IASB Exposure Draft ED/2021/08 Initial Application of IFRS 17 and IFRS 9 – Comparative information

Page 1 of 5Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

27 September 2021Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure Draft ED/2021/08Initial Application of IFRS 17 and IFRS 9 – Comparative informationThe 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. We are grateful for theopportunity to provide you with our comments on this Exposure Draft (ED).We welcome the proposed classification overlay as it will improve the usefulness of thecomparative information in question and not unnecessarily disrupt the implementation ofIFRS 9 and IFRS 17.Additionally, we have some suggestions on the ED. Firstly, regarding the scope of theproposed classification overlay, we note that the scope is limited to financial assets thatare connected with insurance contracts. This differs from the scope of the temporaryexemption for IFRS 9 in IFRS 4, which applies to all financial assets and liabilities. Duringour outreach, many stakeholders suggested that the scope of the classification overlaybe extended to cover all financial assets, while a small minority strongly objected to thissuggestion for the reasons as stated in the Appendix. On balance, we consider thatextending the scope of the overlay would ease the operational burden of identifying inscope assets and would better align with the current exemption from IFRS 9 in IFRS 4.Secondly, we suggest that the IASB clarify the application of the expected credit loss(ECL) model in IFRS 9 in the context of the ED. In particular, to avoid confusion, the EDshould explicitly specify whether the application of the IFRS 9 ECL model is optional orprohibited and whether it applies on an instrument-by-instrument basis, on an assetclass basis, or for all assets subject to the classification overlay. We also suggest thatthe Board clarify whether the IAS 39 incurred loss model applies to assets subject to theoverlay for which the entity has elected not to apply the IFRS 9 ECL model.Our detailed comments are provided in the Appendix. If you have any questionsregarding the matters raised in this letter, please contact me (ceciliakwei@hkicpa.org.hk)

or Carmen Ho (carmenho@hkicpa.org.hk), Associate Director of the Standard SettingDepartment.Sincerely,Cecilia KweiDirector, Standard Setting DepartmentPage 2 of 5Work undertaken by HKICPA in forming its viewsThe HKICPA:

(i)

issued an Invitation to Comment on ED/2021/08 on 29 July 2021 to its membersand other stakeholders;

(ii) sought input from its Hong Kong Insurance Implementation Support Group andInsurance Regulatory Advisory Panel, which are mainly comprised of technical andindustry experts;

(iii) developed its views through its Financial Reporting Standards Committee, havingreflected on its stakeholder views. The Committee comprises academics, preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on IASB ED/2021/08Question: Do you agree with the proposed amendment in this Exposure Draft?Why or why not? If not, what alternative do you propose and why?Overall

1.We generally agree with the overall objective of the ED and support the proposedamendments. The ED offers a practical solution to improve information usefulnessand eliminate accounting mismatches in the comparative period upon the initialadoption of IFRS 17 and IFRS 9. The HKICPA thinks that the proposals will easeor otherwise not negatively impact the ongoing implementation activities for the twostandards, and the implementation of the proposals would:

(a) alleviate significant accounting mismatches between insurance contractliabilities (measured at current value) and related financial assets (if measuredat amortized cost) under IAS 39; and(b) if the entity restates comparative information for IFRS 9, help resolveclassification differences between financial assets derecognized in thecomparative year (to which IAS 39 will apply) and other financial assets (towhich IFRS 9 will apply).

2.The HKICPA considers the proposals will help entities to present comparativeinformation in a clear and consistent manner. The proposals will also allow forgreater alignment of the resulting information presented, enabling financialstatement users to better identify and assess changes and trends between periods.The HKICPA is hopeful that the implementation of these proposals will also reducethe need for supplementary information necessary to explain mismatches thatwould otherwise arise if entities continued to apply IAS 39 in the comparative period.

3.The HKICPA supports finalizing the ED in a timely manner. Based on the feedbackgathered from our stakeholders, we do not expect the amendments to negativelyaffect entities' ongoing implementation activities.AppendixPage 3 of 5

4.While we generally agree with the proposals in the ED, we have some suggestionson how the proposals may be improved:

(a) Extend the scope to cover all financial assets rather than only those connectedwith insurance activitiesThe scope of the classification overlay proposed in the ED is different from thescope of the temporary exemption to IFRS 9 in IFRS 4. In particular, paragraphC28E(a) of the ED prevents an entity from applying the classification overlay tofinancial assets that are not connected to insurance contracts. In contrast,paragraphs 20A and 20B in IFRS 4 allow an entity to apply the temporaryexemption to IFRS 9 to all financial assets and liabilities, subject to an insuranceentity’s activities being predominately connected to insurance.Many of our stakeholders recommended that the IASB further exploreexpanding the perimeter of the application of the classification overlay in the EDto be the same as that in the IFRS 4 temporary exemption (i.e. at a reportingentity level). These stakeholders suggested that the operational burden wouldbe minimized if insurers do not need to separately identify out-of-scope financialassets. In addition, the proposed scope could create inconsistencies inpresentation for financial assets related to insignificant banking or assetmanagement activities at the consolidated reporting entity level of an entity withpredominantly insurance activities. These stakeholders also noted that the ED’sproposals are developed in the context of providing relief to entities that areapplying the temporary exemption from IFRS 9 in IFRS 4, and hence it makessense to have a scope consistent with that temporary exemption.However, a small minority of our stakeholders agreed with the scope of theoverlay as proposed in the ED, which is to avoid accounting mismatchesbetween only insurance contract liabilities and related financial assets. Theserespondents are of the view that the overlay should not be made available to,for example, an insurer with a banking business to restate comparatives for thebanking business’s financial assets under IFRS 9 without having to apply theIFRS 9 impairment model as the ECL model is considered to be optional forassets subject to the overlay approach based on the ED’s current drafting (seebelow). These stakeholders also considered that it should not be operationallychallenging for entities to identify in-scope assets. As noted in BC19 of the ED,entities should be familiar with identifying assets connected with insurancecontracts as this is already a requirement in paragraph C29(a) of IFRS 17.Moreover, it is likely that only assets that arise under a different business model(i.e., a banking business) will be ineligible under the ED’s proposals, and theseshould already be segregated.We broadly agree with many of our stakeholders and think that the IASB shouldfurther explore aligning the scope of the classification overlay in the ED to bethe same as that in the IFRS 4 temporary exemption (i.e., at a reporting entitylevel, hence for entities whose activities are predominately connected withinsurance), as we think that this may ease the operational difficulty of identifyingin-scope financial assets and promote comparable and consistent presentationof all financial assets. Nevertheless, we acknowledge the concerns raised by asmall majority of our stakeholders above. Therefore, we suggest that the IASBconsider these when taking into account cost-benefit considerations anddetermining what is most useful for financial statement users.Page 4 of 5(b) Clarify the application of the IFRS 9 impairment modelWe welcome the proposal in the ED that entities can, but are not required to,apply the ECL requirements in IFRS 9 to financial assets subject to the overlaymodel given that this could disrupt implementation activities.Nevertheless, we suggest that the ED explicitly clarify the application of theIFRS 9 impairment requirements in two respects:

