Annual report 2010 - Dexia.com

Notes to the consolidated financial statements• Insurance contracts, including reinsurance contracts, andthe accepted reinsurance treaties, with the exception of thein-house-defined employee benefit plans;• Financial instruments issued with a discretionary profitsharing(a discretionary participation feature (DPF));• Unit-linked (UL) contracts stipulating that the policyholdercan switch at all times, at no expenses, to an investmentproduct with a guaranteed interest-rate and a probable profitsharing.1.10.1.2. ClassificationClassification is done policy by policy, whereas, for groupinsurances, classification is done at employer level.The Non-life insurance portfolio features include only insurancecontracts that contain significant insurance risk.1.10.1.3. Shadow accountingInsurers are permitted, but not required, to change theiraccounting policies so that a recognised but unrealised gainor loss on an asset affects those measurements in the sameway as a realised gain or loss does. The related adjustmentto the insurance liability (or deferred acquisition costs orintangible assets) shall be recognised in equity if, and onlyif, the unrealised gains or losses are recognised directly inequity.Dexia will limit the application of shadow accounting, if underlegal and/or contract conditions, the realisation of gains onan insurer's assets has a direct effect on the measurementof some or all of its DPF insurance contracts and investmentcontracts with discretionary participation features.1.10.1.4. Shadow-loss adjustmentTo determine the need for a shadow-loss adjustment, Dexiafirst has to determine whether additional liabilities would berequired, assuming current market-investment yields ratherthan the estimated return of the assets. If the level of liabilitiesrequired is higher than the total liabilities, then the deficiencyshould decrease the unrealised gains recorded in equity andincrease the liabilities through a shadow premium deficiencyadjustment.This requires the liability adequacy test (see I.10.1.9 LiabilityAdequacy Test – below) to be performed after all (if any)shadow adjustments. Should there be insufficient unrealisedcapital gains left in equity to accommodate the shadow lossadjustment, the additional liability increase should be chargedto the statement of income.1.10.1.5. Discretionary participation feature (DPF)Discretionary participation feature is a contractual rightto receive, as a supplement to the guaranteed benefits,additional benefits:• that are likely to be a significant portion of the totalcontractual benefits;• whose amount or timing is contractually at the discretion ofthe issuer; and• that are contractually based on:- the performance of a specified pool of contracts or aspecified type of contract; or- realised and/or unrealised investment returns on a specifiedpool of assets held by the issuer; or- the profit or loss of the company, fund or other entity thatissues the contract.All unrealised gains and losses coming from investmentsbacking insurance contracts and investment contracts withDPF are categorised proportionally for the part related to theinsurance contracts and investment contracts with DPF in aseparate line of the equity.Proportional calculation is performed on the basis of thecarried reserves and by separated management of the assets.1.10.1.6. Insurance contracts with depositcomponent (unbundling)All unit-linked products that contain both an insurancecontract and a deposit component will be unbundled.Accounting policies for insurance contracts are applied tothe insurance component; accounting policies for financialinstruments are applied to the deposit component.The unit-linked products that can be converted into aguaranteed investment product (branch 21) with profitsharing fall under IFRS 4 (investment with DPF) and will notbe unbundled.1.10.1.7. Embedded derivativesIAS 39 applies to derivatives embedded in an insurancecontract unless the embedded derivative is itself an insurancecontract. The requirements for insurance contracts with DPFalso prevail for financial instruments with DPF elements.As an exception to the IAS 39 requirement, Dexia does notneed to separate, and measure at fair value, a policyholder'soption to surrender an insurance contract for a fixed amount(or for an amount based on a fixed amount and an interestrate),even if the exercise price differs from the carryingamount of the host insurance liability. However, the IAS 39requirement does apply to any put option or cash surrenderoption embedded in an insurance contract if the surrendervalue varies in response to a change in a financial variable(such as an equity or commodity price or index), or anon-financial variable that is not specific to a party to thecontract.1.10.1.8. DPF in financial instrumentsIf the issuer classifies part of, or the entire feature as aseparate component of equity, the liability recognised for thewhole contract shall not be less than the amount that wouldresult from applying IAS 39 to the guaranteed element.At each reporting date, Dexia checks as to whether thisminimum requirement has been met: if it has not, thecorresponding liabilities are adjusted accordingly.1.10.1.9. Liability Adequacy TestsAn insurer applies a liability adequacy test (LAT) to its insuranceproducts and investment contracts with DPF. Dexia assesses ateach reporting date whether its recognised insurance liabilitiesManagement reportConsolidatedfinancial statementsAdditional information Annual financial statementsAnnual report 2010 Dexia135