if the IASB'skey concern with applying the predominance test below the reporting entity levelrelates to the possibility of manipulating the deferral and managing earnings bytransferring assets between related parties within a group, this could be addressed byadding restrictions and requirements for asset reclassifications among related parties.APPENDIXPage 12 of 13The analysts agreed with using a liability test as the general approach to assesspredominance. They also broadly agreed with applying the predominance test at thereporting entity level and think that the proposed disclosures under the deferralapproach would be an improvement from disclosures currently provided.The analysts further commented that, in an ideal situation, the financial statements ofinsurers should be highly comparable and consistent. However, the analystsacknowledge the difficulty for entities to move from IAS 39 to IFRS 9 withoutunderstanding the full implications of the forthcoming insurance contracts standards tobe issued. Given this misalignment in effective dates, they commented that for theinterim period they would not be opposed to a group entity consisting of 50% insuranceoperations and 50% banking/asset management operations applying the deferralapproach at the reporting entity level.The analysts re-emphasized that clear and effective communication about theimplications arising from the misalignment in effective dates to users of financialstatements should be required in financial reports.Summary of outreach feedback on Question 5(a) Optional approachesThe majority of our respondents including our insurance regulator supports providingthe overlay and deferral approaches as optional so that companies can assess whichapproach is a better fit for their circumstances. The HKICPA agrees with this proposal.APPENDIXPage 13 of 13(b) Timing of approachesNo major issue was raised surrounding the proposal to allow entities to stop applyingthe overlay or deferral approaches from the beginning of any annual reporting periodbefore the new insurance contracts standard is applied. The HKICPA also does nottake any issue.Summary of outreach feedback on Question 6Some of our respondents do not support having an expiry date on the deferralapproach for the time being. These respondents would prefer that the expiry date isset when the forthcoming insurance standard is issued.Other respondents commented that the IASB could address this issue by clarifying inthe draft standard or the amendments to IFRS 4 that the IASB will revisit the timing ofthe sunset clause if the issuance of the forthcoming insurance contracts standard isdelayed. The HKICPA would support this approach.