Changes to local GAAP .................................................................... 4344
9 INSURANCE CONTRACTS ACQUIRED IN BUSINESS COMBINATIONS
AND PORTFOLIO TRANSFERS ..................................................................... 4345
9.1
Expanded presentation of insurance contracts ........................................... 4345
4280 Chapter 51
9.1.1
Practical issues .................................................................................... 4347
9.1.1.A
The difference between a business
combination and a portfolio transfer ......................... 4347
9.1.1.B
Fair value of an insurer’s liabilities ............................ 4348
9.1.1.C Deferred
taxation
..........................................................
4348
9.1.1.D Negative
intangible assets ........................................... 4348
9.2
Customer lists and relationships not connected to contractual
insurance rights and obligations ..................................................................... 4348
10 APPLYING IFRS 9 WITH IFRS 4 ............................................................... 4349
10.1 The temporary exemption from IFRS 9 ....................................................... 4350
10.1.1
Activities that are predominantly connected with
insurance ............................................................................................. 4352
10.1.2
Initial assessment and reassessment of the temporary
exemption ........................................................................................... 4354
10.1.3 First-time
adopters
............................................................................
4356
10.1.4
Relief for investors in associates and joint ventures ................... 4357
10.1.5
Disclosures required for entities using the temporary
exemption ........................................................................................... 4358
10.1.5.A
Disclosures required to understand how an
insurer qualified for the temporary exemption ...... 4358
10.1.5.B
Disclosures required in order to compare
insurers applying the temporary exemption
with entities applying IFRS 9 ...................................... 4361
10.1.6
EU ‘top-up’ for financial conglomerates ....................................... 4364
10.2 The overlay approach ....................................................................................... 4365
10.2.1
Designation and de-designation of eligible financial assets .......4367
10.2.2 First-time
adopters ............................................................................ 4369
10.2.3 Disclosures required for entities applying the overlay
approach .............................................................................................. 4369
11 DISCLOSURE ................................................................................................ 4371
11.1
Explanation of recognised amounts ................................................................ 4372
11.1.1
Disclosure of accounting policies .................................................... 4373
11.1.2
Recognised assets, liabilities, income and expense .....................4376
11.1.2.A
Assets and liabilities .......................................................4376
11.1.2.B Income
and
expense
.....................................................4379
11.1.2.C Cash
flows ...................................................................... 4382
11.1.3
Gains or losses on buying reinsurance .......................................... 4382
11.1.4
Process used to determine significant assumptions ................... 4382
11.1.5
The effects of changes in assumptions .......................................... 4387
11.1.6
Reconciliations of changes in insurance assets and
liabilities ............................................................................................... 4389
Insurance contracts (IFRS 4) 4281
11.2 Nature and extent of risks arising from insurance contracts .................... 4392
11.2.1
Objectives, policies and processes for managing insurance
contract risks ...................................................................................... 4394
11.2.2
Insurance risk – general matters .....................................................4397
11.2.3
Insurance risk – sensitivity information ....................................... 4400
11.2.4
Insurance risk – concentrations of risk ........................................ 4402
11.2.5
Insurance risk – claims development information ..................... 4403
11.2.6
Credit risk, liquidity risk and market risk disclosures ................ 4407
11.2.6.A
Credit risk disclosures .................................................. 4408
11.2.6.B Liquidity
risk disclosures ............................................. 4410
11.2.6.C Market
risk disclosures ................................................. 4412
11.2.7
Exposures to market risk from embedded derivatives ............... 4414
11.2.8 Other
disclosure matters ................................................................... 4415
11.2.8.A
IAS 1 capital disclosures................................................ 4415
11.2.8.B Financial
guarantee contracts ..................................... 4417
11.2.8.C Fair
value
disclosures .................................................... 4417
11.2.8.D Key
performance
indicators
........................................
