International Financial Reporting Standard 4

Insurance Contracts

In March 2004 the International Accounting Standards Board (IASB) issued IFRS 4 Insurance Contracts. In August 2005 the IASB amended the scope of IFRS 4 to clarify that most financial guarantee contracts would apply the financial instruments requirements. In December 2005 the IASB published revised guidance on implementing IFRS 4.

Other IFRSs have made minor consequential amendments to IFRS 4. They include Improving

Disclosures about Financial Instruments (Amendments to IFRS 7) (issued March 2009), IFRS 9 Financial Instruments (issued November 2009 and October 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011) and IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013

from paragraph

INTRODUCTION

 

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INTERNATIONAL FINANCIAL REPORTING STANDARD 4

INSURANCE CONTRACTS

 

OBJECTIVE

SCOPE

Embedded derivatives

Unbundling of deposit components

RECOGNITION AND MEASUREMENT

Temporary exemption from some other IFRSs

Liability adequacy test

Impairment of reinsurance assets

Changes in accounting policies

Current market interest rates

Continuation of existing practices

Prudence

Future investment margins

Shadow accounting

Insurance contracts acquired in a business combination or portfolio transfer

Discretionary participation features

Discretionary participation features in insurance contracts Discretionary participation features in financial instruments

DISCLOSURE

Explanation of recognised amounts

Nature and extent of risks arising from insurance contracts

EFFECTIVE DATE AND TRANSITION

Disclosure

Redesignation of financial assets

APPENDICES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redesignation of financial assets

APPENDICES

 

A    Defined terms

B    Definition of an insurance contract

C    Amendments to other IFRSs

 

 

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS EDITION APPROVAL BY THE BOARD OF IFRS 4 ISSUED IN MARCH 2004  APPROVAL BY THE BOARD OF FINANCIAL GUARANTEE CONTRACTS  AMENDMENTS TO IAS 39 AND IFRS 4) ISSUED IN AUGUST 2005 BASIS FOR CONCLUSIONS DISSENTING OPINIONS

 

International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is set out in paragraphs 1-45 and Appendices A-C. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the Standard. Definitions of other terms are given in the Glossary for International Financial Reporting Standards. IFRS 4 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance

Introduction

 

Reasons for issuing the IFRS

 

IN1  This is the first IFRS to deal with insurance contracts. Accounting practices for insurance contracts have been diverse, and have often differed from practices in other sectors. Because many entities will adopt IFRSs in 2005, the International Accounting Standards Board has issued this IFRS

a)to make limited improvements to accounting for insurance contracts until the Board completes the second phase of its project on insurance contracts

b)to require any entity issuing insurance contracts (an insurer) to disclose information about those contracts

IN2 This IFRS is a stepping stone to phase II of this project. The Board is committed

to completing phase II without delay once it has investigated all relevant conceptual and practical questions and completed its full due process

Main features of the IFRS

IN3 The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IFRS 9 Financial Instruments. Furthermore, it does not address accounting by policyholders

IN4 The IFRS exempts an insurer temporarily (ie during phase I of this project) from some requirements of other IFRSs, including the requirement to consider the Framework1 in selecting accounting policies for insurance contracts. However the IFRS

a) prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions

b)requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets

(c)requires an insurer to keep insurance liabilities in its statement of financial position until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against

related reinsurance assets

IN5 The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more

reliable and no less relevant

1The reference to the Framework is to IASC's Framework for the Preparation and Presentation of Financial Statements, adopted by the IASB in 2001. In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting

 

In particular, an insurer cannot introduce any of the following practices,

although it may continue using accounting policies that involve them:

a)measuring insurance liabilities on an undiscounted basis

b) measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services

c)using non-uniform accounting policies for the insurance liabilities of subsidiaries

IN6 The IFRS permits the introduction of an accounting policy that involves remeasuring designated insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer so elects, other current estimates and assumptions). Without this permission, an insurer would have been required to apply the change in accounting policies consistently to all similar liabilities

