EY’s annual Financial Reporting Developments series | Financial Services Sector

George Prieksaitis:

Hello everyone and welcome to EY’s 2021 Financial Services Financial Reporting Development Seminar. My name is George Prieksaitis. I'm a partner in our professional practice group here in Canada, and I'll be your EY Canada host for today's webcast. Before turning things over to our speakers, I'd like to quickly review some of the features available to you through this WebEx platform we're on today.

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With that, let's review our presenters and the agenda. For those of you who would like to see additional content beyond the slides, go to www.ey.com/frd (financial reporting developments) for a list of all the publications that EY has issued in the last year. Here are today’s presenters — you've met me, and you will be also hearing from Amanda Snjaric, a senior manager in Professional Practice, Matthew Richardson, a senior manager in our Financial Accounting Advisory Services business, and Ulana Oswald and Bobby Thompson, both senior managers in our Assurance practice. And we're very happy to have with us today two representatives from the Ontario Securities Commission — Alex Fisher and Ritika Rohailla.

Here’s our agenda — Matthew is going to start us off with an update on IBOR reform. Amanda and Ulana are going to go through our other financial institution hot topics and some reminders. Matthew, Amanda and Ulana are all going to talk about IFRS Financial Reporting Developments. Then we're going to have a presentation from the Ontario Securities Commission with Ritika and Alex. And last but not least, we're going to have an update on applying IFRS 17 Insurance Contracts with Bobby. With that, I turn it over to Matthew to talk about IBOR reform.

Matthew Richardson:

Thanks, George. I'll be talking about the update to IBOR reform and its financial reporting implications, keeping in mind that this topic has been on our agenda for the last couple of years. I'll spend some time today, not necessarily going through what the guidance is, kind of rehashing that a little bit, but also focusing on some practical issues that have arisen as we're a bit into it now, as well as going through a detailed example, to see how the actual guidance and reliefs can be applied.

Just as a bit of a background, of course, there's a multi-jurisdictional effort to transition away from IBORs, which are kind of submission-based, potentially subject to manipulation, to what's known as alternative risk-free rates or RFRs. And frequently, those rates have more transaction volume, and they are overnight rates, generally speaking. Several milestones happen during the year, including the most significant being that the administrator of LIBOR announced that for various tenors, the cessation dates are now known. On June 30, 2023, USD LIBORs for one month and three months will be ceasing, and for most other tenors and most other LIBORs, December 31 of this year will actually be the cessation date. Also in March of this year, the spread that's meant to compensate for the difference between LIBORs and the new rates was established for derivatives following the ISDA protocol. I will point out that in Canada, we don't have an IBOR. CDOR is the main rate, and there are no plans at this time for it to discontinue. So, most of the efforts thus far by Canadian entities have been focused on the US market, which is where we see the most exposure to. But of course, we'll stay up to date on any updates on the Canadian front.

The IASB reacted to the various market developments by implementing a two-phase approach to providing guidance, both of which are now effective. The first phase dealt with pre-replacement issues, such as those issues that are highly probable for hedge accounting. And the second phase deals with issues arising on the transition itself. I'll focus most of this on the application of Phase two.

The first main relief that was given was for modifications to contracts, such as debts or assets and loans, for example. Generally speaking, if the change to the contract was a direct consequence of the reform, and done on an economically equivalent basis, you're able to update the EIR on a prospective basis. What that means is you just go from accruing interest based on LIBOR, and just like any other normal reset, you would now start doing it based on SOFR, for example. However, if you add any additional changes, you will have to do some additional analysis to make sure it doesn't constitute a de-recognition event, and perhaps you'd have to book a modification gain or loss.

Some practical issues with this that have arisen thus far have been what do direct consequences actually mean? The logical ones include switching the contract from saying “LIBOR” to saying “SOFR”, for example. Adding a spread that would compensate for the difference, perhaps changing the reset period, for example, LIBOR resets monthly; but of course, SOFR is an overnight rate, perhaps it resets every day, things of that nature.

Things that would not be in scope, however, include if you change the maturity of the loan; if you change the principal of the loan; and perhaps most contentiously, if you start adding floors or remove floors, you change any options that are present in the contract itself. Those in themselves are not necessary to actually affect the change, and therefore not considered in the scope of the relief, which is somewhat narrow.

Another issue arising is what does economically equivalent mean? And this is a very judgmental area. It's a new principle, and it does not necessarily need to be a quantitative analysis — it's not like you have to be exactly equal fair value before and after, it's not meant to work that way. Generally speaking, if you follow one of the established market protocols, such as the ISDA fallback provisions or the ARRC recommendations (ARRC is the entity in the United States, which is taking the lead in terms of a regulatory point of view to help switch from LIBOR to SOFR), as they represent industry consensus, those could be considered economically equivalent on a qualitative basis. Generally, if you have two market participants negotiating in good faith, it's going to be assumed to be economically equivalent. However, there's still some judgment there.

So, in some cases, where you don't follow the industry consensus and do more of a bespoke negotiation, you might have to prove economic equivalence using a quantitative method. We have three methods/spreads listed here — they are not exhaustive but are very common from what we've seen so far.

The spot market spread would just be basically — what is, for example, SOFR, on the date of transition? What is LIBOR on the date of transition? That difference would represent the spread that you adjust your contract by. Another way would be the basic spread on the forward market. You could consider this to be a fair value approach, where the field cash flows are basically fair value equivalent once you've switched to SOFR, and you would solve for whatever that spread ought to be. It's going to be very common for derivative negotiations. As well as there's a historical spread approach, where you just pick a historical period, such as a one-year period or a five-year period, for example, and take the spread between the two rates and apply that to your contract. I will note that the ISDA spread is the most common or popular spread to put into your contracts, even if you're not falling back. It's a historical spread and used as a five-year period.

There's also a relief for hedge accounting, and this is very useful. I'll go through an example to illustrate the application of it, but in a nutshell, it will allow you to make changes to both your hedging instrument and your hedged item and be able to continue hedge accounting — you don't have to discontinue just because you've changed the critical terms of your hedge.

In addition, Phase two came with new disclosures. Phase one only dealt with disclosures that affected hedging relationships. Phase two covers all IBOR exposures that the entity faces and some of their transition plans, for example, and quantitative information about their exposures — something to keep in mind for the upcoming year-ends. I’ve saved some time here to walk through an example, and hopefully this example will show how the practical application. Take an example of a relatively simple cash flow hedge — we have a LIBOR-based debt that matures in five years, LIBOR plus 20 basis points. We also have an interest rate swap that receives LIBOR, pays fixed, and we've designated it as a cash flow hedge. As part of that cash flow hedge, we've designated the LIBOR risk. And so, we've established a hypothetical derivative to measure the changes due to the hedged risk. Because it's basically perfect hedge, our hypothetical derivative is equal to our external derivative.

A year elapses, and we're going to modify our hedging instrument in this case. At the time of that modification, the difference between LIBOR and SOFR is 30 basis points, and we'll consider this to be economically equivalent for the purpose of the example. The swap is amended on an economically equivalent basis by changing the leg from LIBOR to SOFR, and adjusting the fixed leg by the economically equivalent spread. It's going from 3%, down to 2.7%. Because SOFR is less than LIBOR, it makes sense that you’re fixed leg would not be adjusted downward. You could have also adjusted it, so the fixed leg is the same and you have a spread in your floating leg. But in this case, we're adjusting the fixed leg down.

Given that we have made an adjustment to our hedging instrument, with the relief, we're actually able to continue hedge accounting and update our hedge documentation. We have to update our hedge documentation because our hedging instrument has changed. I will point out that at this point, the hedged item has not changed, it's still LIBOR, so we're not touching the hedged risk, and we're not touching the hypothetical derivative.

As we saw, the hedging instrument is now SOFR, the hedged item, and the hypothetical derivative is still LIBOR, which will create basis differences moving forward. They're not the same index, so they're not going to move exactly the same. IFRS still requires you to measure effectiveness and book that to P&L. Under IAS 39, you're still under Phase one, because the hedged item has not changed. Therefore, you don't have to do the 80%-125% retrospective test; however, you still have to do your prospective test. And if you're doing hedge accounting under IFRS 9, it's a different test. It's economically equivalent and it's only prospective, but you have to demonstrate that, for example, between LIBOR and SOFR, there's an economic relationship there.

Let's carry forward another year, and we've now finally amended our hedged, our debt and our debt is now based on SOFR. At the time of this transition, the new market spot spread is actually 25 basis points — note that that's different from what it was a year ago. So we've switched our debt over from LIBOR to SOFR, but in addition, we've actually made that plus 20 credit spread. We've reduced it to 14, perhaps the company was able to get a better deal because either the market spreads have changed or they have done better and they're at a lower credit risk. So, they were able to change the credit spread in addition to just switching over from LIBOR to SOFR.

The first step to is to apply the reliefs to the debt itself. The next step would then be to apply to the hedge accounting relationship. First, you would look at switching from LIBOR to SOFR and that would be considered a direct consequence of the reform. We consider the fixed spread of 25 basis points as compensation for the difference in rates, and that's done on an economically equivalent basis. However, because we also change the fixed spread from 20 to 14, a reduction of 6, that's an additional charge and we have to analyze that. The first thing you do is say, is that 6 basis point reduction actually substantial? Generally speaking, 6 basis points is not going to be substantial. But for example, this is the classic 10% test. And if you're above 10% difference, you would actually derecognize the liability. In this case, we're assuming it's not substantial. We then apply step two, which is to update the EIR. We're no longer under LIBOR, we're now under SOFR, but that has to be updated on an economically equivalent basis. So, we actually use the 25 basis points spread there. Then step three is, because we know we had a change that was not required by the reform, to assess if there's any gain or loss. So, you have to take your new cash flows, which is the SOFR plus 25, plus 14, and discount it back using the economically equivalent EIR. And so, in this case, since we've reduced the spread, we'll have a bit of a gain.

The next thing to do would be to update the hedging relationship. We don't have to discontinue because the hedged item was not derecognized and we're able to update the hedge documentation without discontinuing either. Our hedged item is now SOFR-based, and we would update that. The hedged risk should now be SOFR-based as well. Therefore, we have to update our hypothetical derivative. Now, it used to be LIBOR and 3%, which is what it was at the beginning and equivalent to the original swap that was hedging it. And now we've changed it to be “Pay SOFR”, and we're changing the fixed leg on our hypothetical derivative by 25 basis points, which was the economically equivalent spread at the time the debt changed. Again, SOFR is less than LIBOR, so we reduced the fixed leg on our hypothetical derivative.

