Impracticable

It is impracticable to apply a requirement if the entity cannot apply it after making every reasonable effort to do so. ‘Impracticable’ is a high hurdle. What constitutes undue cost or effort is a matter of judgement.

In short:

IFRS definition IAS 8: Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if:

  1. the effects of the retrospective application or retrospective restatement are not determinable;
  2. the retrospective application or retrospective restatement requires assumptions about what management’s intent would have been in that period; or
  3. the retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that:
    1. provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised,
      measured or disclosed; and
    2. would have been available when the financial statements for that prior

IFRS definition IAS 1 7: Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.

The longer version

Either:

  1. Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.
  2. Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if:
    1. The effects of the retrospective application or retrospective restatement are not determinable;
    2. The retrospective application or retrospective restatement requires assumptions about what management’s intent would have been in that period; or
    3. The retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that:
      1. Provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured, or disclosed; and
      2.  Would have been available when the financial statements for that prior period were authorised for issue;

from other information.

Fair value model investments in associates in IFRS 9

When an investment in an associate is recognised initially, an investor shall measure it at the transaction price. The transaction price excludes transaction costs. At that moment the investor may elect to subsequently measure the investment in an associate at fair value through profit or loss (the fair value option).

At each reporting date, an investor shall measure its investments in associates at fair value, with changes in fair value recognised in profit or loss, using the fair valuation guidance in IFRS 13. An investor using the fair value model shall use the cost model for any investment in an associate for which it is impracticable to measure fair value reliably without undue cost or effort.

Significant judgements in applying IFRS 17

Consistent with IAS 1, IFRS 17 requires disclosure of significant judgement and changes in judgment that an entity makes in applying the standard. [IAS 1 122, IFRS 17 93] Specifically, an entity must disclose the inputs, assumptions and estimation techniques it has used, including: [IFRS 17 117]

  • Methods to measure insurance contracts within the scope of IFRS 17 and processes to estimate the inputs to those methods. Unless impracticable, an entity must also provide quantitative information about those inputs.
  • Any changes in methods and processes for estimating inputs used to measure contracts, the reason for each change, and the type of contracts affected.
  • to the extent not covered above, the approach used:
    • To distinguish changes in estimates of future cash flows arising from exercising discretion from other changes in estimates of future cash flows for contracts without direct participation features
    • To determine the risk adjustment for non-financial risk, including whether changes in the risk adjustment for non-financial risk are disaggregated into an insurance service component and an insurance finance component, or are presented in full in the insurance service result.
    • To determine discount rates
    • To determine investment components

An entity should apply IFRS 17 retrospectively from the transition date unless impracticable and: [IFRS 17 C4]

  • Identify, recognise and measure each group of insurance contracts as if IFRS 17 had always applied
  • Derecognise any existing balances that would not exist had IFRS 17 always applied
  • Recognise any resulting net difference in equity

This means the balances derecognised upon application of IFRS 17 would include balances recognised previously under IFRS 4, as well as items such as deferred acquisition costs, deferred origination costs (for investment contracts with discretionary participation features) and some intangible assets that relate solely to existing contracts. The requirement to recognise any net difference in equity means that no adjustment is made to the carrying amounts of goodwill from any previous business combination. (IFRS 17 BC374)

However, the value of contracts within the scope of IFRS 17, that were acquired in prior period business combinations or transfers, would have to be adjusted by the acquiring entity from the date of acquisition (i.e., initial recognition of the contracts) together with any intangible related to those in-force contracts.

Any intangible asset derecognised would include an intangible asset that represented the difference between the fair value of insurance contracts acquired in a business combination or transfer. It would also include a liability measured in accordance with an insurer’s previous accounting practices for insurance contracts where an insurer previously chose the option in IFRS 4 to use an expanded presentation that split the fair value of acquired insurance contracts into two components. (IFRS 4 31)

IFRS 17 does not include, unlike some other IFRS standards, a simplification for contracts that have been derecognised before transition. This is due to the inherent reliance of the model on the CSM at initial recognition of a group of contracts, combined with the long- term nature of many insurance contracts. The consequence is that full retrospective application will be impracticable in more situations because entities will not have sufficient historic information for contracts that were derecognised in the past.

Alternative transition approaches

Notwithstanding the requirement for retrospective application, as described above, if it is impracticable (as defined in IAS 8) to apply IFRS 17 retrospectively for a group of insurance contracts, an entity must apply one of two alternative approaches instead: the modified retrospective approach; or the fair value approach to that group of insurance contracts.

The choice between the modified retrospective and fair value approaches is made separately for each group of insurance contracts for which it is impracticable to apply IFRS 17 retrospectively to that group. An entity is permitted to use either of these two methods, although use of the modified retrospective approach is conditional on the availability of reasonable and supportable information.

If an entity does not have reasonable and supportable information to apply the modified retrospective approach, it would have to apply the fair value approach. [IFRS 17 C8] Within the two permitted methods, there are also measurement choices available, depending on the level of prior year information.

An overview of the transition methods is illustrated below:

Decide transition method by group of contracts
Full retrospective approach under IAS 8

Full retrospective application is based on a revision of estimates for all periods after the initial recognition of a group of contracts, requiring the use of historical data.

For long-duration contracts, full retrospective application is likely to be impracticable in many cases, because an entity would have to use hindsight if some of the historical data is lacking.

Impractible
Modified retrospective approach OR Fair value approach
Insufficient reasonable and supportable information available

Impracticable

 

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