IN7 An insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it should not introduce additional prudence

IN8 There is a rebuttable presumption that an insurer's financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement 

of insurance contracts

IN9 When an insurer changes its accounting policies for insurance liabilities, it may reclassify some or all financial assets as 'at fair value

through profit or loss The IFRS

INT10 a)clarifies that an insurer need not account for an embedded derivative separately at fair value if the embedded derivative meets the definition of an insurance contract

b)requires an insurer to unbundle (ie account separately for) deposit components of some insurance contracts, to avoid the omission of assets and liabilities from its statement of financial position

c)clarifies the applicability of the practice sometimes known as 'shadow accounting

d)permits an expanded presentation for insurance contracts acquired in a business combination or portfolio transfer

e)addresses limited aspects of discretionary participation features contained in insurance contracts or financial instruments

IN11 The IFRS requires disclosure to help users understand

a)the amounts in the insurer's financial statements that arise from insurance contracts

b)the nature and extent of risks arising from insurance contracts

International Financial Reporting Standard 4 Insurance Contracts

Objective

 

1             The objective of this IFRS is to specify the financial reporting for insurance

contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance

contracts. In particular, this IFRS requires

a)limited improvements to accounting by insurers for insurance contracts

b)disclosure that identifies and explains the amounts in an insurer's financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing

and uncertainty of future cash flows from insurance contracts

Scope

1             The objective of this IFRS is to specify the financial reporting for insurance

contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance

contracts. In particular, this IFRS requires

a)limited improvements to accounting by insurers for insurance contracts

b)disclosure that identifies and explains the amounts in an insurer's financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts

Scope

 

An entity shall apply this IFRS

a)insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds

b)financial instruments that it issues with a discretionary participation feature

(see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires disclosure about financial instruments, including financial instruments that contain such features.

 This IFRS does not address other aspects of accounting by insurers, such as

accounting for financial assets held by insurers and financial liabilities issued by insurers (see IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 and IFRS 9 Financial Instruments), except in the transitional provisions in paragraph 45.  An entity shall not apply this IFRS to

a)product warranties issued directly by a manufacturer, dealer or retailer (see IAS 18 Revenue and IAS 37 Provisions, Contingent Liabilities and Contingent Assets

employers' assets and liabilities under employee benefit plans (see IAS 19

b)Employee Benefits and IFRS 2 Share-based Payment) and retirement benefit

obligations reported by defined benefit retirement plans see IAS 26 Accounting and Reporting by Retirement Benefit Plans

c) contractual rights or contractual obligations that are contingent on thefuture use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee's residual value guarantee embedded in a finance lease (see IAS 17 Leases, IAS 18 Revenue and IAS 38 Intangible Assets

d)financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable

e)contingent consideration payable or receivable in a businesscombination see IFRS 3 Business Combinations

f) direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policyholder).However, a cedant shall apply this IFRS to reinsurance contracts that it holds

For ease of reference, this IFRS describes any entity that issues an insurance contract as an insurer, whether or not the issuer is regarded as an insurer for legal or supervisory purposes

A reinsurance contract is a type of insurance contract. Accordingly, all references in this IFRS to insurance contracts also apply to reinsurance contracts

Embedded derivatives

IFRS 9 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. IFRS 9 applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract As an exception to the requirements in IFRS 9, an insurer need not separate, and measure at fair value, a policyholder's option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirements in IFRS 9 do apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract. Furthermore, those requirements also apply if the holder's ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified levelParagraph 8 applies equally to options to surrender a financial instrument containing

.a discretionary participation featur

 

Unbundling of deposit components

Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those

components

a)unbundling is required if both the following conditions are met

the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component the insurer's accounting policies do not otherwise require it to

recognise all obligations and rights arising from the deposit component

b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations unbundling is prohibited if an insurer cannot measure the deposit