I’ll move forward. At this point, we're kind of done with our updates to the hedge documentation, but we do have to first prospectively start measuring effectiveness. And you'll note that the hedging instrument is SOFR-based, and our hypothetical derivative is now SOFR-based because our debt itself is SOFR-based. However, the hypothetical derivative has a different fixed leg than the actual derivative. This will be a small source of ineffectiveness in the relationship moving forward, and that should be booked. Of course, you now have to do your full effectiveness tests again, as Phase one has ended. There's no longer any uncertainty in the relationship. That’s the end of my example. Again, I'll point out, as George mentioned at the start, there are some publications on the website that was highlighted by George that have much more detail in terms of IBOR relief. Of course, feel free to reach out to any of us. Perhaps there are some questions that I just haven't seen, but if not, I'll hand it back to you, George.

George Prieksaitis:

The only question I'm seeing is a little bit about how to get the slides again, and they will be emailed out after the session, along with your CPE certificates. I don't believe there's a way to download them from the website here today. I'm not seeing any questions about IBOR reform, we can move on to the next topic.

Ulana Oswald:

Thanks, George, and hi everyone. Next on our agenda today is to discuss some of the financial institution hot topics. The first of these topics that we'll cover is some key considerations on ECM measurement. For those who attended the FRD last year in 2020, when COVID-19 was new and kind of at the height of the pandemic, this discussion will be familiar. There isn't much new that I'm discussing today; however, these are still good and applicable reminders for everyone on the call. Let us first dive into the impacts of COVID-19 or any other disruptions for that matter, and how that should be reflected in ECM measurement.

The first of the considerations is at the individual level, because large-scale moratoriums and guaranteed loans tend to turn off the usual significant increase in credit risk backstops. Such as, for example, for days past due, financial institutions need to consider other indicators that can determine whether the borrower’s difficulties are temporary, such as a forced leave from work versus longer term; the implementation of any government initiatives, and to what extent they will limit defaults; a holistic approach for retail consumers that addresses economic conditions, history of missed payments, current data such as employment status or account activity, and the consideration of portfolio approaches with the application of expert judgment; and lastly, whether LGDs require any revisions.

From a collective and portfolio-level consideration, you should think about products. For example, are we talking about mortgages versus retail secured loans. The type of relief measures that have been provided such as “geography”, for example, rural areas may behave differently; “industry” and to what extent industries have been impacted; and borrowers that may have specifically been affected by supply and demand chain issues, which we're seeing a lot of now. Unfortunately, there's no automatic approach to doing this, some counterparties will be more prone to significantly deteriorate. For the portfolio groupings, entities may have to revise macro-economic assumptions and/or apply bottle overlays.

Next, we're going to consider disclosures for ECL. Developing macroeconomic forecasts continues to be challenging. This means that scenarios for ECL calculation will represent a key area of judgment for year-end, placing more reliance on experts using more overlays and producing results that will vary, which makes benchmarking harder. The following types of disclosure will help investors and analysts and should be considered:

1.     How do your new scenarios and weights compare to previous ones, which occurred during the height of the COVID-19 pandemic? What are the main differences from before? What is the underlying rationale for these differences?

2.     As it relates to the overlays to the macroeconomic models or assumptions, what have your adjustments to inputs been? Are there changes compared to prior reporting periods and impacts? Additional disclosure may be required for a specific focus on vulnerable sectors where there's been a prolonged pandemic or sectors that have had the most severe impact.

3.     And lastly, sensitivity analysis around the macroeconomic assumptions continues to be important and helpful.

Last year, we covered in greater detail the various types of government relief measures that we're seeing in Canada. Although, we're in a better state than last year, many of these relief measures or changes to the relief measures will have had an impact on 2021 reporting. Consider the status of government support measures and what impacts those have had or continue to have on the credit quality indicators. Disclosures should provide an update on COVID-19 measures that were implemented by your financial institution and the related exposures. Whether any specific risk-monitoring approaches to improve early identification of trouble borrowers has been implemented, and what impact that has had on the classification and ECL estimates; and a number of other accounting estimates related to COVID-19 measures, such as the calculation of EIR, potential effects of guarantees and modification accounting. As it relates to disclosures on ECL movement and outlook, you should be considering the following for 2021.

1.     Analysis of the main movements in ECL allowance and the related profit and loss effects:

a.     Where significant, they should include movements in Stage one and two ECL allowance. Explanation of Stage three losses, for example, if there were any significant single-name losses;

b.     Movement and overlays the rationale for these estimation approaches, current impact, and expectation on timing of the withdrawal of the overlay;

2.     Also consider any recent trends on credit risk indicators;

3.     Vulnerable concentrations and expectations for 2021;

4.     Transfers in and out of Stage two, including trends by material portfolios and drivers, explanation for any movement in Stage two proportion of total ECL, and if there have been any changes to the transfer triggers.

Another topic that continues to be relevant from last year is the accounting forbearance measures and debt modifications. As I mentioned, last year, we discussed the various types of measures and reliefs that were being provided by financial institutions in Canada. All of them requiring careful consideration of the specific terms and conditions. The same continues to be true for this fiscal year. Some of these measures, such as term extension, or interest, or debt forgiveness, could result in the amendment of the contractual terms of the financial assets. Continuing to apply your existing accounting policies, financial institutions need to determine whether these changes result in derecognition of the existing financial asset. As a reminder, on the right-hand side of the slide, you'll see the IFRS 9 derecognition decision tree. If the relief mechanisms that you were offering meet the derecognition criteria, you derecognize the original asset, the modified asset is considered a new financial asset, and you should be assessing whether it is credit-impaired at initial recognition. If the derecognition criteria is not met, and therefore, you do not derecognize, you must first calculate the modification, gain or loss, which will likely be losses calculated as the modified cash flows discounted at the original effective interest rate, less the original cash flows discounted at the same original EIR. Then you need to revise the ECL and recognize a catch-up adjustment in P&L for the changes in the expected cash flows discounted at the original EIR, and determine whether a significant increase in credit risk has occurred. In the next slide, I'll remind you about the specifics around two of the relief programs. As I mentioned, specific facts and circumstances need to be considered for various reliefs. However, there were and will continue to be two common examples.

First is the payment holidays and term extensions. This is where you are suspending payments and or extending loan repayment days. The fact pattern here is that because financial institutions are continuing to accrue interest during that suspension period, there's likely no modification gain or loss to be recognized. The financial institution does need to revise the estimate of ECL, after determining whether for Stage one assets, a significant increase in credit risk event occurred, or whether for Stage one and two assets, the exposure is considered to be credit-impaired, and therefore in Stage three. The second relief program to discuss is the interest in principal forgiveness. For Stage one and two assets, this is a change in the contractual cash flows, because the financial institution will now be receiving three months less of interest than originally stated in the contract, as an example, and therefore would likely be a modification loss to be recognized. Again, as I just mentioned, you'd then have to revise the ECL. This is different for Stage three assets, where if there was no reasonable expectation of recovering that portion of the asset that was forgiven, then the amount should be written off as a partial derecognition. Hopefully, that was more of a reminder for folks on the call since these accounting issues continue to be the same ones that we dealt with during fiscal 2020.

The next financial institution hot topic that I will discuss today is green finance and ESG loans. As everyone knows, ESG issues are increasing worldwide, and as a result, we've seen a number of ESG-linked loans, which are structured in 2021. Given how much of a hot topic ESG is with investors and seeing the year-over-year growth from 2019 to 2020 unsustainable debt issuances, we believe this will continue to grow. That said, IFRS 9 application to ESG financial instruments can lead to difficulties, including failing the SPPI test and the non-recourse nature of the instruments. As a reminder, on this slide 28, this table outlines the requirements for the contractual cash flows that are solely principal and interest tests, which is referred to as the SPPI test under IFRS 9. In order for a contract to meet the test, the contractual cash flows of the instrument must be consistent with a basic lending arrangement, which can include consideration for time value of money, and credit risk, and some other pretty basic lending risks and costs, but nothing else. Any exposure to risks or volatility, unrelated to basic arrangements such as leverage or exposure to changes in equity, would cause the instrument to fail.

On the next slide, there are four exceptions that are outlined in IFRS 9 for deviations from pure SPPI. First is if the characteristic can have only a de minimis effect on the contractual cash flow of the financial asset. While de minimis is not defined in IFRS 9, the dictionary definition is too trivial to merit consideration. Implicit in this definition is that if an entity has to consider whether the impact is de minimis, whether that's quantitatively or qualitatively, that would apply that it is not. To be considered de minimis, the impact of the feature on the cash flow of the financial asset must be expected to be de minimis in each reporting period and cumulatively over the life of the financial asset. Second is if the contractual cash flow characteristic could have an effect on the cash flows that is more than de minimis, but that the cash flow characteristic is not genuine and it does not affect the classification of the financial asset. A cash flow characteristic is not genuine if it affects the instrument’s contractual cash flows only on the occurrence of an event that is extremely rare, highly abnormal, and very unlikely to occur. Next, some features that modify the time value of the money element of interest may pass the cash flow characteristic test depending on the outcome of the benchmark test, meaning that it is not significantly different from the cash flows of pure principal and interest. And lastly, in some jurisdictions, the government or regulatory authority sets interest rates. A regulated interest rate is considered by the IASB to serve as a proxy for the time value of money element for the purpose of applying the contractual cash flow characteristics test if that regulated interest rate provides consideration that is broadly consistent with the passage of time and does not provide exposure to risk or volatility in the contractual cash flows that are inconsistent with a basic lending arrangement.

What does this mean for ESG loans? It is very likely that the contractual terms of these cash flows vary depending on ESG metrics, or other environmental measures. For example, measures relating to compliance with emissions and waste regulations or a sustainability index, for example. In such cases, financial institutions will need to consider whether the ESG clause has more than a de minimis impact on the cash flow; if the ESG clause is unrelated to a basic lending arrangement; if it can be considered as related to the credit risk of the issuer, and whether it represents a decrease to the bank's profit margin in contemplation of marketing or ethical issues. In addition to answering these questions, a financial institution also needs to consider the mechanism of tracking and analyzing these types of loans. Maybe I’ll pause here and see if there are any questions that have come through.

