p17m7mqf5rja118ar1v0jodunr4.pdf

Chapter 35
INSURANCE CONTRACTS (IFRS 4)
BACKGROUND AND INTRODUCTION
IFRS 4 is the first Standard from the International Accounting Standards Board (IASB) on insurance contracts. The extent of guidance in IFRS 4 is quite modest in
comparison with the more comprehensive overhaul of insurance accounting that is envisaged by the IASB in the future. IFRS 4 was introduced in time for insurance
companies to comply with the adoption of International Financial Reporting Standards (IFRS) in Europe and elsewhere in 2005. The Standard is designed to make
limited improvements to accounting practices and to provide users with an insight into the key areas that relate to accounting for insurance contracts.
All entities that issue policies that meet the definition of an insurance contract in IFRS 4 have to apply the Standard. Additionally, the Standard applies to financial
instruments with so-called discretionary participation features. The Standard does not apply to other assets and liabilities of the insurance companies, such as financial
assets and financial liabilities, which fall within the scope of IAS 39. Similarly, it does not address the accounting required by policyholders. Additionally, IFRS 4 sets
out new disclosure requirements for contracts that qualify as insurance, including details about future cash flows.
(in accordance with IFRS 4)
DEFINITION OF KEY TERM
Insurance contract. A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
IFRS 4 covers most motor, travel, life, and property insurance contracts as well as most reinsurance contracts. However, some policies that transfer no
significant insurance risk, such as savings and pension plans, are covered by IAS 39 and accounted for as financial instruments irrespective of their legal form.
IAS 39 also applies to those contracts that principally transfer financial risk, such as credit derivatives and some financial reinsurance contracts. IFRS 4 does
not apply to: product warranties, which are covered by IAS 18 and IAS 37; employers’ assets and liabilities under employee benefits plans, which are covered
by IAS 19 and IFRS 2; and contingent consideration payable or receivable in a business combination, which is covered by IFRS 3, Business Combinations.
Financial guarantee contracts are outside the scope of IFRS 4 unless the issuer elects to apply IFRS 4 to such contracts. An issuer may make such an election
only if it has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts.
FIRST PHASE
Insurance contracts continue to be covered by existing accounting practices during this first phase of the development of a comprehensive set of standards on
insurance. The IFRS actually exempts an insurer temporarily from some requirements of other Standards, including the requirement to consider the IASB’s
Framework in determining accounting policies.
IFRS 4 makes limited improvements to accounting policies for insurance contracts in order to bring them more into line with IFRS. The Standard
1. Prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period date. This includes catastrophe provisions and
equalization provisions.
2. Sets out a minimum liability adequacy test that requires insurers to compare their recognized insurance liabilities against estimates of future cash flows.
Additionally, there is a requirement to carry out an impairment test for reinsurance assets.
There is a requirement for an insurer to keep insurance liabilities in its statement of financial position until they are discharged. The IFRS also prohibits offsetting
insurance liabilities against related reinsurance assets.
CHANGES IN ACCOUNTING POLICIES
Insurers are permitted to modify their existing accounting policies for insurance contracts as long as any changes meet the IASB’s criteria for improving the
relevance of their financial statements without making them less reliable. An insurer cannot introduce any of these practices, although it can continue using accounting
policies that involve any of them:
• Measuring insurance liabilities on a nondiscounted basis
• Measuring contractual rights to future investment management fees at an amount that exceeds their fair value
• Using nonuniform accounting policies for the insurance liabilities of a subsidiary
Insurers can use current market interest rates to value liabilities, thus bringing them more into line with movements in associated assets that are interest-sensitive.
This measure does not need to be applied consistently across all insurance liabilities. However, insurers will need to designate the liabilities that will be measured using
market rates.
An insurer does not need to change its accounting policies on insurance contracts in order to eliminate excessive prudence. However, an insurer that already
measures its insurance contracts with sufficient prudence should not introduce additional prudence.
An insurer need not change its accounting policies for insurance contracts to eliminate future investment margins. However, entities cannot change to an accounting