The following is an example of a case when an insurer's accounting policies do not require it to recognise all obligations arising from a deposit component. A cedant receives compensation for losses from a reinsurer, but the contract obliges

the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedant's accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required To unbundle a contract, an insurer shall

a)apply this IFRS to the insurance component

b) apply IFRS 9 to the deposit component

Recognition and measurement

Temporary exemption from some other IFRSs

Paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and  Errors specify criteria for an entity to use in developing an accounting policy if no IFRS applies specifically to an item. However, this IFRS exempts an insurer

from applying those criteria to its accounting policies for

(a)insurance contracts that it issues (including related acquisition costs and

related intangible assets, such as those described in paragraphs 31 

b) reinsurance contracts that it holds

 Nevertheless, this IFRS does not exempt an insurer from some implications of

the criteria in paragraphs 10-12 of IAS 8. Specifically, an insurer

a)shall not recognise as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the end of the reporting period (such as catastrophe provisions and equalisation provisions

b)shall carry out the liability adequacy test described in paragraphs 15-19

c) shall remove an insurance liability (or a part of an insurance liability) from its statement of financial position when, and only when, it is extinguished—ie when the obligation specified in the contract is discharged or cancelled or expires

d) shall not offsetreinsurance assets against the related insurance liabilities; or income or expense from reinsurance contracts against the expense or income from the related insurance contracts

(e) shall consider whether its reinsurance assets are impaired (see paragraph

Liability adequacy test

An insurer shall assess at the end of each reporting period whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss

 

If an insurer applies a liability adequacy test that meets specified minimum requirements, this IFRS imposes no further requirements. The minimum requirements are the following

a) The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees

b) If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss

If an insurer's accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16, the insurer shall

a)determine the carrying amount of the relevant insurance liabilities2 less the carrying amount of any related deferred acquisition costs; and any related intangible assets, such as those acquired in a business

combination or portfolio transfer (see paragraphs 31 and 32). However, related reinsurance assets are not considered because an insurer accounts for them separately (see paragraph 20)

b) determine whether the amount described in (a) is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of IAS 37. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities

If an insurer's liability adequacy test meets the minimum requirements of paragraph 16, the test is applied at the level of aggregation specified in that test. If its liability adequacy test does not meet those minimum requirements, the comparison described in paragraph 17 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfoli

The amount described in paragraph 17(b) (ie the result of applying IAS 37) shall reflect future investment margins (see paragraphs 27-29) if, and only if, the amount described in paragraph 17(a) also reflects those margins

Impairment of reinsurance assets

If a cedant's reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognise that impairment loss in profit or loss A reinsurance asset is impaired if, and only if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract; and that event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer

Changes in accounting policies

Paragraphs 22-30 apply both to changes made by an insurer that already applies IFRSs and to changes made by an insurer adopting IFRSs for the first time

An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in IAS 8

To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in IAS 8, but the change need not achieve full compliance with those criteria. The following specific issues are discussed below

(a)current interest rates (paragraph 24

(b)continuation of existing practices (paragraph 25

(c)prudence (paragraph 26

d)future investment margins (paragraphs 27-29); and

(e)shadow accounting (paragraph 30

Current market interest rates

An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities3 to reflect current market interest rates and recognises changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph permits an insurer to change its accounting policies for designated liabilities, without applying those policies consistently to all similar liabilities as IAS 8 would otherwise require. If an insurer designates liabilities for this election, it shall continue to apply current market interest rates (and, if applicable, the other current estimates and assumptions) consistently in all periods to all these liabilities until they are extinguished

Continuation of existing practices

An insurer may continue the following practices, but the introduction of any of them does not satisfy paragraph 22

a)measuring insurance liabilities on an undiscounted basis

b)measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables

c)using non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and related intangible assets, if any) of subsidiaries, except as permitted by paragraph 24. If those accounting policies are not uniform, an insurer may change them if the change does not make the accounting policies more diverse and also satisfies the other requirements in this IFRS

 

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