In the IFRS balance of insurance companies, mortgage loans are generally accounted for at amortized cost. In addition to that, the fair value of mortgage loans has to be disclosed in the notes to the balance sheet (IFRS 7.25). This fair value is subsequently used in the supervisory framework notably the liability adequacy test under Solvency I (until 2016) and in the market value balance sheet under Solvency II as of 2016.
The fair value of the mortgages shall be measured in accordance with IFRS 13. The requirements make an important distinction between valuation at initial recognition and subsequent valuation. It is important that an entity determines at initial recognition whether the transaction price at that moment represents the definition of fair value.
Usually this results in a conclusion that the transaction price at initial recognition equals the fair value (IFRS 13.58). In case of a level-3 valuation (which is normally the case for residential mortgages), this specifically means that a valuation technique that uses unobservable inputs in a subsequent period, shall be calibrated so that at initial recognition the result of the valuation technique equals the transaction price (IFRS 13.64).
However, there might be cases when the transaction price at initial recognition differs from the fair value. In that case, if another IFRS than IFRS 13 requires or permits an entity to measure an asset initially at fair value and the transaction price differs from the fair value, the entity shall apply that other IFRS (IFRS 13.60). This means that together with IFRS 13, IAS 39.43A and IAS 39 AG 76 have to be applied in the specific situation that an entity has determined and shown evidence that the fair value at initial recognition (based on a level 3 measurement) differs from the transaction price. IAS 39 AG 76b then requires that the measurement at initial recognition shall be adjusted by deferring the difference between the fair value and the transaction price at initial recognition. After initial recognition, the entity shall recognize that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.
In case the deferral adjustment of IAS 39 AG 76b is applicable, IFRS 7.28 additionally requires to disclose more information about this deferral adjustment by class of financial assets, namely:
- The accounting policy for recognizing in profit or loss the difference between the fair value at initial recognition and the transaction price to reflect a change in factors (including time) that market participants would take into account when pricing the asset.
- The aggregate difference yet to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference.
- Why the entity concluded that the transaction price was not the best evidence of fair value, including a description of the evidence that support fair value.