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

1 2 7 10 13 13 15 20 21 24 25 26 27 30 31 34 34 35 36 36 38 40 42 45

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

 

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

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

 

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

 

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

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

 

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

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

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

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

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

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

 

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

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

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