IAS/IFRS

1. IAS/IFRS ALAC Conference Insurers and IAS / IFRS Frank Helsloot (AXA Group Belgium) Luxembourg 23 February 2005

2. IAS - IFRS --> some principles Classification of Assets and Liabilities ---> some industry related principles Conclusions Table of Contents

3. IAS/IFRS ALAC Conference IAS - IFRS Some principles

4. Framework IAS (International Accounting Standard) SIC (Standard Interpretations Committee) IFRS (International Financial Reporting Standard) Standard Implementation Guidance Basis for Conclusions Exposure Draft (Standard in preparation) IAS / IFRS

5. Accounting (recognition and derecognition) economic reality prevails legal reality activity based instead of industry based component approach asset / liability approach instead of deferral and matching Presentation in / out balance cash flow statement Statement of changes in equity Measurement amortised cost fair value Disclosures detailed information management information Some Principles

6. IAS/IFRS ALAC Conference Classification of Assets and Liabilities Some Industry Related Principles

7. Financial Instruments (IAS 39 - IAS 32) Measurement categories Amortised Cost and Fair Value Impairment Embedded derivatives Hedges Trade date versus settlement date Real Estate (IAS 40 and IAS 16) Insurance Insurance contract Discretionary participation IAS 39 <---> IFRS 4 Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts Classification of assets and liabilities

8. Financial Instruments (IAS 39 - IAS 32) Measurement categories Amortised Cost and Fair Value Impairment Embedded derivatives Hedges Trade date versus settlement date Real Estate (IAS 40 and IAS 16) Insurance Insurance contract Discretionary participation IAS 39 <---> IFRS 4 Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts Classification of assets and liabilities

9. Strict use of HTM Limited use of FV designated (under discussion) Derivatives and embedded derivatives are at trading Financial Instruments: Measurement Categories

10. Amortised Cost: (assets and liabilities) Add all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (IAS 18), transaction costs and other premiums or discounts ----> Cash flow schema ----> Internal administrative costs are excluded Calculate the Effective Interest Rate: rate that discounts the estimated future cash payments or receipts through the expected life of the financial instrument Carrying amount based on Effective Interest Rate Contractual book value (cash flow based) Changes in applications needed (IT budget!) Financial Instruments: Measurement Rules

11. Measurement Rules:Amortised Cost: simpl.example

12. Fair Value: (assets and liabilities) incorporate all embedded derivatives in the product (mortgages: cap and floor, prepayment option,….) changes in fair value are reported in either P/L (volatility!!) or Equity (depends on portfolio) deferred acquisition cost not recognised (immediately in P/L) fair value can not be lower than amount payable on demand) when there is no market: fair value will largely equate to a mark-to-model system measurement is contract by contract either accounting or disclosures changes in applications needed (IT budget!) Financial Instruments: Measurement Rules

13. Impairment Financial Instruments: Measurement Rules Type of financial asset Basis for Impairment P/L charge reversible Amortised Cost Recoverable amount Yes Available for sale Equity securities Market amount No Debt securities Recoverable amount Yes

14. Definition of a derivative: 3 characteristics: its value changes in response to the change in a specified ‘underlying’ interest rate security price foreign exchange rate index of prices or rates credit rating it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors it is settled at a future date Can be contained explicit (guaranteed interest rate) or even implicit (prepayment option) in a contract: ---> embedded derivative Financial Instruments: Derivatives

15. Identification of embedded derivatives in Assets: Financial instruments IAS 39 Liabilities: Insurance investments IAS 39 Insurance contracts Test for separation no separation if feature does not meet the definition of derivative if host at fair value (trading or trading designated) if closely related feature meets definition of insurance contract Measurement at Fair value Financial Instruments: Embedded derivatives

16. Fair-value hedges Cash-flow hedges Hedges of a Net Investment in a Foreign Operation Portfolio hedge of interest rate risk Hedge Disclosures Effectiveness test Alternative: ? Use of ‘Fair Value through P/L designated’ portfolio Financial Instruments: Hedges

