from the underlying items. An example of this would be the effect of financial
guarantees. These relate to future service and adjust the contractual service margin
except to the extent that the entity applies risk mitigation; and
• other changes in estimates of fulfilment cash flows. An entity applies the same
requirements consistent with insurance contracts without direct participation
features to determine what extent they relate to future service and therefore adjust
the contractual service margin (see 8.6.2 above).
An entity is not required to identify the separate components of the adjustments to the
contractual service margin resulting from changes in the entity’s share of the fair value
of underlying items that relate to future service and changes in the fulfilment cash flows
relating to future service. Instead, a combined amount may be determined for some or
all of the adjustments. [IFRS 17.B114].
Except in situations when a group of contracts is onerous, or to the extent the entity
applies the risk mitigation exception (see 11.2.4 below), the effect of the general model
and the variable fee approach may be compared, as follows:
Comparison of
General model
Variable fee approach
Insurance finance income or •
Change in the carrying •
Change in the fair value of
expenses (total) recognised in
amount of fulfilment cash
underlying items
statement of financial performance
flows arising from the time
value of money and
financial risk
• Accretion of interest on the
contractual service margin
at rate locked at initial
recognition
• Any difference between the
present value of a change in
fulfilment cash flows
measured at current rates and
locked rates that adjust the
contractual service margin
Insurance contracts (IFRS 17) 4551
Changes in the carrying amount Recognised immediately in the Adjusts the contractual service
of fulfilment cash flows arising statement of financial performance margin unless risk mitigation
from the time value of money
applied (in which case adjusts
and financial risk
profit or loss or other
comprehensive income)
Discount rates for accretion of, Rates determined at initial Rate included in the balance sheet
and adjustment to, the contractual recognition
measurement (i.e. current rates)
service margin
11.2.3
Coverage period for insurance contracts with direct participation
features
Based on the Standard as currently written, the recognition of the contractual service
margin in profit or loss for insurance contracts with direct participation features follows
the same principle for contracts without direct participation features discussed at 8.7
above. That is, the contractual service margin is recognised in profit or loss to reflect
the services provided in the period.
In May 2018, the TRG discussed an IASB staff paper which considered whether services
provided by an insurance contract include investment-related services and observed that:
• IFRS 17 identifies contracts subject to the variable fee approach as contracts that
provide both insurance services and investment-related services;
• the consequence of variable fee approach contracts providing both insurance
services and investment-related services is that:
• the references to services in paragraphs 45 and B119 of IFRS 17 relate to
insurance and investment-related services;
• the reference to quantify benefits in paragraphs B119(a) of IFRS 17 relates to
insurance and investment-related benefits; and
• the reference to expected coverage duration in paragraphs B119(a) of IFRS 17
relates to duration of insurance and investment-related services.
The TRG members expressed different views on whether it was necessary to clarify
that the definition of coverage period for variable fee approach contracts includes the
period in which investment services are provided.35 In June 2018, the IASB tentatively
decided to propose to clarify the definition of the coverage period for insurance
contracts with direct participation features. The proposed amendment would clarify
that the coverage period for such contracts includes periods in which the entity
provides investment-related services.36 At the time of writing this publication the
proposed amendment has not yet been exposed for consultation.
The effect of the proposed amendment can be illustrated by the following example.
Example 52.45: Insurance services and investment component with different
durations
An insurance contract matures in year 10 and pays the customer the account value at maturity. The contract
also includes a death benefit that varies depending on which year in the 10 year period the death occurs.
Specifically, if the customer dies in years 1-5, the customer’s beneficiary would receive a death benefit that
is the higher of 110% of the premium paid or the accumulated account value (assume that the death benefit
4552 Chapter 52
for years 1-5 results in significant insurance risk). However, if the customer dies in years 6-10 the customer’s
beneficiary receives only the account value. There is no surrender policy.
Does the insurer only have to consider years 1-5 for determining the coverage units to determine the
amortisation of the contractual service margin? Or does the insurer need to consider all 10 years for
determining coverage units and amortisation of the contractual service margin?
