FSC announces proposed amendments to the “Regulations Governing the Preparation of Financial Reports by Insurance Enterprises” as concerns foreign exchange gains and losses to align with the long-term operational realities of the life insurance industry and ensure the fair presentation of financial statements
2025-12-23
The Financial Supervisory Commission (hereinafter, “the FSC”), in accordance with Paragraphs 19 and 20 of International Accounting Standard No. 1 “Presentation of Financial Statements” (IAS 1), has proposed amendments to the “Regulations Governing the Preparation of Financial Reports by Insurance Enterprises” concerning the treatment of foreign exchange gains and losses. These amendments aim to better reflect the long-term operational realities of the life insurance industry and ensure the fair presentation of financial statements. The proposed changes include revisions to two articles and one form, with the rationale behind these changes and specific details as follows:
I. Current state of foreign investments and currency hedging in the life insurance industry:
1. Reasons for the high level of foreign investment by the life insurance industry:
Funds held by Taiwan’s insurance companies come primarily from premiums on long-term insurance paid by policyholders. As life insurance contracts typically have long durations, the funds must be allocated to suitable long-term fixed-income products to meet contractual obligations and achieve a match between the duration of assets and liabilities.
Taiwan’s domestic bond yields are low, and the market size is insufficient to absorb and provide investment targets that meet the life insurance industry’s cost of capital. The overseas bond market is larger and offers higher yields, prompting the life insurance industry to seek stable returns in foreign markets so as to align with their long-term liabilities.
As of the end of October 2025, the life insurance industry’s foreign investments amounted to NT$22.3 trillion. After excluding policies denominated in foreign currencies, the foreign exchange risk exposure was NT$15.2 trillion. Of this, approximately 60% has been hedged recently.
2. Reasons for the use of large-scale currency hedging tools by the life insurance industry:
According to International Accounting Standard No. 21 “The Effects of Changes in Foreign Exchange Rates” (IAS 21), foreign currency assets and liabilities should be translated at the spot exchange rate for financial reporting purposes. To mitigate the impact of short-term exchange rate fluctuations on profit or loss, the life insurance industry has utilized significant amounts of derivative financial instruments to hedge over the years.
Traditional hedging tools primarily include currency swaps (CS) and non-deliverable forwards (NDF). Since 2022, the interest rate differential resulting from the US Federal Reserve rate hikes has kept CS costs elevated. Additionally, the NDF market is limited to offshore transactions, while an imbalance between supply and demand has driven up prices. As a result, the life insurance industry has faced substantial and ongoing hedging costs.
From 2019 to October 2025, the cumulative cost of currency hedging for the life insurance industry reached NT$1.6 trillion, far surpassing the total after-tax net profits of NT$1.4 trillion during the same period. This underscores the high cost of hedging, which has had limited effectiveness in terms of actual risk mitigation.
II. Background and rationale for adjusting currency accounting valuation in Taiwan’s life insurance industry:
IAS 21 mandates that foreign currency assets and liabilities be translated at the spot exchange rate, with exchange differences recognized in the profit and loss statement. While this is the general principle, Taiwan’s life insurance industry typically holds foreign currency assets over the long term to match long-term policy liabilities. Most insurers do not have an immediate need for currency repatriation. As a result, current financial statements are significantly affected by short-term exchange rate fluctuations, which represent unrealized gains or losses. Furthermore, for certain bond assets, both amortized cost and spot exchange rates are applied simultaneously, leading to inconsistencies in valuation and failing to reflect the true economic substance. To address these issues, a more suitable accounting framework is required to reflect the financial position of Taiwan’s life insurance industry.
Excessive hedging in Taiwan’s life insurance industry: At present, Taiwan’s life insurance companies rely primarily on short-term, market-traded derivative instruments for hedging, with the goal of reducing short-term fluctuations in financial statements. However, these tools are inadequate for addressing long-term, structural exchange rate risks. In practice, short-term currency settlements account for only a small portion of cash flow, yet the overall hedging ratio remains as high as 60%. This has resulted in excessive hedging costs, which undermine the industry’s long-term financial health.
III. Experts and scholars support adjusting the currency accounting rules for the life insurance industry
On December 8, 2025, the Accounting Research and Development Foundation held a discussion on the adjustment of the currency accounting system for the life insurance industry. The meeting brought together experts and scholars from both the accounting and practical industry sectors, resulting in the following consensus:
1. Under IAS 21, the requirement to recognize all unrealized exchange differences in the profit and loss statement is inconsistent with the life insurance industry’s long-term operating model. This leads to distorted representations on the profit and loss statement, failing to accurately reflect the industry’s economic reality.
2. The capital structure of Taiwan’s life insurance industry, where foreign currency assets are matched with New Taiwan dollar liabilities, is a unique situation resulting from currency mismatches and the limited scale of the domestic bond market. Given this context, it is appropriate to invoke Paragraphs 19 and 20 of IAS 1 “Presentation of Financial Statements” to allow for a departure from IAS 21, with proper disclosure of the effects of this change.