George Prieksaitis:

Yeah, there are a couple and maybe I'll take the first one about ESG loans. Is there any preliminary feedback from the IASB on the post-implementation review that's going on right now for IFRS 9? I believe this issue is a specific question that was raised. I don't think there's been a whole lot of feedback from them, other than they know that the volume of loans being issued in this space is growing very quickly. And in some ways, some of these issues are like horses that are already out of the barn, and that people have passed them. But the adjustments for the ESG features have also tended to be sometimes rather small, three to five basis points of adjustment if they meet certain criteria. People are trying to argue that that might be de minimis, and there are others who think it may also be somehow correlated to credit risk. But as these adjustments get bigger and more diverse, it's going to get harder and harder to do that, so it's a good question, but there's no other feedback.

And then there was another question — have we seen these loans in industry and actually concluded that it failed the SPPI test when the interest is linked to ESG metrics specific to the entity? The answer is yes, globally. I don't think we've seen a lot of this in Canada yet. There may be some private equity groups who are eager to account for this at fair value through P&L anyway, more like a trading book. They didn't really have to deal with SPPI but it is an issue that has come up, and there are some entities around the world who have failed some of these loans, simply because they don't think it meets all these requirements Ulana has been talking about.

The last question was about whether we have seen anything about new disclosure requirements, and I take it that was more about the ECL stuff that Ulana was talking about earlier. I don't think we've seen anything new in terms of specific requirements. But we are going to talk in a few modules down the road here about a proposal for IFRS 13 and IAS 19 that's trying to streamline and reduce disclosures. If that project is successful, they would take that to other standards, including IFRS 7. I don't know if any of the other panellists have anything else to add to those questions. Ulana, I think back to you.

Ulana Oswald:

Yep. Thank you. Next, we're going to move into IFRS developments. This slide lists out the current standard-setting projects that the IASB is working on. Today, we're going to talk about the financial instruments with characteristics of equity and disclosure initiatives. For any of the remainder of the topics, you'll find some background material in the appendices when you get a copy of the materials.

The objective of the IASB’s Financial Instruments with Characteristics of Equity, referred to as FICE project, is to improve the information provided in financial statements by clarifying underlying principles in IAS 32, adding application guidance to facilitate consistent application, and enhancing presentation and disclosure requirements. The original paper was issued in 2018, with the project being added to the standard-setting program in December of last year. The next milestone will be the exposure draft.

There were three key components of the discussion paper — classification, presentation and disclosure. The paper proposed two principles to classify a financial instrument as a liability. Either the issuer can be required to pay cash or hand over another financial asset before liquidation, or the issuer has promised a particular return to the holder regardless of the issuer’s own performance and share price. However, acknowledging that a binary classification between liability and equity only tells part of the story. It also included proposals for enhanced presentation and disclosure to help distinguish instruments at different points on the spectrum. The expectation is that the proposal would not change the classification of simple instruments; however, may result in changes in the classification of more complex instruments, where there are currently challenges in applying IAS 32 principles. With that, I had it over to Matt.

Matthew Richardson:

Thank you, Ulana. I'll talk about the disclosure initiative targeted standards-level review of disclosures. This project is a few years old at this point, and the Board had been getting feedback from stakeholders or users of financial statements that they have concerns about the actual disclosures of information presented — that there was not enough relevant information and there was too much irrelevant information. For example, disclosure overload often is what that was known as, overall leading to ineffective communication of the information provided. As a result, the board underwent a project to develop draft guidance that they would then use to either amend any existing disclosures, or as George mentioned, eventually as new disclosures are touched, or are added for the first time, the Board will use this guidance to come up with how they're going to lay them out. In March of this year, they released an exposure draft, which had that proposed guidance as well as two test cases, IFRS 13 and IAS 19. It's enough to say, to talk about theoretical guidance that the Board is going to use, that's not actually part of IFRS anyway, but then seeing how that's actually applied to two standards where generally people thought that, as George mentioned, perhaps there's a lot of irrelevant information within there, so, could that be applied to those standards, and we can kind of see what it's going to look like. That exposure draft is still open for comment until January 12, 2022. It was originally October, but they pushed it back to January. To summarize what's actually in there, the Board is explicitly going to try to switch away from more of a “checklist approach” to “an objective-defined approach”. As a result, what will be included will be overall disclosure objectives. Many standards have overall disclosure objectives, but as well as specific disclosure objectives, which will be the requirements. Then underneath each of those specific disclosure objectives, you'll have items of information, which you could use to meet those objectives. Those items of information could either be mandatory or non-mandatory. The Board actually expects that this will lead to a lot more judgment required by prepares. But presumably, if a lot of these items of information, which used to be saved on the checklist and required, are now not no longer mandatory, it could lead to potentially fewer disclosures.

If you go to the next slide, this is the overall disclosure as well as the specific disclosures for IFRS 13. You'll notice that there's nothing really net new, and this will be the same for IAS 19, as well. There's nothing net new in terms of what they're trying to get to or what the objective actually is, but the way that they've phrased it is completely different. They will have a specific disclosure objective, potentially talking about reasonably possible alternative fair value measurements. But instead of having, for example, the sensitivity analysis being required, that would be now a non-mandatory item of information you could use to meet that objective. That's actually caused some questions from our initial discussions with either with clients or amongst us at the firm of what does that actually mean. It will require a lot more judgment to know when you've actually met the disclosure objective, especially when in a lot of cases, the items of information are no longer mandatory and they've been demoted in a way from mandatory to not mandatory.

We can pause on the next slide for a little bit. These are the overall and specific disclosures for IAS 19. A similar approach in terms of checklist information, it all used to be required to now having the disclosure objectives themselves be required, and certain items of information being not mandatory. I will now hand it over to Amanda.

George Prieksaitis:

Maybe we can stop here just for a second for a couple of questions. Back to the ESG SPPI slides — if the loan is callable by the lender if the ESG conditions are not met, and that's the only penalty, does that also fail the SPPI test? I think the answer is no, not automatically. A loan being callable wouldn't necessarily make it fail, a loan being convertible into equity though would fail SPPI and the ESG features wouldn't necessarily change any of that. I think that that's the answer to that question.

There was also this question — is there any insight on what are some of the complex instruments that result in a change in classification, due to the IASB liability versus equity project? The answer is, I think they're trying to make this initially, a very narrow scope of change. Yet, it probably is trying to make a few things that today would otherwise get liability classification into equities, but I think one of the challenges is that they don't want to rewrite IAS 32 in its entirety. They're not going to pull it and replace it, they're simply going to, I would use the word “tweak” it. At least that's the thought, we have to see what they ultimately come up with and that's one of the big projects on the IASB’s agenda for the next couple of years, which would probably be of more interest to this group. But they're also understanding that they don't want to re-boil the ocean on this and don't want to come up with a lot of new guidance that would also cause a whole bunch of unintended consequences. However, if you have an instrument that you think deserves to be classified as equity but is not, certainly feel free to contribute those thoughts as they go through the exposure draft process. Amanda, unless I don't see any other questions, over to you.

 Amanda Snjaric:

Thanks George, and hi, everyone. On these next two slides, we've just listed all of the IASB’s completed projects for your reference. We're not going to be going through all of them today in the interest of time, but we've covered IBOR Phase two. I'll be covering a few topics next, and then later, Bobby will be discussing the amendments to IFRS 17. We've also included some materials on some of these other topics in the appendices for your reference, which we're not going to be covering today.

The first completed project I'll be discussing is the amendment to IFRS 9 relating to Fees in the 10% test, which was issued by the IASB back in May 2020. As many of you probably recall in determining whether to derecognize a financial liability that has been modified or exchanged, an entity assesses whether the terms are substantially different. And IFRS 9 regards terms as substantially different if the net present value of the cash flows under the new terms, including any fees paid net of any fees received, discounted at the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original debt instrument. This is what's commonly referred to as the 10% test. It wasn't clear originally from the standard, whether the cash flows under the new terms should include only fees payable to the lender, or whether they should also include other transaction costs. The amendment clarifies that only fees paid or received between the borrower and the lender should be included in the test. And the IASB believes that this clarification aligns with the objective of the test, which is to quantitatively assess the significance of the difference between the old and new terms, on the basis of the changes in the contractual cash flows between the borrower and the lender. These amendments should be adopted prospectively, and they have an effective date for the period’s commencing on or after January 1, 2022, although early adoption is permitted with the appropriate disclosures.

On this slide, we're just going to illustrate this guidance with a simple example. Entity A modifies the terms of his term loan with the lender. And the present value of the cash flows of the original financial liability discounted using the original EIR is $110,000. And then the present value of the cash flows with the new terms, discounted using the original EIR, is $100,000, excluding any costs and fees. The entity incurs $5,000 of fees paid to the lender and $2,000 of legal costs. Based on the amendment, when performing the 10% test to determine whether the terms are substantially different, only the $5,000 of lender fees would be included, not the full fees of $7,000. As illustrated on the slide, the difference would therefore be 4.5%, which is less than the 10% threshold, and therefore the terms would not be substantially different, and modification accounting would be applied.

George Prieksaitis:

Maybe Amanda, before we move on, there's a question about this, and it's an interesting one. If the fees are paid by the parent for a subsidiary’s debt, does that mean that they're not included in the test in the subsidiary standalone financial statements? I’ll admit, I don't know if I had thought about that. Do you have any thoughts about that question? Because I'm thinking the answer is probably not. If that's not fees paid to the borrower if they're due, and also I'm not sure whether those fees paid by the parent or then due back, like an intercompany requirement, or whether they're just paid outright by the parent and are forgivable at some level. But I think with this new definition, if it's not fees paid to the lender or to the borrower, to the lender, sorry, then I'm not sure it's supposed to be included.

Amanda Snjaric:

Yeah, I agree. It's an interesting question, though.

 George Prieksaitis:

Sure, somebody will explore this more fully. Anyway, thank you for the question.

Amanda Snjaric:

Okay, so the next completed project I'll be discussing is Amendments to IAS 1, regarding the disclosure of accounting policies. In 2018, the board added a project to its agenda to develop guidance and examples to help entities apply materiality judgments to accounting policy disclosures. To achieve the objective, the Board amended IAS 1 to require entities to disclose their material accounting policy information rather than their significant accounting policies, and then also amended the materiality practice statement to include guidance and examples on the application of materiality to accounting policy disclosures. And the switch from significant to the material is because material is a defined term in IFRS, and is more widely understood by users according to the Board. It's now defined in paragraph 117 of IAS 1, which states that accounting policy information is material if, when considered together with other information included in an entity's financial statements, it can reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. The Board issued these amendments earlier this year and they're effective for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted.