17. Assets: Trade date or Settlement date accounting no difference on impact on P/L by purchases difference on impact on P/L by sale (immediate recognition of P/L by trade date) trade date will increase assets Liabilities: Settlement date Financial Instruments: Trade date versus Settlement date

18. Financial Instruments (IAS 39 - IAS 32) Measurement categories Amortised Cost and Fair Value Impairment Embedded derivatives Hedges Trade date versus settlement date Real Estate (IAS 40 and IAS 16) Insurance Insurance contract Discretionary participation IAS 39 <---> IFRS 4 Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts Classification of assets and liabilities

19. IAS 40: Investment property Either Cost or Fair Value for all investment property Cost depreciation based on its useful life (IAS 16): split of the property in separate items residual value Fair Value: volatility ? Impact on P/L IAS 16: Property, Plant and Equipment Cost model (benchmark) or Revaluation model (alternative treatment, positive valuation = equity) When an item is revaluated: entire class should be revaluated Real Estate

20. Financial Instruments (IAS 39 - IAS 32) Measurement categories Amortised Cost and Fair Value Impairment Embedded derivatives Hedges Trade date versus settlement date Real Estate (IAS 40 and IAS 16) Insurance Insurance contract Discretionary participation IAS 39 <---> IFRS 4 Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts Classification of assets and liabilities

21. Definitions: Insurance contract: A contract under which one party (the insurer) accepts significant insurance risk(other than financial risk from another party) (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event(whether an insured event will occur, when it will occur or how much the insures will need to pay if it occurs) (the insured event) adversely affects the policyholder. Insurance Contracts

22. Definitions: Discretionary participation: A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: (a) that are likely to be a significant portion of the total contractual benefits; (b) whose amount or timing is contractually at the discretion of the issuer; and (c) that are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profit or loss of the company, fund or other entity that issues the contract. Insurance Contracts

23. IFRS 4 IFRS 4 IAS 39 IAS 32 IFRS 4 IAS 32 Measurement / Accounting Disclosures / Presentation Insurance Contracts Insurance Risk Yes No Investment Contract Insurance Contract Discretionary Participation No Yes

24. Phase 1: Investments: See IAS 39 - IAS 32: Financial Instruments Amortised Cost Fair Value Insurance contracts: Phase 1: Local GAAP Embedded derivatives (IAS 39) Phase 2: 2007? Insurance Contracts

25. Financial Instruments (IAS 39 - IAS 32) Measurement categories Amortised Cost and Fair Value Impairment Embedded derivatives Hedges Trade date versus settlement date Real Estate (IAS 40 and IAS 16) Insurance Insurance contract Discretionary participation IAS 39 <---> IFRS 4 Comparison Local GAAP and IFRS: Impact P/L and Phase 1 and 2 Insurance contracts Classification of assets and liabilities

26. Comparison Local GAAP versus IAS(simplified) Assets Local IAS Changes in FV Fair Value Trading P/L Trading and (emb) derivatives Trading P/L Cost (hedging) Trading P/L Premium/ discount AFS Equity Treasury Fair Value P/L HTM Investments Premium/ discount AFS Equity (debt / equity based) Fair Value P/L Loans and receivables Cost Loans Fair Value P/L Cost Cost Real estate (IAS 40) Fair Value P/L

27. Comparison Local GAAP versus IAS(simplified) Liabilities Local IAS Changes in FV Trading and (emb) derivatives Fair Value Trading P/L Cost (hedging) Trading P/L Cost Amortised Cost Deposits Fair Value P/L Investment Contracts Reserve Phase 1: Fair Value P/L (Insurance IAS 39) Phase 1: Amortised Cost Reserve Phase 1: Local GAAP Insurance Contracts (Life) Phase 2: FV ? P/L ? Insurance Contracts (Non Life) Reserve Phase 1: Local GAAP Phase 2: FV ? P/L ?

28. IAS/IFRS ALAC Conference Conclusions

29. How to manage classification of assets and liabilities on Opening Balance IFRS ? Define strategy about volatility in P/L and in Equity Use of ‘Fair Value designated through P/L’ (under discussion) Use of hedge accounting (under discussion) How to manage P/L and Equity under IFRS? Phase 1 Phase 1 2 Conclusions

30. Thank you for your attention