3. The current approach results in excessively high hedging costs for the life insurance industry, which do not align with its economic reality. Alternative approaches should be considered, such as amortizing unrealized exchange differences over time, to better reflect the long-term nature of the industry’s operations.
4. The treatment of exchange differences on bonds measured at amortized cost, and the use of straight-line amortization for these differences, as a departure from the requirements of IAS 21, was supported by meeting participants.
IV. Draft amendments to Articles 12, 39, and Form 8-9 of the “Regulations Governing the Preparation of Financial Reports by Insurance Enterprises”:
1. Amendment to Article 12, Paragraph 4, Subparagraph 2, Item 6 of the Regulations:
For life insurance companies, in accordance with Paragraph 19 of IAS 1, if financial assets directly held by the company are classified as debt instruments measured at amortized cost, and no hedging has been designated for foreign currency risks, starting from January 1, 2026, any unrealized exchange differences arising from the amortized cost of foreign currency (after conversion) should be amortized on a straight-line basis for each bond, recognized as exchange gains or losses according to the expected remaining life of the debt instruments.
Unamortized cumulative unrealized exchange differences should be recognized as “other assets” or “other liabilities.” Upon disposal of a debt instrument, any unamortized portion should be recognized in the current period’s exchange gains or losses. Disclosures must be made as required by Paragraph 20 of IAS 1 regarding the impact of deviations from the standard.
2. Rationale for Amendments and Other Related Adjustments:
Based on the Accounting Research and Development Foundation’s reply letter dated December 9, 2025, Paragraph 19 of IAS 1 permits deviations from the standard in exceptional cases. Since the application of IAS 21 in Taiwan’s life insurance industry may result in misleading financial reporting and conflict with the objectives outlined in the Conceptual Framework, such deviations are deemed justifiable.
Additionally, Article 39 of the Regulations specifies that these new provisions will take effect starting from fiscal year 2026 and align with amendments to Format 8-9 in Article 29.
V. The FSC’s regulatory approach concerning this issue addresses several key objectives: ensuring fair financial reporting, fostering sustainable industry development, implementing hedging strategies aligned with the long-term operational characteristics of life insurance companies, and strengthening capital resilience. The FSC aims to ensure that life insurance companies’ financial reports fairly reflect their true operational status.
To ensure a comprehensive revision process by incorporating diverse perspectives, the draft amendment was discussed at a meeting held on December 19, 2025, to gather feedback from all stakeholders. In addition to being published in the Executive Yuan Gazette, the draft’s summary and a comparison table of the revised provisions will also be available on the FSC’s website. To give the life insurance industry sufficient time to prepare, all interested parties are invited to submit their comments within 30 days of the announcement through the FSC’s Laws and Regulations Retrieving System website.
I. Current state of foreign investments and currency hedging in the life insurance industry:
1. Reasons for the high level of foreign investment by the life insurance industry:
Funds held by Taiwan’s insurance companies come primarily from premiums on long-term insurance paid by policyholders. As life insurance contracts typically have long durations, the funds must be allocated to suitable long-term fixed-income products to meet contractual obligations and achieve a match between the duration of assets and liabilities.
Taiwan’s domestic bond yields are low, and the market size is insufficient to absorb and provide investment targets that meet the life insurance industry’s cost of capital. The overseas bond market is larger and offers higher yields, prompting the life insurance industry to seek stable returns in foreign markets so as to align with their long-term liabilities.
As of the end of October 2025, the life insurance industry’s foreign investments amounted to NT$22.3 trillion. After excluding policies denominated in foreign currencies, the foreign exchange risk exposure was NT$15.2 trillion. Of this, approximately 60% has been hedged recently.
2. Reasons for the use of large-scale currency hedging tools by the life insurance industry:
According to International Accounting Standard No. 21 “The Effects of Changes in Foreign Exchange Rates” (IAS 21), foreign currency assets and liabilities should be translated at the spot exchange rate for financial reporting purposes. To mitigate the impact of short-term exchange rate fluctuations on profit or loss, the life insurance industry has utilized significant amounts of derivative financial instruments to hedge over the years.
Traditional hedging tools primarily include currency swaps (CS) and non-deliverable forwards (NDF). Since 2022, the interest rate differential resulting from the US Federal Reserve rate hikes has kept CS costs elevated. Additionally, the NDF market is limited to offshore transactions, while an imbalance between supply and demand has driven up prices. As a result, the life insurance industry has faced substantial and ongoing hedging costs.
From 2019 to October 2025, the cumulative cost of currency hedging for the life insurance industry reached NT$1.6 trillion, far surpassing the total after-tax net profits of NT$1.4 trillion during the same period. This underscores the high cost of hedging, which has had limited effectiveness in terms of actual risk mitigation.