The next amendment is to is IAS 8, relating to the definition of accounting estimates. Companies sometimes struggle to distinguish between accounting policies and accounting estimates, which has resulted in diversity in practice. Earlier this year, the Board also issued amendments to IAS 8, in which it introduced a new definition for accounting estimates, which didn't exist before. Accounting estimates are now defined as monetary amounts in financial statements that are subject to measurement uncertainty, to clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors, and also explains how entities use measurement techniques and inputs to develop accounting estimates. The amended standard clarifies that the effects on an accounting estimate of a change in an input or a change in a measurement technique, are changes in accounting estimates if they do not result from the correction of prior period errors.

Let's take an example — an accounting estimate is the fair value of an investment property in accordance with IAS 40. If the entity changed the valuation techniques, say from an income approach to a market approach, this would be a change in the measurement technique applied to estimate the fair value of the investment property. Therefore, this is a change in accounting estimate because the accounting policy, which is to fair value the investment property, has not changed. And so similar to the amendments to IAS 1, these amendments are effective for annual periods beginning on or after January 1, 2023, with earlier application permitted, and they apply to changes prospectively. And although the amendments are not expected to have a material impact on an entity's financial statements, they should provide helpful guidance in determining whether changes are to be treated as changes in estimates, changes in policies, or errors.

The next two slides list the maintenance and research projects on the IASB’s work plan, which again is for your reference. We're not going to be discussing any of these topics in today's webcast. However, I have included materials on a few of them in the appendices, which you can refer to as needed once you get the slides.

The last IASB development topic I'll be touching on is the third agenda consultation. The Board undertakes public consultation on its activities and its work plan every five years, which is what's referred to as the agenda consultation. The objective of this is to gather views on the strategic direction and balance of the Board's activities, the criteria for assessing the priority of financial reporting issues that could be added to the work plan, and then the new financial reporting issues that could be given priority in the Board's work plan. So, in March of this year, the Board published a request for information and comments were due back in September. The Board expects to publish a feedback statement summarizing the feedback, its activities, and its work plan for 2022 to 2026 in Q2 of next year.

Next we're going to discuss a few IFRS interpretations committee topics. The next few slides list all of the agenda decisions from September of last year. This list is for your information because we don't have time to go through all of these decisions today. But as you can see, the committee remains very active, and so we'd advise you to at least scan this list to determine if others are particularly relevant to your company. And similar to the IASB developments, we have included materials in the appendices on a few of these topics. The two that I'll be covering today are — first, the final agenda decision issued in April of this year relating to configuration or customization costs in a cloud computing arrangement, and then the recent tentative agenda decision issued in September relating to cash received via electronic transfer as settlement for a financial asset.

First, we’ll look at the accounting for cloud computing costs. As the use of technology, data and connectivity expands, cloud computing arrangements are becoming more common. Entities will need to apply judgment to account for these arrangements and may need to apply various IFRS standards in doing so. The flowchart that we have on this slide presents the possible outcomes and the general accounting considerations. As you can see, starting at the top left, the first step is to evaluate whether their arrangement contains a lease. In doing so, we consider if the arrangement includes a right to use an asset for which it has the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. Hence, if the arrangement is or contains a lease, we apply IFRS 16 to account for the arrangement. If it doesn't contain a lease, then we assess if it includes an intangible asset, and we evaluate whether the arrangement provides the customer a resource that it can control by applying IAS 38. If the cloud computing arrangement doesn't provide the customer with an intangible asset for the software and doesn't contain a lease, then the right to access the underlying software and the cloud computing arrangement is generally a service contract.

In a cloud computing arrangement, a customer can incur implementation and other types of upfront costs to get the cloud computing arrangement ready for use. Regardless of whether the arrangement contains a software intangible asset or is a service contract, the implementation costs are accounted for based on their nature. The table we have on this slide summarizes the various types of costs, and some considerations depending on if the arrangement contains an intangible asset or a service contract. We'll discuss a few of these that require judgment, but also encourage you to refer to our July 2021, applying IFRS on this topic for more details if you're working through the analysis.

First, for testing costs, the accounting will depend on if the underlying item being tested is capitalized or expensed. If the underlying item is an intangible, then the costs are generally a directly attributable cost of preparing the asset for its intended use, and therefore are capitalized. If the underlying is not intangible, such as if it's a service contract, then they're expensed as incurred. The other one we want to touch on are costs incurred to change other systems. These are costs that customers can incur to modify or enhance their existing software that will continue to be used in conjunction with the software services that they're receiving under the cloud computing arrangement. And customers should follow IAS 38 to determine whether to capitalize or expense these costs, depending on if the costs enhance the functionality of the existing software. And then, the last one that we want to touch on was the cost to configure or customize the underlying software. Where their arrangement includes an intangible, these costs are generally to be capitalized. However, there will be some judgment to determine whether the costs are directly attributable costs of preparing the asset for its intended use, or costs incurred while the asset is capable of operating in the manner intended by management. For example, if they are just costs for cosmetic changes. Now, where the cost to configure or customize the software relate to an arrangement determined to be a service contract, then we apply the IFRIC agenda decision, which I'll be discussing next.

At its March 2021 meeting, the IFRIC finalized this agenda decision relating to the treatment of cost to configure or customize a cloud computing solution that's a service contract, i.e.,  not an intangible asset, which proposed a two-step framework. If the customer does not recognize an intangible asset in relation to the configuration or customization of the application software, it would apply paragraphs 68 to 70 of IAS 38 to account for these costs. The first step is to consider who provides the services — is it the supplier of the application software, or a third-party supplier? If it's with the supplier, then the customer determines when the supplier of the application software performs those services in accordance with the contract. If the services that the customer receives are distinct, then the customer recognizes the cost as an expense when the supplier configures or customizes the application software. If the services are not distinct, because they're not separately identifiable from the customer's right to receive access to the application software, then the customer recognizes the cost as an expense when the supplier provides access to the application software over the contract term. In determining whether the services are distinct or not, from the cloud computing software, the committee discussed that the requirements of IFRS 15 should be considered.

The next IFRIC topic I'll be covering is the recent one relating to cash received via an electronic transfer as settlement for the financial assets. The IFRIC received a request about the recognition of the cash received via an electronic transfer system as settlement for financial assets, which was discussed in September, and a tentative agenda decision was made. In the fact pattern, the electronic transfer system has an automated settlement process that takes three working days to settle a cash transfer. And in the fact pattern, an entity has a trade receivable with a customer. At the entity reporting date, the customer has initiated a cash transfer via the electronic transfer system to settle the trade receivable, and the entity receives the cash in his bank account two days after its reporting date. The request asked whether the entity can derecognize the trade receivable and recognize the cash on the date that the cash transfer is initiated, which is its reporting date, rather than when it's settled after its reporting date.

Both the trade receivables and cash are financial assets in the scope of IFRS 9. And so, the entity needs to apply the paragraphs noted on the slide of IFRS 9 to determine when to derecognize a trade receivable and when to recognize the cash. Based on these requirements, the committee discussed and concluded that the trade receivable should be derecognized when the entity's contractual rights to the cash flows have expired, which, in the fact pattern, would likely be when the cash is received in its bank account at the settlement date. Then the cash should be recognized when the entity becomes party to the contractual provisions of the instrument. In this fact pattern, the instrument is the bank account under which it has the contractual right to obtain cash from the bank for amounts it has deposited in the bank. It's only when the cash is deposited in the bank account that the entity can have a right to obtain the cash, and therefore the committee concluded that the entity should recognize cash as a financial asset on the transfer settlement date and not before. This tentative agenda decision is expected to have a significant impact on many entities if finalized based on what's currently done in practice, and may require entities to adjust many reconciliation and settlement processes and controls. The deadline for comment is in two days, November 25, 2021. And if finalized, it's expected to be sometime early next year.

George Prieksaitis:

Maybe I could stop just to reinforce that for a lot of the financial institutions on the phone, this will have an impact. It's something that, for those of us who've been practising with financial instruments our whole careers and in accounting 101 when we learned how to do bank reconciliations, we often did not think about. And it's a little bit of a surprise to me that it's taken this long to get escalated, but it did finally have a disagreement with somebody to take it to the IFRIC. And the IFRIC is saying that many folks, in fact, probably the entire banking industry, has gotten this wrong, and is probably going to need to fix it. It's certainly not going to be enforced for this year. It would be a decision and if they agreed to finalize this, which it would be next year, it would have to be fixed within a reasonable period of time after that. It's a bit of a sleeper issue, and I want to make sure that everybody pays special attention to this, at least with this group, because you all have massive clearing systems with a number of different clearinghouses that have different settlement periods, for which this will make it a bigger issue. The longer the settlement period, the worse this issue is. I see no other questions in the queue. Amanda, back to you.

Amanda Snjaric:

Okay, next we'll move on to an update on IFRS discussion group developments. The next few slides just list all of the topics in September of last year for your reference, and the one we'll be discussing today is an impairment test for right-of-use assets. When an entity plans to change the use of a right-of-use asset, which has been common these days, the question arises as to whether this plan change in use represents an impairment indicator, and IAS 36 states that a change in use or expected use of an asset, which has an adverse effect on an entity, is an internal source of information for which is an indicator of impairment. And when assessing whether an indicator exists, an entity should consider whether and when the decision to change the use was made by the level of management that is authorized to make those decisions; whether the entity has the ability to change the use and expected manner; and whether the lessor’s approval is required. When an impairment test is required, the entity first has to determine at what level the test is to be performed. As a reminder, the test must be performed at the individual asset level, if the asset generates cash flows that are largely independent of those generated from other assets or groups of assets in the entity. But even if it does not, the impairment test still needs to be performed at the individual asset level if the individual assets’ fair value less cost of disposal exceeds its carrying amount, or if the individual assets’ value in use can be estimated to be close to its fair value, less cost of disposal, and the fair value less cost of disposal can be measured. Otherwise, the impairment test is to be performed at the CGU level. If the period of time is short between the date the decision to change the use of the right-of-use asset as made and the date of the change actually occurring, then the value and use of the asset would consist primarily of cash inflows from subleasing the asset. Since the fair value less cost of disposal would be estimated based on market rates for subleasing the asset, it's likely that the entity would conclude that the asset’s value and use can be estimated to be close to its fair value, less cost of disposal, and that the fair value less cost of disposal can be measured. Just want to remind you that in many jurisdictions, the real estate market is well developed, and therefore fair value less the cost of disposal of a right-of-use asset for real estate can be measured. In these cases, the right-of-use asset will have to be tested for impairment on a standalone basis. Similarly, if the period is short, one might also judge that the right-of-use asset as a generate largely independent cash inflows since a leased asset only contributes to cash inflows of the CGU for a short period of time before it's abandoned or subleased. Overall, the longer the time between a decision being made and the actual change in use occurring, the less likely it is that the decision will immediately impact the level at which any impairment assessment should be performed. The IDG discussed this issue at its December 2020 meeting, and in the paper, a few fact patterns were presented and the members discussed whether the right-of-use asset should be tested for impairment individually or as part of the CGU. The group also discussed factors to consider in making this determination to assist in scenarios that may not be as clear, which are shown on the slide. We've discussed a few of these, the list is not exhaustive, but there are some key factors that should be considered.