(1)Whether it is optional or prohibitedED paragraphs BC15, BC23, and C28C state that an entity is not or wouldnot be required to apply the impairment requirements in IFRS 9, as entitiesmay not be prepared to do so and it would cause a significant burden toentities. However, the requirements in ED are somewhat confusing whencompared to the text in the May IASB agenda paper 2. For instance,paragraphs 23-25 of the May IASB paper explain the challenges of applyingthe IFRS 9 impairment model in this situation and paragraph 37 and thetable in Appendix C also indicate that entities would continue to apply theincurred loss model under IAS 39 even if the classification overlay has beenapplied.Given the above, we recommend that the IASB clarifies whether the IFRS 9impairment model is optional or prohibited.It may also be worth clarifying whether the IAS 39 incurred loss model mustbe applied to assets subject to the overlay approach if the IFRS 9 ECL modelis indeed optional under this approach. This will have an impact to interimfinancial statements (as the assets subject to the overlay approach will havebeen derecognised at the date of initial application of IFRS 17). For example,if a debt instrument measured at FVTPL under IAS 39 would be classifiedas FVTOCI under IFRS 9 in terms of the overlay approach, is the entityrequired to determine impairment loss for the debt instrument in thecomparative period? Bearing in mind that such an assessment would haveno impact on the date of initial application of IFRS 9/17, we would suggestthe Board consider the cost-benefits of such an application.

(2)Whether it is on an instrument-by-instrument basis or entity-level accountingpolicy choiceWe noted that it is currently unclear as to whether the application of the IFRS9 impairment test would be applied on an instrument-by-instrument basis orwhether it is an entity-wide accounting policy choice. Some of ourstakeholders suggested that the ECL model be applied as an entity-wideaccounting policy choice to ensure consistency. Others suggested aninstrument-by-instrument election as an entity-wide policy choice mightdiscourage entities from applying the ECL requirements at all due tocomplexity in applying the ECL model to some assets subject to the overlaywhen ECL information is readily available for the majority of the other assetssubject to the overlay.Page 5 of 5Other suggestions from stakeholders

5.Some of our stakeholders raised other suggestions on the ED. We have includedthese suggestions below.(a) Providing additional disclosures

(1)Disclose whether IFRS 9 impairment requirements have been appliedThese stakeholders considered that application of IFRS 9 impairment isoptional under the ED. Accordingly, these stakeholders suggest disclosuresto help users of financial statements understand whether entities haveselected this option and, if the option is on an instrument-by-instrument basis,to which assets it has been applied.

(2)Disclose to which financial assets the classification overlay has been appliedSome stakeholders believe that this would make the comparative period’sinformation more understandable.However, we also note that a primary feature of the ED is that it is designed notto disrupt implementation, and some stakeholders stated that additionaldisclosures could disincentivize the use of the proposals, which could reducetheir value. Hence, we suggest the IASB take due care in considering whetherto add additional disclosure requirements.(b) Extending the scope of the classification overlay to entities that have adoptedIFRS 9The proposals in the ED are not applicable to entities that have already appliedIFRS 9 before the initial application of IFRS 17. A couple of stakeholders whoare currently applying IFRS 9 considered that accounting mismatches may arisefrom assets derecognised during the comparative period in their case. This isbecause while IFRS 17 provides an option to redesignate financial assets oninitial application (IFRS 17 paragraphs C29-C33) that option refers to IFRS 9’stransition requirements with regard to the restatement of prior period information,and as a result, cannot be applied to financial assets derecognised during thecomparative period. These entities noted that such mismatches would primarilyrelate to financial assets currently measured at amortised cost under IFRS 9 butwhich are expected to move to a fair value measurement, or to equityinstruments currently measured at fair value through other comprehensiveincome which are expected to move to fair value through profit or lossmeasurement.The HKICPA acknowledges the stakeholders’ concerns above; however, wenote again that the proposals in the ED are narrow in scope and specificallydesigned around issues that arise when entities first apply IFRS 17 and IFRS 9at the same time. We hence suggest that the IASB take care of introducingunintended consequences or disrupting timely publication and implementationof the ED’s proposals when considering this suggestion.~ End ~