II. Background and rationale for adjusting currency accounting valuation in Taiwan’s life insurance industry:
IAS 21 mandates that foreign currency assets and liabilities be translated at the spot exchange rate, with exchange differences recognized in the profit and loss statement. While this is the general principle, Taiwan’s life insurance industry typically holds foreign currency assets over the long term to match long-term policy liabilities. Most insurers do not have an immediate need for currency repatriation. As a result, current financial statements are significantly affected by short-term exchange rate fluctuations, which represent unrealized gains or losses. Furthermore, for certain bond assets, both amortized cost and spot exchange rates are applied simultaneously, leading to inconsistencies in valuation and failing to reflect the true economic substance. To address these issues, a more suitable accounting framework is required to reflect the financial position of Taiwan’s life insurance industry.
Excessive hedging in Taiwan’s life insurance industry: At present, Taiwan’s life insurance companies rely primarily on short-term, market-traded derivative instruments for hedging, with the goal of reducing short-term fluctuations in financial statements. However, these tools are inadequate for addressing long-term, structural exchange rate risks. In practice, short-term currency settlements account for only a small portion of cash flow, yet the overall hedging ratio remains as high as 60%. This has resulted in excessive hedging costs, which undermine the industry’s long-term financial health.
III. Experts and scholars support adjusting the currency accounting rules for the life insurance industry
On December 8, 2025, the Accounting Research and Development Foundation held a discussion on the adjustment of the currency accounting system for the life insurance industry. The meeting brought together experts and scholars from both the accounting and practical industry sectors, resulting in the following consensus:
1. Under IAS 21, the requirement to recognize all unrealized exchange differences in the profit and loss statement is inconsistent with the life insurance industry’s long-term operating model. This leads to distorted representations on the profit and loss statement, failing to accurately reflect the industry’s economic reality.
2. The capital structure of Taiwan’s life insurance industry, where foreign currency assets are matched with New Taiwan dollar liabilities, is a unique situation resulting from currency mismatches and the limited scale of the domestic bond market. Given this context, it is appropriate to invoke Paragraphs 19 and 20 of IAS 1 “Presentation of Financial Statements” to allow for a departure from IAS 21, with proper disclosure of the effects of this change.
3. The current approach results in excessively high hedging costs for the life insurance industry, which do not align with its economic reality. Alternative approaches should be considered, such as amortizing unrealized exchange differences over time, to better reflect the long-term nature of the industry’s operations.
4. The treatment of exchange differences on bonds measured at amortized cost, and the use of straight-line amortization for these differences, as a departure from the requirements of IAS 21, was supported by meeting participants.
IV. Draft amendments to Articles 12, 39, and Form 8-9 of the “Regulations Governing the Preparation of Financial Reports by Insurance Enterprises”:
1. Amendment to Article 12, Paragraph 4, Subparagraph 2, Item 6 of the Regulations:
For life insurance companies, in accordance with Paragraph 19 of IAS 1, if financial assets directly held by the company are classified as debt instruments measured at amortized cost, and no hedging has been designated for foreign currency risks, starting from January 1, 2026, any unrealized exchange differences arising from the amortized cost of foreign currency (after conversion) should be amortized on a straight-line basis for each bond, recognized as exchange gains or losses according to the expected remaining life of the debt instruments.
Unamortized cumulative unrealized exchange differences should be recognized as “other assets” or “other liabilities.” Upon disposal of a debt instrument, any unamortized portion should be recognized in the current period’s exchange gains or losses. Disclosures must be made as required by Paragraph 20 of IAS 1 regarding the impact of deviations from the standard.
2. Rationale for Amendments and Other Related Adjustments:
Based on the Accounting Research and Development Foundation’s reply letter dated December 9, 2025, Paragraph 19 of IAS 1 permits deviations from the standard in exceptional cases. Since the application of IAS 21 in Taiwan’s life insurance industry may result in misleading financial reporting and conflict with the objectives outlined in the Conceptual Framework, such deviations are deemed justifiable.
Additionally, Article 39 of the Regulations specifies that these new provisions will take effect starting from fiscal year 2026 and align with amendments to Format 8-9 in Article 29.
V. The FSC’s regulatory approach concerning this issue addresses several key objectives: ensuring fair financial reporting, fostering sustainable industry development, implementing hedging strategies aligned with the long-term operational characteristics of life insurance companies, and strengthening capital resilience. The FSC aims to ensure that life insurance companies’ financial reports fairly reflect their true operational status.
To ensure a comprehensive revision process by incorporating diverse perspectives, the draft amendment was discussed at a meeting held on December 19, 2025, to gather feedback from all stakeholders. In addition to being published in the Executive Yuan Gazette, the draft’s summary and a comparison table of the revised provisions will also be available on the FSC’s website. To give the life insurance industry sufficient time to prepare, all interested parties are invited to submit their comments within 30 days of the announcement through the FSC’s Laws and Regulations Retrieving System website.
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Update：
2026-01-02