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13 Oct. 2016

Limited applicability expected for amendments to AASB 4

AASB 4 Insurance Contracts has been amended by AASB 2016-6  to allow entities to modify their application of AASB 9 Financial Instruments either through the ‘overlay approach’ or by temporarily deferring AASB 9 when their activities are predominantly connected with insurance. The amendments do not apply to insurance contracts subject to AASB 1023 and AASB 1038.
Entities applying AASB 4 can elect to modify their application of AASB 9 by choosing to:

(a) apply the ‘overlay approach’ that involves applying AASB 9 and also applying AASB 139 Financial Instruments: Recognition and Measurement to eligible financial assets to calculate a single line item adjustment to profit or loss so that the overall impact on profit or loss is the same as if AASB 139 had been applied; or

(b) temporarily defer AASB 9 when their activities are predominantly connected with insurance, provided they make additional disclosures to enable users to make comparisons with insurers applying AASB 9.

The AASB expects the amendments to have very limited application in Australia as they do not apply to insurance contracts subject to AASB 1023 General Insurance Contracts and
AASB 1038 Life Insurance Contracts. Those Standards continue to apply until replaced by a new AASB Standard on insurance contracts.  AASB 1023 and AASB 1038 require financial assets backing insurance liabilities, when possible, to be measured at fair value through profit or loss.

The amendments to AASB 4 are set out in AASB 2016-6 Amendments to Australian Accounting Standards – Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts and apply to annual reporting periods beginning on or after 1 January 2018.