Aside from the impairment tests, there are a number of other considerations to be made with respect to the impact of a plan to change the use of a right-of-use asset. Firstly, a plan to change the use of an asset requires entities to reassess the asset’s useful life and residual value. Note that this reassessment is required regardless of the conclusion about impairment indicators and the level at which to perform the impairment test. The second one is about restrictions of the use of the right-of-use asset. When calculating fair value less cost of disposal for the purposes of an impairment test, just want to remind you that the inputs and assumptions should reflect restrictions on the use of the asset but should ignore the entity's plans for that asset since fair value less cost of disposal is based on a market participant’s view — an example might be a restriction from subleasing the asset. Next is to consider whether you have a lease remeasurement or modification, depending on what the original lease agreement contains. The next consideration is the timing of adjustments. As we discussed, a change in use could result in impairment of the right-of-use asset as early as the date on which the plan to change the use of the right-of-use asset is approved by management. However, the change in the lease liability doesn't occur until there's a change in the contractual lease payments. You may be in a situation where your right-of-use asset is impaired, while the lease liability remains on the books until there's a change in contractual terms. Lastly, entities who plan to sublease an asset or sublease a portion of a larger lease need to consider how this impacts accounting for the right-of-use asset. So that's it in terms of this topic. I'll pause to see if there’s been any questions before we pass it over to Ritika and Alex.

George Prieksaitis:

I don't see any new questions. Thank you, Amanda. Alex and Ritika, over to you.

Ritika Rohailla:

Great. Thank you, George. It's a pleasure to be here today and to be included in your annual updates. I'm Ritika Rohailla, and presenting with me today is my colleague, Alex Fisher. Alex and I both work in the Office of the Chief Accountant at the Ontario Securities Commission. Although the format of our presentations continues to be virtual this year, we do always appreciate the opportunity to communicate with reporting issuers and stakeholders, and sessions like this are a great way to do that.

We're going to cover a few topics that have been areas of focus in the regulatory space over the past year or so. First, and probably not surprising is COVID-19, and some financial reporting issues. We'll also provide an overview and share some insights on the publication of our new national instrument on non-GAAP and other financial measures. And lastly, we're going to talk a little bit about the CSA’s proposals on climate-related disclosure that were just published for our comment in October. As always, the views that Alex and I are going to express today are our own and do not necessarily reflect those of the commission or its staff.

Early on in the pandemic, we started looking at financial reporting issues and communicating with stakeholders, and one of the key pieces of regulatory communication that we issued on this topic was Staff Notice 51-362 on COVID-19 disclosure guidance. This staff notice was published in February of this year, and what it does is it summarizes some of our key observations and provides disclosure considerations for the MD&A and financial statements. It has a lot of good information, including some detailed examples. I would strongly encourage you to take a look as you prepare for your year-end filings. And in particular, it covers a number of financial reporting topics that I will spend a few minutes highlighting now.

The first being the need to develop significant judgments and estimates in these times. We're clearly in an environment that's still continually evolving. Many issuers have gone through multiple shutdowns and reopenings, along with other restrictions and impacts on their operations. More than ever before, companies are having to use information that's not perfect, and that's constantly changing, to come up with our estimates. But this is precisely what makes it more important than ever to let investors know what's going on. For example, how did you come up with your cash flow projections for fair value assessments? What were the underlying judgments that were made? How did you determine the discount rates and the impacts that COVID-19 had?

From a big picture perspective, we really have two broad messages that we're trying to stress. The first is that there's no one-size-fits-all approach. It is important for companies to use the best available information that they have at the time to make well-reasoned judgments. The second flows from that, and that is the disclosure of those judgments. More than ever before, the disclosure needs to be entity-specific, and as new information comes in, you'll need to update those judgments. I know a lot of companies are nervous making judgments with all this uncertainty, but it needs to be done. From a regulatory perspective, I guess what I can do to assure you is to say that we're not in the business of second-guessing those well-reasoned judgments that are made in good faith. We may ask more questions, certainly. But again, that's why good disclosure is key.

Some other areas of financial reporting focus that the notice talks about are going-concern assessments, and in particular, that need for robust disclosure of judgments and when the determination of going concern and the existence of material uncertainties was a close call. Some issuers disclosed information about the breach of covenants, but they didn't disclose the implications of that breach on going concern or what they were going to do to remedy the breach. Expected credit losses is another one that was covered in some detail earlier on, and impairments as well. I mentioned before, many issuers did not identify the reason for impairments, or they just noted the negative economic impacts of COVID-19 as an impairment indicator for all their CGUs, but they didn't elaborate on those impacts. And of course, there are new areas that are cropping up that haven't been as prevalent as before, such as government grants and assistance. The notice has some tips and considerations for disclosure on those topics as well.

This particular notice also talks about non-GAAP financial measures, which has been an area of interest to us. We've been monitoring these metrics, and in particular, the use of any new COVID-19-related adjustments within the composition of the non-GAAP measure, and there are a couple of things in this area that we've been messaging about. First is the concern around labelling a COVID-19-related item as non-recurring if it's likely to recur again in the next two years. As we've seen, the impact of COVID-19 could still go on for some time. And given the uncertainty in the current environment, there's probably a limited basis to conclude that a loss or expense is non-recurring. The next point is that it would be misleading to describe an adjustment as COVID-19-related if you don't explain how the adjustment was specifically associated with COVID-19. For example, it wouldn't be appropriate to characterize an impairment as COVID-19-related when indicators of impairment clearly existed prior to the pandemic, unrelated to COVID-19. The key point is if you're going to characterize something as COVID-19-related, you need to explain how and why it was related to COVID-19.

I'll just mention that the staff notice also talks about some hot button issues for MD&A disclosure content as it pertains to COVID-19. The messages here aren't new, and the key here really is that we are looking for issuers to provide real- and entity-specific reasons to explain why certain variances have occurred. I won't go into all the details here, but again, I do encourage you to review the staff notice for guidance on the MD&A as it pertains to the discussion of operations, liquidity and forward-looking information in advance of your annual filings.

I'll pass it over to Alex for discussion on non-GAAP.

Alex Fisher:

Fantastic. Thank you for inviting me to chat with you about my favourite topic, which is non-GAAP financial measures, and our new national instrument, our new law on the topic of non-GAAP financial measures.

Non-GAAP financial measures are a topic often discussed by securities regulators both in Canada and globally. In Canada, such measures have grown in popularity with approximately 95% of TSX 60 reporting issuers reporting non-GAAP financial measures, and this spans all industries, all sectors, all sizes of companies. Our original staff notice on the topic was issued, I think probably about 20 years ago, and subsequently updated and revised several times to address evolving circumstances. During this time, we issued reports, notices and other publications that discussed the disclosure of non-GAAP financial measures, and cited, unfortunately, disclosure deficiencies. Over this time, interestingly, we found that other financial measures that do not necessarily meet the specific definition of non-GAAP financial measures in the Staff Notice 52-306 could be equally problematic if not accompanied by appropriate disclosure. Such measures could include those disclosed in the notes to the financial statements, but really lacked context when taken outside of the notes to the financial statements. Investors came literally knocking on a door and asking for action. They asked for a few things, which I'll talk about, but these findings, as well as a call for action from investors, ultimately led to the issuance of a new securities law on the topic, which is replacing our staff guidance. This rule or instrument was issued in spring of this year, and I’ll chat about the effective date in a moment.

What is this instrument? This instrument provides a set of disclosure requirements for disclosure outside of the financial statements, which substantially incorporate our staff guidance and Staff Notice 52-306 but covers a broader spectrum of measures. As you can see on the slide, we talk about non-GAAP, which is our historical, traditional non-GAAP measures, but we also talk about these other financial measures that when disclosed outside of the financial statements, can lack context. The example that I'll give is regarding the total segment measure, and we can talk a little bit more about that as well.

The effective date has been staggered, reporting issuers will initially apply these disclosures to financial years ending on or after October 15. What I have here on the slide is just a little summary to say what is your year-end, and when you are initially expected to apply these disclosures. Non-reporting issuers apply these disclosures to documents after December 31, 2021, and so that could be a long-form prospectus, for example.

On the next slide, we have a disclosure summary. I'm not going to go through all of these disclosures, but what I did want to mention was that the national instrument does include a set of very clear disclosure requirements, which substantially incorporate the expectation and Staff Notice 52-306. If you look at the non-GAAP column, the historical non-GAAP column, many of these disclosures, I think all of these disclosures, will be familiar to those that are involved in the topic. But they have been expanded for clarity precision because this is a law that we need to be very explicit in what those disclosure requirements are. And we've included many new simplifications. For example, what are those simplifications? An ability to incorporate information by reference insert instances, which does not exist currently.

The requirements for forward-looking information and ratios are also simplified in relation to Staff Notice 52-306, and the other financial measures columns, I would say they're similar to non-GAAP, but scaled down significantly, really to address the risks and concerns that we're trying to get to. For example, you will see that total of segment measures require a lot less disclosure. Well, that's because already some disclosure exists in the body of your financial statements relating to this topic.

So, what are these disclosures? Well, typical things like reconciliation back to the financial statements, ensuring the measures not presented with more prominence, ensuring that it has an appropriate label, it's described why it's useful, and these are just to name a few. I'm going to pause here, I want to let everyone take a look at this slide and consider it, and then maybe we can go to questions if people do have some.

