Concepts of IFRS 4 – Insurance Contracts & Implementation ...

IFRS 4 Phase I
Unbundling & Embedded Derivatives
Unbundling
Derivatives & Embedded Derivatives Defined
Some insurance contracts contain both
insurance and deposit components.
Unbundling is required if both the
following conditions are met:
i. Insurer can measure the deposit component
separately
ii. Insurer‟s accounting policies do not otherwise
require it to recognise all obligations and rights
arising from the deposit component.
If unbundled, IAS 39 will apply to the deposit
component and IFRS 4 to the Insurance
Component
Embedded derivatives should be
separated from host contract,
measured at fair value and changes
in fair value to be taken in profit and
loss
– This requirement applies to an
insurance contract also, unless the
embedded derivative itself is an
insurance contract
– An exception allowed when there is a
policyholder option to surrender an
insurance contract for a fixed amount
• This will impact the top line of the
company as deposit component will be
reduced from the total premium and
accounted under IAS 39 Financial
Instruments
• IT systems needs to be upgraded /
modified to separately capture the
deposit component and recognise front
end fees as revenue
• The life insurance products in India are
designed in such a way that embedded
derivative components cannot be
separated from host contract
• Unbundling of insurance contracts has
also been prohibited in IRDA Report for
IFRS
Copyright Birla Sun Life Insurance Company Limited 2008