Based on the Standard as currently written, the CSM would be released over the insurance
coverage period in years 1-5. Based on the proposed amendment to IFRS 17 and the views
of the TRG, if the contract falls within the scope of the variable fee approach, the contract
provides insurance and investment –related services and the coverage period for total
services is ten years. The coverage units should be determined reflecting the benefits to
the policyholder of the insurance service and the investment-related services.
11.2.4 Risk
mitigation
Amounts payable to policyholders create risks for an entity, particularly if the amounts
payable are independent of the amounts that the entity receives from investments; for
example, if the insurance contract includes guarantees. An entity is also at risk from
possible changes in its share of the fair value returns on underlying items. An entity may
purchase derivatives to mitigate such risks. When applying IFRS 9, such derivatives are
measured at fair value through profit or loss. [IFRS 17.BC250].
For contracts with direct participation features the contractual service margin is
adjusted for the changes in the fulfilment cash flows, including changes that the
derivatives are intended to mitigate (unlike for contracts without direct participation
features where the contractual service margin is not adjusted for such changes).
Consequently, the change in the value of the derivative would be recognised in profit
or loss, but, unless the group of insurance contracts was onerous, there wo
uld be no
equivalent change in the carrying amount to recognise, creating an accounting
mismatch. A similar accounting mismatch arises if the entity uses derivatives to mitigate
risk arising from its share of the fair value return on underlying items. [IFRS 17.BC251-253].
Therefore, the Board concluded that, to avoid such accounting mismatches, an entity should
be permitted to not recognise a change in the contractual service margin to reflect some or
all of the changes in the effect of financial risk or the entity’s share of underlying items or the
fulfilment cash flows that do not vary based on the returns of underlying items. [IFRS 17.B115].
An entity that elects to use this approach should determine the fulfilment cash flows in a
group which is eligible in a consistent manner in each reporting period. [IFRS 17.B117].
This relief is conditional on the entity having a previously documented risk management
objective and strategy for sing derivatives to mitigate financial risk arising from
insurance contracts and, in applying that objective and strategy: [IFRS 17.B116]
• the entity uses a derivative to manage the financial risk arising from the insurance
contracts;
• an economic offset exists between the insurance contracts and the derivative, i.e.
the values of the insurance contract and the derivative generally move in opposite
directions because they respond in a similar way to the changes in the risk being
mitigated. An entity should not consider accounting measurement differences in
assessing the economic offset; and
• credit risk does not dominate the economic offset.
Insurance contracts (IFRS 17) 4553
If any of the conditions above ceases to be met, an entity should: [IFRS 17.B118]
• cease to apply the risk mitigation accounting from that date; and
• not make any adjustment for changes previously recognised in profit or loss.
IFRS 17 is silent as to where this effect should be presented in the statement of
comprehensive income (i.e. in insurance service result or in insurance finance income
and expense).
11.2.5
Disaggregation of finance income or expense between profit or loss
and other comprehensive income
As discussed at 15.3 below, entities have an accounting policy choice, per portfolio of
insurance contracts, between:
• including insurance finance income and expense in profit or loss; or
• disaggregating insurance finance income and expense between profit or loss and
other comprehensive income.
For insurance contracts with direct participation features the allocation of the insurance
finance income or expense is different depending on whether or not the underlying
items are held.
If the underlying items are not held, then the insurance finance income or expense
included in profit or loss is an amount determined by a systematic allocation of the
expected total finance income or expense over the duration of the group of contracts
(see 15.3.1 below).
If the underlying items are held, then the insurance finance income or expense included
in profit or loss is an amount that eliminates accounting mismatches with income and
expenses on the underlying items held. This means that the expenses or income from
the movement of the insurance liability should exactly match the income or expenses
included in profit or loss for the underlying items, resulting in the net of the two
separately presented items being nil (see 15.3.3 below). This approach is sometimes
referred to as the ‘current period book yield approach’.
11.3 Investment contracts with discretionary participation features
An investment contract with discretionary participation features does not include a
transfer of insurance risk. Nevertheless, these contracts are within the scope of IFRS 17
provided the entity also issues insurance contracts. [IFRS 17.3(c)].