On the next slide, we have the companion policy. What is our companion policy? Many preparers almost unanimously asked for more guidance. They wanted to know explicitly what do we mean in this case, or, what do we mean in that case? What would be our expectation and Scenario A or B, which we've never had over the years.

We responded to that request by issuing a companion policy that includes guidance, interpretations and examples, and we also have a very neat flowchart that we've created in response to feedback from preparers. They thought this flowchart was very useful and we’ve included that flowchart right into the body of the companion pet policy. On the topic of non-GAAP, I encourage all attendees to visit our website, download the instrument and download the companion policy to learn more. For the CPAs on the line, we also did a webinar with CPA Canada on the topic, which is archived and available for free viewing. You can just google CPA Canada and the topic that we have here in our webinar, and I'm sure that will pop up and you can have an hour-long session of a free CPD that talks to you about this topic. At this point, I will pause.

 

George Prieksaitis:

Hi, Alex, I don't see any questions submitted yet. I'm certain there must be people on the call who have something. Let me ask one because this is a financial services audience. I know there's been a lot of discussion about OSFI measures, like Tier one capital ratios, or the measure of capital adequacy for insurance companies i.e. for life insurance companies. There was confusion about whether that is something that's exempted from the standard, because it's required by law, or an SRO? But I believe the conclusion is, all these OSFI guidelines are not exactly laws. I understand there's been a lot of discussion about whether that is really what was intended here and so on. Do you have anything you can help our participants with about what's being done around that?

Alex Fisher:

Sure, and that's a great question. So, George is referring to an exception that we have in the rule for any measure that is disclosed in accordance with a law or in accordance with an SRO, and there are some other requirements there, but that's the gist of it. And so, the question became “ Are OSFI guidelines law?” And I'm not a lawyer, so I'm not the best to conclude on that. You could seek counsel on that topic, but I believe from what I understand is that OSFI guidelines are required, but they're not, I think, technically “law”, as was explained to me, and therefore, that exemption, if that's the case, would not apply. And we understand this concern. We understand this dilemma that is being faced with these measures, so we have been working with the Canadian Bankers Association to find a solution and an appropriate response. We understand the issue, we understand the concern, and we are trying to find an appropriate response. Members of the Canadian Bankers Association can reach out to them; they might have a more robust update to give, but I would say, shortly there will be a response.

George Prieksaitis:

For our banking clients that are October 31 year-ends, obviously this is a bit more timely. But almost all the insurance companies are December year-ends, and they have a myriad of their own terms that are generated from OSFI requirements as well. We look forward to your messages. Stay tuned, there are going to be some more things coming out. Is there anything more in the way of frequently asked questions, or if people do have questions? What's the best way to try to get answers to those Alex, in your mind?

Alex Fisher:

That's great. So yeah, if people do have questions that they're struggling with, I always encourage you to contact your primary regulator. Who would that be? Download our instrument, go to your jurisdiction, and there's a name there — if it's Ontario, that would be me, or any of my colleagues in Ontario, and we'd be happy to chat with you about any questions that you have. If it's something that you're struggling with, I would say that's the best approach. And if we do get a lot of common questions, then definitely an FAQ might be worthwhile. I will tell you the most common question we have gotten so far, is about transition. With transition, we've tried to clarify, and if you look at my slide that I put on transition, it really answers when that initial transition is required. And that's really been the crux of most of the questions. I would also say, to prepare, do look at the companion policy, and do look at the flowchart, because most of the questions whether you have a measure that falls in the scope of this rule? And I think that's what the flowchart gets you to do. Once you know you're in the scope of the rule, the disclosures are very similar to what most people have been used to for non-GAAP, and they won’t come as a surprise to you. I'll leave it at that.

George Prieksaitis:

Okay, I mean people are shy or being very polite Alex, I don't see any other questions being posed in the Q&A.

Alex Fisher:

Or I did a fantastic job presenting and everybody understands. And so that's okay, too.

George Prieksaitis:

I think your advice though, that the best thing to do is to make sure you carefully read it, it's not a terribly long read, and I find the companion policy to be very helpful myself. Of course, another option is to talk to your external auditors who are familiar with this. We are not lawyers either, but we are very familiar with this. And we are going to be watching as comment letters start to roll out as there are more questions as things are unfolding. I think of this as a journey. I've said this to Alex, other times, people are still feeling out kind of what is maybe acceptable and what isn't. Ultimately, that's for the OSC and for other provincial securities regulators to decide, but we're certainly here to help. And I think the best thing to do is to ask lots of questions. We can certainly try to find ways to connect you with the right people too. Is there anything else? Alex, I'll turn it back over to you.

Alex Fisher:

No, that's it. Ritika I think has some comments on climate.

George Prieksaitis:

Of course. There we go.

Ritika Rohailla:

We're going to cover the recent proposals on climate change that just came out. The CSA is obviously of the view that climate change-related risks are becoming pervasive across most sectors. But these risks can be really hard for companies to assess and quantify just given that they're inherently subject to greater uncertainty. This can make it hard for companies to meet their disclosure obligations to disclose material risks, and where predictable, the financial impacts of those risks. If we look at securities legislation as it exists today, there are three key requirements that would currently drive climate-related disclosures. The first is that public companies have to disclose any material commitments, events, risks, or uncertainties that they believe will materially affect the company's future performance. They're also required to disclose all material risk factors. And lastly, if a company has implemented environmental policies that are fundamental to its operations, then it must describe those policies and the steps taken to implement them.

Then, in October of this year, the CSA published for comment proposed National Instrument 51-107 on climate-related disclosure. There were many drivers that led to the publication of this instrument, and one of them was increased investor interest. Investors have said to us that they want access to enhanced climate information as they become more focused on climate-related risks in making their investment decisions. And some investors have expressed concern that what they're currently getting is not sufficient. And certainly, at the CSA, we have observed this insufficient disclosure as well. We've seen variations in disclosure practices, with some issuers providing boilerplate disclosure or none at all. And in fact, our most recent review in 2021 found that while issuers have improved, they're providing more climate-related information when compared to our last review in 2017. The disclosure still tends to be fragmented or inconsistent, and there continue to be areas for further improvement. Global developments is another driver and there’s a growing convergence among regulators to align disclosure requirements with recommendations made by the Task Force on Climate-Related Financial disclosures, also known as TCFD.

And then separately, in March of this year, the Ontario government included in the provincial budget a recommendation from our Capital Markets Modernization Task Force that the OSC mandate companies to provide environmental, social and governance disclosure that complies with the approach adopted by the TCFD. And so clearly, climate-related risks have increasingly become a mainstream business issue. And in response to these concerns, we published the proposals in this national instrument last month for comment.

As I mentioned, our proposals generally aligned with the four core disclosure elements of the TCFD recommendations. The first being governance — the issuers would be required to provide disclosure on how its board and executive officers oversee, assess and manage climate-related risks and opportunities. The second is strategy — this would require the issuer to disclose the actual and potential impacts of climate-related risks and opportunities on its business strategy and financial planning. The third core element is risk management — this would require an insurer to disclose how it identifies, assesses and manages climate-related risks. And lastly, we have metrics and targets, which would require an issuer to disclose the metrics and targets used to assess and manage climate-related risks and opportunities.

While the proposed rules do incorporate many of the TCFD recommendations, there are two modifications on the next slide that are noteworthy. The first is that under the proposed rules, Canadian reporting issuers would not be required to submit a scenario analysis describing the resilience of the organization’s strategies under different climate-related scenarios. And the reason for that is really two-fold. First is that we acknowledge that scenario analysis is costly to do, and also that the methodologies to do so may not yet be mature enough. And the second modification is that the proposed instrument would allow reporting issuers to emit greenhouse gas or GHG emissions reporting. While the TCFD recommends all of the GHG emissions that fall within Scopes one, two and three be disclosed, the proposed rule would instead allow an issuer to disclose their reasons for omitting these disclosures.

The proposed rules would not be expected to come into force before December 31, 2022, and there would be a phased-in period, such that they would apply for non-venture issuers beginning with their annual filings due in 2024, which is the December 31, 2023 year-end, and for venture issuers in 2026, for their 2025 year-ends.

This slide kind of just highlights some of the overall objectives of the proposed instruments. We found that there's a mix of disclosures and what issuers are providing to investors. So, more voluntary complying with various aspects of different disclosure frameworks, some are providing information aligned with market expectations and ad hoc information requests driven by institutional investors. One of the proposed objectives is to reduce this fragmentation and to give investors access to more consistent, comparable and useful information. They're also positive from a public company perspective, who stand to attract more capital from domestic and international investors who are increasingly expecting clearer disclosure on these issues.

And then lastly, I just wanted to highlight some other international activities. As you may be aware, the IFRS Foundation is establishing the International Sustainability Standards Board or the ISSB. The board will have offices in multiple locations, one of them being Montreal. And related to that, I just wanted to note that the International Organization of Securities Regulators, or IOSCO, has also been intimately involved in this work. A Technical Experts Group was formed, which the OSC is part of, and that group has been doing work to advise the IFRS Foundation on prototype climate-related standards.

That's all that we have from our perspective today. Happy to take any questions now or at the end of the presentation. And I believe I'm passing it on to Bobby next.

George Prieksaitis:

I think there's one question Ritika. Can you share the CSA’s thinking or philosophy around harmonization across the various disclosure and reporting standards? And I suppose this is coming from a large international outfit who's probably got lots of different groups asking for lots of different things. Is there any thinking about the need to try to harmonize this? Or is it better to get on with doing it sooner rather than later?

Ritika Rohailla:

I think there’s both aspects to that. I think from our perspective, we were mandated by our provincial government to align our disclosure requirements, i.e., the TCFD requirements, and that is kind of what we are seeing regulators across the globe doing as well. And then certainly, as the international element of this evolves with the International Sustainability Standards Board, I think the view is that there will be climate-related standards coming out from there.

George Prieksaitis:

And do you think their support will try to harmonize with those international standards? Or do you think that Canada needs its own standards in the meantime, or maybe just in this intervening period before these international groups really get going?

Ritika Rohailla:

I think, this is again a personal view, my personal view would be that we would be providing input as those international standards are developed. And we are supportive with trying to align with those. Again, that's a personal view.

George Prieksaitis:

Yeah. Okay. No, that’s very good. Okay, I see no other questions. Thank you very much both to Ritika and Alex, that was great. Maybe they’ll be able to stay if there are any more questions you have for Ritika or Alex. You don't get these opportunities very often so take full advantage if you have any other questions on their topics. And so, with that, Bobby, I'll pass it over to you to talk about IFRS 17.

