Amendments to AASB 1038Amendments to AASB 1038

Amendments to AASB 1038

56 In paragraphs 10.2, 10.5, 10.5.1, 10.6, 10.6.1, 10.7, 10.7.1 and 10.7.2, the references to ‘AASB 139’ are replaced with ‘AASB 9’.

57 Paragraphs 2.2.1, 10.2.1 and 10.2.2 are amended, and paragraph 19.4 is added as follows:

2.2.1 AASB 9 Financial Instruments requires hybrid contracts that contain financial asset hosts to be classified and measured in their entirety in accordance with the requirements in paragraphs 4.1-4.5 of that Standard. However, AASB 139 Financial Instruments: Recognition and Measurement requires an entity to separate some embedded derivatives from their host contract where the host contract is outside the scope of AASB 9., Such instruments are measured them at fair value and include changes in their fair value are included in the statement of comprehensive income. AASB 9 and AASB 139 applyies to derivatives embedded in a life insurance contract unless the embedded derivative is itself a life insurance contract.

10.2.1 An insurer applies AASB 139 to its financial assets. Under AASB 139 a financial asset is classified and measured at fair value through profit or loss when is a financial asset that meets either of the following conditions:

(a) it is classified as held for tradingdoes not meet the criteria specified in paragraph 4.2 of AASB 9 to be classified at amortised cost; or

(b) it is designated as “at fair value through profit or loss” upon initial recognition in accordance with paragraph 4.5 of AASB 9. An entity may use this designation when it is a contract with an embedded derivative and paragraph 11A of AASB 139 allows the entity to measure the contract as “at fair value through profit or loss”; or when doing so results in more relevant information, because either:

(i) it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or

(ii) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity’s key management personnel (as defined in AASB 124 Related Party Disclosures), for example the entity’s board of directors and chief executive officer.

AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards permits entities to designate financial assets as “at fair value through profit or loss” on first application of the Standard.

10.2.2 The view adopted in this Standard is that, in all but rare cases, financial assets within the scope of AASB 139 that back life insurance liabilities or life investment contract liabilities are permitted to be measured at fair value through profit or loss under AASB 139. This is because the measurement of life insurance liabilities under this Standard incorporates current information and measuring the financial assets backing these life insurance liabilities at fair value eliminates or significantly reduces a potential measurement inconsistency which would arise if the assets were classified as available for sale orand measured at amortised cost. In addition, under AASB 139, a group of financial assets may be designated as at fair value through profit or loss where it is both managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy. In the vast majority of cases, financial assets backing life investment contract liabilities and financial assets backing life insurance liabilities would be managed and their performance would be evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.