The OCI option under the IFRS 17 VFA

The previous post in this series worked through how a variable fee approach (VFA) model projects the unit fund and turns it into the paragraph B104 liability split: the fund held at value, the entity's share of it as income, and the non-unit cash flows as outgo. That post closed on the VFA measurement rule that differs from the general measurement model (GMM): where the financial movements on the liability go. This post picks that up and works through three things:

• How the VFA's financial impacts interact with profit or loss and the CSM
• Why the asset return can create a mismatch in profit or loss
• How the paragraph 89 OCI option eliminates that mismatch

1 — Where the VFA finance result comes from

For a contract with direct participation features, paragraph B104 nets the liability into the fund the entity owes policyholders, held at fair value, less the entity's variable fee. Every financial movement on that liability goes to one of two places: the contractual service margin (CSM), or finance income or expense (FIE) — presented in profit or loss (P&L), or split between P&L and OCI.

Three movement rules follow from the B104 split, and each sends its financial change to one of those destinations:

The entity's share and the non-underlying-item financial changes are absorbed into the CSM and released later, over coverage units, alongside the rest of the margin. Note the contrast with the general model: the VFA CSM carries no locked-in accretion rate (locked-in accretion is scoped to contracts without direct participation features, B72(b)) — its financial re-measurement arrives through exactly these B112 and B113(b) adjustments, at current values. The investment return on UI never touches the CSM: it is FIE in the period it happens (B111). That piece is what the rest of this post is about.

UI = underlying items · ES = entity's share of UI · CNV = cash flows not varying with UI

The investment return on UI increases the liability, so it is a loss in profit or loss, not a gain — the entity owes more to policyholders as the fund grows.

Only the investment return on UI goes to P&L, as a loss — the rest is absorbed by the CSM. The OCI option splits the UI return between FIE in P&L and OCI.

The liability itself has a simple composition worth keeping in view: the LFRC carrying amount = UI − ES + CNV — the underlying items at fair value, less the entity's share of the UI, plus the cash flows that do not vary with the underlying items (CNV). Part 1 of this series, projecting the unit fund, unpacks each of those components.

2 — How is the asset return shown in P&L?

The liability moves one-for-one with the fair value of the underlying items (B111), so the insurance finance expense for the period is the full investment return on those items. The assets backing the contract move by roughly the same amount economically, when the entity holds the underlying items, but how much of that asset return reaches profit or loss depends on the entity's IFRS 9 classification of the assets, not on the economics: fair value through profit or loss (FVTPL), fair value through OCI (FVOCI), or amortised cost.

If the OCI option is not elected, the full investment return on the underlying items goes to finance income or expense in profit or loss, but the full investment return on the assets does not always reach profit or loss. That causes the mismatch.

3 — The option: paragraph 88 default, paragraph 89 election

Paragraph 87A splits the accounting policy choice in two. For insurance finance income or expenses generally, paragraph 88 gives an entity a choice between including all of it in profit or loss each period, or disaggregating it using a systematic allocation of the expected total over the contract's duration (paragraph 88(b), applying B130-B133). Paragraph 89 replaces that choice for contracts with direct participation features where the entity holds the underlying items: instead of a systematic allocation, the entity may elect to include in profit or loss the amount that eliminates the accounting mismatch with the income or expense the underlying items themselves recognise in profit or loss (paragraph 89(b), applying B134-B136; sometimes called the book-yield approach).

Paragraph B134 is precise about the mechanics: the amount taken to profit or loss must exactly match the income or expense the underlying items recognise in profit or loss for the period, so that the net of the two separately presented items is nil. Whatever is left over — the difference between that matched amount and the total insurance finance income or expense for the period — goes to OCI (paragraph 90).

That precondition matters. Holding the underlying items is what makes the investment return on the liability side and on the asset side the same economic number in the first place; it is also the specific test paragraph 89 sets. An entity that invests premiums in assets other than the identified pool, rather than in the pool itself, does not meet that test even if it still writes contracts with direct participation features. It falls back to the paragraph 88 choice, and the systematic-allocation election, not the paragraph 89(b) election, is what's available if it wants to disaggregate.

Mechanically, once an entity holds the underlying items, the election works in three steps:

1. P&L impact: nets to nil. The finance expense in profit or loss is set equal to the asset return recognised in profit or loss that period. The investment result (asset return less finance expense) nets to nil: liability and asset returns match through profit or loss exactly.
2. OCI impact: nets to nil. The rest of the investment return on the underlying items (the full UI return less the asset return taken through profit or loss) goes to OCI — and cancels out in OCI.
3. The assets do the same. IFRS 9 does the equivalent split on the other side of the balance sheet: an FVOCI-classified bond backing the contract recognises effective interest and realised gains in profit or loss and parks unrealised fair-value movements in OCI; an amortised-cost instrument recognises only its effective-rate income, with no OCI at all, because there is no fair-value remeasurement to park anywhere. Backing the fund one-for-one, the asset-side OCI and the liability-side OCI are equal and opposite — they cancel.

When the backing assets are FVOCI and held 1:1 against the underlying items, the two sides converge: the amount the liability takes through profit or loss matches the asset's own profit-or-loss amount by construction (B134), and the liability's OCI residual (paragraph 90) moves against the asset's own FVOCI unrealised movement in the equal and opposite amount, because both are tracking the fair value of the same pool. Profit or loss and OCI both net to nil, which is the point of the election: it eliminates an accounting mismatch that never reflected an economic one. Amortised-cost backing is a different picture. The liability-side election still works exactly as B134 describes on the profit-or-loss line, but the asset carries no fair-value OCI to offset the liability's OCI residual — that residual sits in OCI on its own, without an asset-side counterpart.

4 — What it looks like

The same period, shown without and with the OCI option:

Bar heights are illustrative — no figures. Without the election, profit or loss shows the full finance expense on the fund against only the part of the asset return that reaches profit or loss, and the asset OCI has no liability-side partner. With the election, the investment result and OCI both net to nil, on both sides of the balance sheet. Part of the asset return goes to OCI — a mismatch arises unless the OCI option is elected.

No OCI:

• Full UI return through P&L
• Partial asset return through P&L
• Partial asset return through OCI
• Mismatch created

OCI elected:

• P&L impact nets to nil
• OCI impact nets to nil

5 — When is the OCI option not needed?

When the asset return is fully sent to profit or loss (FVTPL).

With FVTPL backing, the full asset return is already in profit or loss, so the finance expense set against it matches it in full — there is no difference left to send to OCI. The option has no effect.

• With FVTPL, the full asset return goes to P&L
• The full UI return goes to P&L, without OCI
• No mismatch in this case
• Nothing needs to go to OCI

From mechanics to review

The unit fund post set out how the liability is built for a direct participation contract; this post sets out what happens to the financial movement on it once IFRS 9 enters the picture on the asset side. Both are presentation questions layered on top of the same measurement: the total result for the period does not change, only how it is split between profit or loss, OCI, and the CSM. If you are configuring or reviewing a VFA model's finance-result presentation, or deciding which of the paragraph 88 and 89 policy choices fits a book, that scope sits within the IFRS 17 work on this site.