There is no de minimis limit on the number of insurance contracts that an entity must
issue in order to ensure that its investment contracts with discretionary participation
features are within the scope of IFRS 17. In theory, an entity need only issue one
insurance contract.
An investment contract with discretionary participation features is a financial
instrument that provides a particular investor with the contractual right to receive, as a
supplement to an amount not subject to the discretion of the issuer, additional amounts:
[IFRS 17 Appendix A]
• that are expected to be a significant portion of the total contractual benefits;
• the timing or amount of which are contractually at the discretion of the issuer; and
4554 Chapter 52
• that are contractually based on:
• the returns on a specified pool of contracts or a specified type of contract;
• realised and/or unrealised investment returns on a specified pool of assets
held by the issuer; or
• the profit or loss of the entity or fund that issues the contract.
The Basis for Conclusions observes that although investment contracts with
discretionary participation features do not meet the definition of insurance contracts,
the advantages of treating them the same as insurance contracts rather than as financial
instruments when they are issued by entities that issue insurance contracts are that:
[IFRS 17.BC83]
• Investment contracts with discretionary participation features and insurance
contracts that specify a link to returns on underlying items are sometimes linked
to the same underlying pool of assets. Sometimes investment contracts with
discretionary participation features share in the performance of insurance
contracts. Using the same accounting for both types of contracts will produce more
useful information for users of financial statements because it enhances
comparability within an entity. It also simplifies the accounting for those contracts.
For example, some cash flow distributions to participating policyholders are made
in aggregate both for insurance contracts that specify a link to returns on
underlying items and for investment contracts with discretionary participation
features. This makes it challenging to apply different accounting models to
different parts of that aggregate participation.
• Both of these types of contract often have characteristics, such as long maturities,
recurring premiums and high acquisition cash flows that are more commonly found
in insurance contracts than in most other financial instruments. The Board
developed the model for insurance contracts specifically to generate useful
information about contracts containing such features.
• If investment contracts with discretionary participation features were not
accounted for by applying IFRS 17, some of the discretionary participation features
might be separated into an equity component in accordance with the Board’s
existing requirements for financial instruments. Splitting these contracts into
components with different accounting treatments would cause the same problems
that would arise if insurance contracts were separated. Also, in the Board’s view,
the accounting model it has developed for insurance contracts, including the
treatment of discretionary cash flows is more appropriate than u
sing any other
model for these types of contracts.
Investment contracts with discretionary participation features are accounted for in the
same way as other insurance contracts. That is to say, the general model is applied (as
discussed at 8 above) and, at initial recognition, an entity should assess whether the
contracts contain direct participation features and hence should apply the variable fee
approach (discussed at 11.2 above).
However, as investment contracts without discretionary participation features do not
transfer insurance risk, IFRS 17 requires certain modifications as follows: [IFRS 17.71]
Insurance contracts (IFRS 17) 4555
• the date of initial recognition is the date the entity becomes party to the contract.
This is consistent with the requirements for recognition of a financial instrument
in IFRS 9 and is likely to be earlier than the date of initial recognition for an
insurance contract (see 6 above);
• the contract boundary (see 8.1 above) is modified so that cash flows are within the
contract boundary if they result from a substantive obligation of the entity to
deliver cash at a present or future date. The entity has no substantive obligation to
deliver cash if it has the practical ability to set a price for the promise to deliver the
cash that fully reflects the amount of cash promised and related risks; and
• the allocation of the contractual service margin is modified so that the entity should
recognise the contractual service margin over the duration of a group of contracts
in a systematic way that reflects the transfer of investment services under the
contract. This requirement is similar to the revenue recognition guidance
contained in IFRS 15 which seems logical as IFRS 15 would apply to the asset
management component of an investment contract without discretionary
participation features.
11.3.1
Contracts with switching features
Some contracts may contain options for the counterparty to switch between terms that
would, prima facie, result in classification as an investment contract without
discretionary participation features (accounted for under IFRS 9) and terms that would
result in a classification as an investment contract with discretionary participation
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 900