Bobby Thompson:

Thanks, George. And it's great to see 475 people on here. I will just say I see a lot of former colleagues and friends, and it's great to see you. Now George did promise me if more than 200 people drop off during the insurance section, he would buy me lunch. I'll let you debate whether that's an insurance contract, a hedge, or a gambling contract. But here we go nonetheless. We're going to talk about IFRS 17 Insurance Contracts for the next 20 minutes or so. And I'm happy to take any questions that you might have on some of the updates and amendments.

This is just a short snapshot in a really long period of time that IFRS 17 has been evolving. In May of 2017, the initial standard dropped and there were a number of changes that were made along the way, as insurers said this accounting regime does not fit my contract. And then another jurisdiction would say, well, that doesn't fit my contracts. We've come to this final version of IFRS 17, about a year and a half ago, two years ago now, which is going to take effect on January 1, 2023. And we're actually 38 days away from the comparative period because you do have to restate the 2022 or the comparative period to the first period that you will adopt IFRS 17. For those of you, I was thinking about how to present this, because we want to give something for everyone, but we acknowledge that there's going to be some folks who haven't picked up IFRS 17 before and some people on this call I know are industry experts. So, we’ll try to cover a broad spectrum. But essentially what we're going to talk about today is a small amount of what is IFRS 17. Then we're going to talk about more of an executive spin, and for those who are reading financial statements, how do you look at key performance indicators? And then there is an IFRS 9 overlay amendment that's been released and we're waiting for the final words of, which I'll go over in a sufficient amount of detail. Please ask questions along the way as that makes this more interesting.

Oftentimes, when you see a slide like this, the first thing the IFRS 17 presenter is going to say is that the balance sheet is collapsing, there's going to be a lot less lines on an insurer's balance sheet than there previously was, and that is true. If you look at a new balance sheet under IFRS 17, it's only going to have a few lines on it. If you have deferred acquisition costs that you've incurred, that are related to future renewals, those aren't going to be their own assets, those are going to be included in a portfolio of contracts with other related contracts that are enforced today. All deferred acquisition costs that you would have had on your balance sheet, say if you're a P&C insurer, will be collapsed in with your insurance liability. If that puts your whole portfolio of contracts into a liability position, and there'll be one liability, that's quite condensed. The portfolio might also be in an asset position, although we expect that to be a lot less common. When I go through the balance sheet, a couple of things that don't often get talked about are VOBA assets, i.e., Value of Business Acquired. If you've been through an acquisition under IFRS 3 and you put an intangible distribution network-esque kind of thing on your books, oftentimes referred to as a VOBA, or a Value of Business Acquired, you need to really look through. If I were to ask 10 insurance experts on this call, what is a VOBA asset? I would probably get 10 slightly different answers, and that's okay. The real question is that you need to look through and say, are these really DAC-related costs? Are these really other cash flows that are attributable within IFRS 17 and should become part of the cash flows, or do these really represent intangible distribution networks that are a more general overhead type of things that have been capitalized that will stay under IAS 38? There is a little bit of a look through there that people need to consider. Generally speaking, if you have premiums receivable, it will get collapsed. The only real question there is, if you use a broker and the broker has default risk, is the premium received when it gets to the broker, or when it gets to you, the company? And when do you recognize something as a receivable under IFRS 9, versus when do you recognize something under IFRS 17. Policy loans is something you'll also see collapsed in. Generally speaking, what people don't appreciate with policy loans is that even today, you should be taking the spread on these policy loans — the expected amount you will borrow, versus the interest you're charging, the spread between those two — and actually have them as your insurance cash flows today. But most insurers do not do this under the current regime. And if there isn't a sufficient amount of borrowing in the future from your policyholders, you probably aren’t going to change that under IFRS 17. But it is a requirement to think about and make that call on institution-by-institution basis. On the liability side, the one thing I do want to say, because I think the four IFRS 4 categories on the IFRS 4 side are more straightforward, but undistributed surplus needs a lot of thought, particularly for life insurers who issue participating contracts, and for mutual companies who have some sort of distributed surplus, which is basically your capital base today. The question is going to be, do you feel those are obliged to a policyholder, a mutual policyholder or a par policyholder, and under what dates are there to get those to those policyholders as to whether that should be considered equity, or liability? The good news is OSFI’s capital standard, as it stands for Tier 1 capital, does include these undistributed surpluses, whether they're liability or equity in your Tier 1 capital ratios.

Now we get to the income statement, which is going to look very different. That's going to be really the thesis for the rest of my presentation here is, this is going to very much change the way people read financial statements, what they're thinking about, and the KPIs are likely going to be different, as well. Instead of net earned premiums or gross written premiums, those premium-based measures as your top line, you're going to have insurance revenue, okay? Insurance revenue is going to be net of something called a non-distinct investment component. And in plain English, what that is, is just amounts that are going to be paid in all circumstances. If I know that I'm going to have to pay something, whether it's via claim or a refund, that's not revenue, that's just a deposit liability. It's held within my insurance balance sheet and it doesn't go through the P&L.

We'll see insurance revenue possibly be a little bit smaller than previously premiums were. And you'll see also quite a bit of change on the expense side. We don't just have a “change in liabilities” line like we do today. Instead, we're going to break things out quite a bit, which we'll talk about on the next slide in a moment. I will also speak to the changes in the discount rate that are going to be split out from changes from the insurance operations. And what that's going to let investors do is really evaluate the asset management side of your insurance business, from the actual insurance operations side of the business. Insurance service result or a gross margin type of metric is how well I am managing my insurance operations? And then your finance result investment income minus your accretion and changes in discount rates is how well am I managing the financial side, and is the financial side really supplementing my insurance operation, or vice versa? There's going to be a little bit more transparency on the income statement on this topic, perhaps than there was in the past.

You can see what actually comprises some of these lines. When you think about revenue, it's going to be (this is under the general model, but also would be relevant for the premium allocation approach, which we'll talk about in a little bit) made up of expected claims. The risk adjustment, the risky release from that, because you're going to be holding your reserves at the best estimate liability, a probability-weighted liability plus risk adjustment, or some sort of conservatism factor. As well as any contractual service margin, which is the new concept. Today, under IFRS 4 in Canada, whenever you have a profit, whether it emerges over time, or whether it emerges upfront or loss, you recognize it in the P&L right away, right? There isn't a lot of deferral of these profits. Under IFRS 17, if you have a profit embedded in a contract, it gets recognized over the service period and losses in onerous contracts get recognized right away. But interestingly enough, the onerous portion of the contract shows up through your insurance service expense line, because really, it's just the pre-recognition of a claim that's going to come. It actually gets reversed as those claims develop, but that all happens in the expense line. Effectively, over the life of a contract, insurance revenue is meant to be premium. While there will be a timing difference over the long run, you should see insurance revenue being somewhat close to the premium’s metric today, minus that investment component aspect I talked about.

There are three models, which you will measure insurance contracts with. There's the general model, which effectively is for most long-duration contracts. There are two exceptions to using the general model. The first is where you have a short-duration contract, like the premium output, and then you use the premium allocation approach. And that's a simplification of the general model, where basically what the standard was thinking when they wrote that part was, well, when the duration gets very short for the liability for remaining coverage, how long an insurance contract provides you with coverage, the impact of financing, discounts and profits all get recognized over one year, and there isn't a significant amount of discounting. As such, we should be able to use a bit of a simplification model to recognize that revenue. That's basically pretty consistent with the accounting model we have today for short-duration contracts, such as auto policies and things of that nature. There are some differences, but as a general framework, there are a lot of similarities. And then you have the variable fee approach, which is for contracts that are really more like investment contracts, but they have insurance risks. For example, in segregated funds and some participating contracts, you're going to see this special model called the variable fee approach used. If you have a lot of these contracts or need more information, you should really reach out. This talk here today just isn't long enough to get into the depths of that. But the general model is where we'll focus a little bit of our time and then during the KPIs, I'll speak for the P&C industry as well.

This is an overview of the general model for those who are maybe new to the topic. This is your reserves, you have your present value of future cash inflows, less your present value future cash outflows, which are claims and expenses you project over time; a risk adjustment factor, which is meant to make you indifferent between a contract with risk and a contract without risk to a certain confidence interval, where you determine the confidence interval and disclose; and any residual profit you have is contractual service margin deferred profit.

On day one, a profitable contract will have an income statement impact of zero, and then the income state impact will emerge overtime. If you have an onerous contract, you can see here I have the same components, but let's say my claims and expenses are very large and I've written this product at a loss, then the loss goes through the P&L right away. And today, if you have an assumption adjustment, the assumption adjustment goes through the P&L. When insurance companies do their basis change cycles throughout the year, you'll see that there's a lot of volatility in those quarters, or there can be a lot of volatility in those quarters. Tomorrow, there's only volatility or downside risk, if a group of contracts becomes onerous, versus profitable contracts that will first absorb all of the assumption adjustments through deferred profit on the balance sheet.

If we move forward, that's a little bit of the table that I want to set for how do you read these financial statements going forward? What are the KPIs going to be? And I saw a question pop up here that I'm just going to address before I move on — can you use different approaches? Absolutely. Part of your portfolio might be best reflected by the general model, part of it might be best reflected by the premium allocation approach and some from the variable fee approach. If you're a conglomerate for example, and let's say you have life insurance, group insurance, which are one-year contracts, and then some sort of segregated fund contract, you would employ all three models, just not to the same contracts, of course.