4418
List of examples
Example 51.1:
Significant insurance risk ................................................................. 4294
Example 51.2:
Loan contract with prepayment fee .............................................. 4297
Example 51.3:
Deferred annuity with policyholder election .............................. 4298
Example 51.4:
Residual value insurance .................................................................. 4300
Example 51.5:
Contract with insurance and financial risk ................................... 4300
Example 51.6:
Reinsurance contract with ‘original loss warranty’ clause ......... 4301
Example 51.7:
Insurance of non-insurance risks ................................................... 4302
Example 51.8:
Deferred annuity with guaranteed rates ....................................... 4304
Example 51.9:
Guarantee fund established by contract ....................................... 4304
Example 51.10:
Insurance contract issued to employees related
to a
defined contribution pension plan ................................................. 4305
Example 51.11:
No market value adjustment for maturity benefits ..................... 4305
Example 51.12:
No market value adjustment for death benefits .......................... 4305
Example 51.13:
Investment contract linked to asset pool ...................................... 4306
Example 51.14:
Credit-related guarantee .................................................................. 4306
Example 51.15:
Guarantee fund established by law ................................................ 4306
Example 51.16:
Right to recover future premiums .................................................. 4306
Example 51.17:
Catastrophe bond linked to index .................................................. 4307
Example 51.18:
Insurance policy issued to defined benefit pension plan .......... 4307
Example 51.19:
Market value adjustment without death or maturity
benefits ................................................................................................ 4307
4282 Chapter 51
Example 51.20:
Death or annuitisation benefit linked to equity prices or
index ...................................................................................................... 4310
Example 51.21:
Life contingent annuity option ........................................................ 4310
Example 51.22:
Policyholder option to surrender contract for cash
surrender value .................................................................................... 4310
Example 51.23:
Policyholder option to surrender contract for value based
on a market index ............................................................................... 4311
Example 51.24:
Persistency bonus ............................................................................... 4311
Example 51.25:
Unbundling ........................................................................................... 4313
Example 51.26:
Unbundling a deposit component of a reinsurance
contract ................................................................................................. 4313
Example 51.27:
Unitised with-profits policy ............................................................. 4317
Example 51.28:
DPF with minimum interest rates ................................................... 4317
Example 51.29:
DPF recognition .................................................................................. 4319
Example 51.30:
Shadow loss recognition .................................................................. 4330
Example 51.31:
Shadow accounting ........................................................................... 4343
Example 51.32:
Business combination under IFRS 4 .............................................. 4346
Example 51.33:
Purchase of portfolio of one-year motor insurance contracts ....... 4349
Example 51.34:
Determination of eligibility for the temporary exemption
at reporting entity level when the group is eligible for the
temporary exemption ........................................................................ 4351
Example 51.35:
Determination of eligibility for the temporary exemption
at reporting entity level when the group is not eligible for
the temporary exemption ................................................................. 4351
Example 51.36:
Calculation of the predominance ratio ......................................... 4354
Example 51.37:
Discontinuation of the temporary exemption ............................. 4356
Example 51.38:
Illustrative disclosure explaining how an insurer qualified
for the temporary exemption – where the gross liabilities
within the scope of IFRS 4 exceed 90% of total liabilities ........ 4359
Example 51.39:
Illustrative disclosure explaining how an insurer qualified
for the temporary exemption – where the gross liabilities
within the scope of IFRS 4 are less than 90% of total
liabilities but liabilities connected with insurance are in
excess of 90% of total liabilities ...................................................... 4359
Example 51.40:
Illustrative disclosure explaining how an insurer qualified
for the temporary exemption – where the total carrying
amount of liabilities connected with insurance are greater
than 80% but less than 90% of total liabilities .............................. 4360
Example 51.41:
Illustrative disclosures required in order to compare
insurers applying the temporary exemption with entities
applying IFRS 9 .................................................................................. 4363
Example 51.42:
Disclosure of claims development ................................................. 4404
Example 51.43:
Contract containing a guaranteed annuity option ....................... 4414
Example 51.44:
Contract containing minimum guaranteed death benefits ......... 4414
4283
Chapter 51
Insurance contracts
(IFRS 4)
1 INTRODUCTION
IFRS 4 – Insurance Contracts – issued in 2004, is an interim accounting standard for
insurance contracts. Subsequent to the issue of IFRS 4, the IASB spent many years
developing a new accounting standard for insurance contracts to address the various
deficiencies within IFRS 4, including the absence of a measurement model.
