Insurance Europe and the CFO Forum have written jointly to the European Financial Reporting Advisory Group (EFRAG) and the International Accounting Standards Board (IASB) regarding the post implementation review of International Financial Reporting Standard (IFRS) 9 — financial instruments.
Overall, the classification and measurement requirements under IFRS 9 achieve the IASB’s intended objectives. However, Europe’s insurers strongly support a change to allow recycling for equities measured at fair value through other comprehensive income (FVOCI) to help ensure that profit and loss correctly reflects financial performance for all long-term investors. Allowing the recycling of realised gains or losses to profit or loss would remove the existing accounting disadvantage for long-term equity investments for FVOCI users and further bring IFRS 9 in line with the IASB’s Conceptual Framework.
The prohibition of recycling creates the false impression that cumulative gains and losses at the time of disposal of equity instruments are not relevant or economically significant, and therefore not a part of financial performance. In fact, yields from capital gains have been larger historically than dividends and are therefore more relevant. They are also a fundamental reason for investing in equities and such long-term investments are a key element of the insurance business model.
To address previous concerns raised about impairments of equity instruments under IAS 39, insurers propose that a well-defined, robust reversible impairment model is introduced to accompany recycling for FVOCI equities which would provide clear indicators for impairment.