So how do you read these financial statements going forward? We spend so much time on IFRS 17, talking about new contracts that are going to be written. I'm very guilty of that. But realistically, come 38 days from now, all of the stuff that's already on the books needs to be transitioned to IFRS 17, meaning your transition is going to completely be driven by enforced contracts. We need to get this right, because if we get transitioned wrong, that's going to live with us for 10–20 years, however long it takes for some of these contracts to run off. The standard requires that we use the full retrospective approach, which means that as of January 1, 2022 and forward, we're using IFRS 17. But from December 31 backwards, for as many years as we can go, we need to apply the standard fully retrospectively. The problem is, with insurance contracts, there are many different data elements that are required, system elements that are required, a lot of hindsight that could be involved. If it is impracticable, a similar definition to that under IAS 8, then you are not required to apply the full retrospective approach back to that date. If you look at Europe, you're going to see insolvency too. People are going back in time 2016, 2015, quite a way back. In North America, South America, Asia, even Australia, Oceania, we're seeing quite a bit of this, we just don't have this data, it just doesn't exist in a way that's needed for IFRS 17. There's a whole host of reasons. But we might be seeing applications back to 2021, maybe 2021 is on full retro and nothing else, or 2020, or 2019, but we're just not seeing a lot. Companies need to make that evaluation. It's going to be accompanied by a company assessment, and there's a lot of judgment. And as a reader of financial statements, we need to be understanding about how much of this is using the actual IFRS 17 model, and how much is using one of the other two approaches when you can't do it fully retrospective, and that is modified retrospective or fair value. I'm not going to speak too much to modified retrospective, because there just isn't a lot of use of that in Canada. We're just not seeing that as an approach, because that means you have to use full retrospective, but where you can't do it, where you have missing data, you have to make an assumption about what that is, and then have a whole bunch of disclosures about what that assumption is, and that that becomes a very onerous exercise for companies and not a lot of people are going near the MRA. However, the fair value approach, we see quite a bit of in Canada, and how you approach fair value is going to be very important. As a user of the statements, what's going to also be important is you might not have a lot of inputs to that fair value, because it's been assessed globally and generally accepted by most, that the fair value approach is not actually a non-recurring fair value measurement that requires all the IFRS 13 disclosures. When you're reading financial statements, you need to understand the vast majority of a company's books, perhaps all the contracts written 2020 and backwards for life insurance companies, are going to be fair valued on the transition date, and then run off on that book forward. So, there needs to be a lot of understanding about what’s going to be in that book and how it's going to emerge, and then contracts will be added on under the go forward IFRS 17 model from there. In 10–20 years, we'll see these fair value amounts go to pretty low values, but they're going to be very significant in the short run.

If we go to the next slid. Okay, let's talk about KPIs with that context in mind. Right? A lot of our guiding principles for KPIs aren't going to change, and you're starting to see investor presentations come out. There are two groups, large financial institutions in Europe, who've now released their IFRS 17 expected transition impacts. One of them released and said, “Hey our profits are going way up”, the other one released and said “our profits are going way down”. I think there's a bit of risk to being a first mover there, and we're going to see how this emerges over time whether results are plus-minus or stay relatively straightforward.

This is where, for the more executive folks who are thinking about this more from reading the financial statements, and how is this going to impact my KPIs? KPIs will be very different under IFRS 17 than they were under IFRS 4. I want to focus on a few, but a couple that I'll focus on to start is right now you're measuring a lot with gross written premiums as a volume of business metric; and net earned premiums as your revenue metric. You're going to have a new accounting basis, and you're going to have insurance revenue. And like I said, over the long run, net earned premiums and revenue should be close, but they might not be in any given period. As such, we need to really understand what those differences are, and you will see some changes. But most people, when we do surveys, say they're going to continue to track gross written premiums.

I also want to talk about shareholders’ equity, specifically for life insurance companies. When people are doing shareholders’ equity and return on equity, one of the questions is as follows — previously in my equity balances, I had an undistributed surplus like car surplus, mutual surplus, whatever that is, and all that CSM, that Contractual Service Margin, that deferred profit on my balance sheet, that was in my equity as well. Am I changing the base of my equity when I do these KPIs going forward, and is that going to largely change? I know my income’s going to change as well because I just showed you how the income statement looks very different than it used to, and my equity base is also changing.

Return on equity metrics and operating return on equity metrics, or core metrics, whatever the metric you are using on a non-GAAP basis or a GAAP basis, will be different than it is under IFRS 4, and people need to take a lot of time to really understand what that is. And like I said, tying it back to my discussion earlier on some of the people who are first movers in terms of presenting their findings and their results to the market on a preliminary basis, the market’s not fully understanding these results. As executives, people need to take time and really understand what's going on.

The other thing I want to say is on the value of new business, IFRS 17 is going to give us disclosures around onerous contracts and profitable contracts that are written or acquired in the year. This is going to change the way that people are receiving information on new business, and whether profit or loss is recognized upfront or deferred, and that's something that will be available to the market.

This is just a roll-forward of the source of earnings. I was laughing when Matthew was going over the Disclosure Efficiency Project, because IFRS 17 introduced a lot of disclosures into the practice and a lot of breakdowns. I talked about how the balance sheet is shrinking, the disclosures are growing, because all of that information we used to have is going to be flushed out in a really big, what we call roll forward tables. And that's whether you're under the premium allocation approach, the general model, or the VFA, you need to roll forward, likely in Canada on a segment basis opening contracts, changes from the P&L, changes in your reserves that do impact reserve components, cash flow changes, and then all the way to closing reserves. There's a lot of information and a lot of granularity, and that's why you see projects under IFRS 17 have seven-, eight-, nine-figure budgets, because there's just so much extra information to track and it completely transforms the way people are accounting for things today. As you do this source of earnings (this will all be available to you in the notes), if you're an insurance writer, it's going to be very apparent how your profits are emerging on a segment-by-segment basis at least. You can do more granular, but we aren't seeing a lot of people take up that option. You’re going to see what is my income from fees, what is my income from my investment returns, but then also looking at what's my income from my risk release versus how was my actual versus expected result? If I see someone have fairly neutral insurance service results, and I see that they had really bad actual versus expected, my insurance expenses were a lot bigger than my expected claims, and I'm only compensating that with my release of risk adjustment and contractual service margin, I'm going to want to know, is that negative experience going to persist in the future and what's driving that? All of this information will be very available, and that's why for people who are interested in insurance, we'll just need to keep monitoring results, the industry, and how things emerge.

We move to the next slide and we're almost through here, folks. I'll be very brief on this slide and just say that CSM is a store of earnings, right. Now, people are going to relook as it may not change economically how much dividend is available, but it might change the optics of where is the dividend coming from? Is my profit coming from the release of risk and deferred profit recognition? Or, in the PNC space prior to your development and revenue emergence over my expenses? Or is it coming from my investment performance and understanding those will really impact the market of how people are being evaluated.

This is for the P&C folks. Core ratio — we always talk about the core ratio and there is likely going to be fairly significant changes across the core ratio. If you look at claims and expenses, what expenses are attributable to and which ones are not; which ones should be in your expense ratio versus which ones are just overhead expenses — that’s going to change, and that's going to change the makeup of the ratio. Acquisition cost — “what is a policyholder acquisition cost” is changing. And we see a lot of variance across the industry in how much expenses are attributable and how much acquisition expense is being defined, and you can even see that on the Quiz Three results across the industry from OSFI. Companies are having all kinds of different levels of expenses being attributable, which you know, might not make things comparable, but certainly will have an impact on both the core ratio and on capital. And then, of course, the denominators are changing because we don't have net earned premiums available to us as a GAAP measure. If you need for your core to be made up of a number of GAAP measures, net earned premiums become some sort of insurance revenue metric, and what does that do? As such, the core is going to change and there is a task force working with OSFI on how that will change, but we're seeing other global jurisdictions make changes to the core ratio. And while they aren't necessarily comparable today, global metrics of core combined ratios certainly go forward. People who are reading these financial statements in these non-GAAP measures are going to need to understand the sources of difference.

I will just take a couple of minutes here, and I apologize we're a little bit over, just to talk about the IFRS 9 overlay amendment that's come out. We're just waiting for the final wording here on the IFRS 9 overlay. Effectively what happened was, in Europe – who by the way, as of this morning decided they're going to endorse the standard in 2023, which is great and we kind of knew they were and we sure hope they weren't going to change their mind, but they did decide this morning and they did announce their endorsement.  They had lobbied to the IASB, the CFO forum in Europe, and said, hey, doing IFRS 9 retrospectively where you have to go through the instrument by instrument and figure out which ones lasted to 2023, and am I going to reclassify those and recognize ECL on top of doing my IFRS 17 conversion, is just too much. And it's not going to give a sensible answer either. The IASB, after a lot of consultation, said for all of your assets, whether they're surplus-backing or whether they are liability-backing, you can go back in time in 2022 and say what you think the classification should have been, relative to your liabilities under IFRS 9 versus IFRS 17, and carry that classification forward, and then apply IFRS 9 on a prospective basis as of January 1, 2023 for those who had the initial deferral. And what this is going to do is it's going to cause you to have less mismatch in your asset result versus your liability result. It is optional instrument by instrument, which is interesting, because for the reason why people were complaining that it was too hard to do, they also wanted the right to not do it for certain instruments. And it can be applied whether you decide to fully retrospect and go back into 2022 and restate some of your balances under IFRS 9, or not. If you do decide to go back and restate some of the balance under IFRS 9, it's those items that are derecognized that you can apply the overlay approach to up to the December 31, 2022 timeframe in your comparatives 2022. The other huge thing is you don't need to apply the expected credit loss model in 2022. If you don't apply the standard retrospectively, you can start applying that January 1, 2023, and you'll just use your incurred loss model. The question arises, if I was using in my original 2022 financial statements fair value through P&L, and now I'm reclassifying things to fair value through OCI or amortized costs as a result of this overlay, do I recognize incurred losses? Or do I not have to recognize those incurred losses, because right now, the exposure draft of this just tells us that, sorry the agenda paper just tells us that they don't want to change the impairment. But if you were recognizing something marked to market through the P&L, and now you need to bring that on the books as of January 1, 2022, and then evaluate subsequent changes whether there's incurred loss and there is an incurred loss, reason stands that you would record that. But we need to understand what the final words say. As such, all of this is really good context. Take this slide and hopefully it's helpful to you. It's certainly getting a lot of positive feedback across the Board, but really it's subject to those final words that are going to be issued in a month's time. George, that's all I have for IFRS 17 in the overlay.

George Prieksaitis:

I don't see any other questions being posed just yet. And there is going to be a publication that I'm sure EY I will do once that exposure draft on the IFRS 9 overlays is finished. And we do need to read the fine print to make sure we know we're doing. I admit, this is all getting cut a little bit close, given that people have to do the restatement of the comparative periods in 2022. But look for that on the website, www.ey.com/ifrs. It'll be published as soon as it's available.

Not seeing any other questions, I think we've answered all the questions that are posed. Thank you to the people who posed questions, I appreciate it. I want to thank all our presenters, Bobby, Matthew, Amanda, Ulana, and also our two friends from the OSC, Alex and Ritika. And with that, we look forward to folks having a good year-end. If there’s anything else, please contact your friends at EY. Have a good day.