The new insurance accounting standard, IFRS 17 – Insurance Contracts – was issued in
May 2017. IFRS 17 is effective for accounting periods beginning on or after
1 January 2021. When IFRS 17 is applied, IFRS 4 is withdrawn. IFRS 17 is discussed in
Chapter 52. This chapter discusses only IFRS 4.
1.1
The history of the IASB’s insurance project
The IASB and its predecessor, the IASC, have been developing a comprehensive
standard on insurance contracts since 1997 when a Steering Committee was established
to carry out the initial project work. [IFRS 4.BC3]. It was decided to develop a standard on
insurance contracts because:
(a) there was no standard on insurance contracts, and insurance contracts were excluded
from the scope of existing standards that would otherwise have been relevant; and
(b) accounting practices for insurance contracts are diverse, and also often differ from
practices in other sectors. [IFRS 4.BC2].
Historically, the IASB and its predecessor avoided dealing with specific accounting
issues relating to insurance contracts by excluding them from the scope of their
accounting standards. Currently, insurance contracts are excluded from the scope of the
following standards:
• IFRS 7 – Financial Instruments: Disclosures;
• IFRS 9 – Financial Instruments;
• IFRS 15 – Revenue from Contracts with Customers;
• IAS 32 – Financial Instruments: Presentation;
• IAS 36 –
Impairment of Assets;
4284 Chapter 51
• IAS 37 – Provisions, Contingent Liabilities and Contingent Assets;
• IAS 38 – Intangible Assets; and
• IAS 39 – Financial Instruments: Recognition and Measurement.
In addition, contractual rights from insurance contracts are excluded from the measurement
requirements of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations.
An alternative to developing a standard on insurance contracts would have been for the
IASB to remove the insurance contract scope exemptions from these standards.
Revenue would then have to be measured in accordance with IFRS 15 and most
insurance contract liabilities would have to be recognised in accordance with either
IAS 39 or IFRS 9 or IAS 37 depending on their nature. However, the IASB and its
predecessor were persuaded that an insurance contract is sufficiently unique to warrant
its own accounting standard and spent many years deciding what accounting that
standard should require.
The Steering Committee established in 1997 published an Issues Paper – Insurance – in
December 1999 which attracted 138 comment letters. Following a review of the
comment letters, the committee developed a report to the IASB that was published
in 2001 as a Draft Statement of Principles – Insurance Contracts (DSOP). The DSOP
was never approved. [IFRS 4.BC3].
The IASB began discussing the DSOP in November 2001. However, at its May 2002
meeting the IASB concluded that it would not be realistic to expect the implementation
of a full recognition and measurement standard for insurance contracts by 2005 (in time
for the adoption of IFRS in the EU).1
Consequently, the insurance project was split into two phases: Phase I, which became IFRS 4
and Phase II, which resulted in the publication of IFRS 17 in May 2017. IFRS 17 has an
effective date of accounting periods beginning on or after 1 January 2021 (see Chapter 52).
Amendments made to IFRS 4, designed to mitigate the impact on insurers of applying
IFRS 9 before applying IFRS 17, are discussed at 1.3 and 10 below.
1.2
The development of IFRS 4
IFRS 4 was finalised in a relatively short period by the IASB once it became clear that a
standard was required in time for the EU adoption of IFRS in 2005. An exposure draft,
ED 5 – Insurance Contracts – was issued in July 2003 with a comment period expiring
on 31 October 2003. The IASB was extremely responsive to comment letters with most
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 848
