International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 903
Example 52.49: Purchase of portfolio of one-year motor insurance contracts
Background
Parent A obtained control of insurer B in a business combination on 31 December 2021. B has a portfolio of
one-year motor insurance contracts that are cancellable by policyholders.
Analysis
Because Insurer B establishes its relationships with policyholders through insurance contracts, the customer
relationship with the policyholders meets the contractual-legal criterion for recognition as an intangible asset.
IAS 36 and IAS 38 apply to the customer relationship intangible asset. [IFRS 3.IE30(d)].
14
PRESENTATION IN THE STATEMENT OF FINANCIAL
POSITION
IFRS 17 specifies minimum amounts of information that need to be presented on the
face of the statement of financial position. This minimum information is supplemented
by disclosures to explain the amounts recognised on the face of the primary financial
statements (see 16 below).
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For presentation in the statement of financial position, IFRS 17 requires insurance
contracts to be aggregated by groups and presented separately as follows: [IFRS 17.78]
• insurance contracts issued that are assets;
• insurance contracts issued that are liabilities;
• reinsurance contracts held that are assets; and
• reinsurance contracts held that are liabilities.
This presentation is also required by IAS 1. [IAS 1.54(da), (ma)].
The groups referred to above are those established at initial recognition when a
portfolio of insurance contracts is divided into groups (see 5 above).
Any assets or liabilities for insurance acquisition cash flows are subsumed in the carrying
amount of the related groups of insurance contracts issued, and any assets or liabilities
for cash flows related to groups of reinsurance contracts held subsumed in the carrying
amount of the groups of reinsurance contracts held. [IFRS 17.79].
The presentation requirements are significantly different to that required by IFRS 9 in
respect of financial instruments. They are also likely to differ significantly from any
presentation applied previously by an insurer under IFRS 4. For example:
• individual positive and negative contract balances within a group will be
aggregated (netted) on the statement of financial position; and
• all rights and obligations arising from an insurance contract are presented net in
one line of the statement of financial position unless the components of the
contract are separated and accounted for under a different IFRS (see 4 above). The
rights and obligations presented net would include, for example, policyholder
loans, insurance premiums receivable, liabilities for incurred claims and deferred
acquisition costs.
There is no requirement for disclosure of balances in respect of the general model, the
premium allocation model or the variable fee approach to be shown separately on the
face of the statement of financial position. Nor is there a requirement for the
components of the contract balances (for example, the contractual risk margin) to be
presented on the face of the statement of financial position.
However, an entity should disclose reconciliations in the notes to the financial
statements that show how the amounts disclosed on the face of the statement of
financial position (i.e. the net carrying amount of contracts within the scope of IFRS 17)
changed during the reporting period because of cash flows and income and expenses
recognised in the statement of financial performance. Separate reconciliations are
required for insurance contracts issued and reinsurance contracts held. [IFRS 17.98]. The
detailed requirements of these reconciliations are discussed at 16.1 below. In summary,
separate reconciliations are required for contracts subject to the general model and the
premium allocation approach together with reconciliations for the individual
components of the contract balances. An entity is required to consider the aggregation
of these reconciliations necessary to meet the overall disclosure objectives of the
disclosure requirements of IFRS 17. [IFRS 17.95].
Insurance contracts (IFRS 17) 4567
There is nothing to prevent an entity from providing further sub-analysis of the
insurance and reinsurance assets and liabilities (which may make the relationship of the
reconciliations to the face of the statement of financial position more understandable).
Indeed, IAS 1 states that additional line items (including the disaggregation of those items
specifically required), headings and subtotals should be presented on the face of the
statement of financial position when such presentation is relevant to an understanding
of the entity’s financial position. [IAS 1.55].
In February 2018, the TRG members observed that applying the presentation
requirements reflects a significant change from existing practice and this change results
in information complexities and costs. In May 2018, the IASB staff prepared an outreach
report which included implementation concerns regarding the presentation of groups
of insurance contracts in the statement of financial position. In particular, the TRG
members expressed concern that information disaggregated in a manner consistent with
the way entities manage their operations and systems, for example separate
identification of insurance receivables, reserves that relate to future coverage, the
liability for incurred claims and deferred acquisition costs, would be lost in applying
IFRS 17. The outreach report has been provided to the IASB although it is not clear at
the time of the writing of this chapter what further steps, if any, will be taken by the
Board to address the concerns voiced by TRG members.43
15
PRESENTATION IN THE STATEMENT OF FINANCIAL
PERFORMANCE
An entity is required to disaggregate the amounts recognised in the statement of profit
and loss and the statement of other comprehensive income (collectively, the statement
of financial performance) into: [IFRS 17.80]
• insurance service result comprised of:
• insurance revenue; and
• insurance service expenses; and
• insurance finance income or expenses.
In addition, income or expenses from reinsurance contracts held should be presented
separately from the expenses or income from insurance contracts issued. [IFRS 17.82]. An
entity may present the income or expense from a group of reinsurance contracts held,
other than finance income and expense, as either: [IFRS 17.86]
• a single amount (netted); or
• separately:
• the amounts recovered from the reinsurer; and
• an allocation of the premium paid.
This presentation is also required by IAS 1 which, additionally, requires insurance
finance income and expense to be split between contracts issued within the scope of
IFRS 17 and reinsurance contracts held on the face of the statement of profit or loss.
[IAS 1.82(a)(ii), (ab), (ac)]. IAS 1 also requires this split in other comprehensive income when
insurance finance income is disaggregated. [IAS 1.7(i), (j)].
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The change in risk adjustment for non-financial risk is not required to be disagg
regated
between the insurance service result and the insurance finance income or expense.
When an entity decides not to disaggregate the change in risk adjustment for non-
financial risk, the entire change should be included as part of the insurance service
result. [IFRS 17.81].
The following table illustrates a summary statement of financial performance under IFRS 17.
Statement of profit or loss and other comprehensive income
2021 2020
£’m
£’m
Insurance revenue
10,304
8,894
Insurance service expenses
(9,069)
(8,489)
Incurred claims and insurance contracts expenses
(7,362) (7,012)
Insurance contract acquisition cash flows
(1,259) (1,150)
Insurance service result before reinsurance contracts held
1,235
405
Income (expenses) from reinsurance contracts held
(448)
(327)
Insurance service result
787
78
Finance income and expense from contracts issued within the scope
394 353
of IFRS 17
Finance income and expense from reinsurance contracts held
200
300
Net financial result
594
653
Profit before tax
1,381
731
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Finance income and expense from contracts issued within the scope
50 (25)
of IFRS 17
Finance income and expense from reinsurance contracts held
(25)
50
Other comprehensive income for the year net of tax
25
25
Total comprehensive income for the year
1,406
756
There is nothing to prevent an entity from providing further sub-analysis of the
components of the insurance service result (which may make the relationship of the
reconciliations discussed at 16 below to the face of the statement of financial
performance more understandable). Indeed, IAS 1 states that an entity should present
additional line items (including by disaggregating the line items specified by the
standard), headings and subtotals in the statement(s) presenting profit or loss and other
comprehensive income when such presentation is relevant to an understanding of the
entity’s financial performance. [IAS 1.85].
Each of the amounts required to be reported in the statement of financial performance
are discussed at 15.1 to 15.3 below.
15.1 Insurance
revenue
Insurance revenue should depict the provision of coverage and other services arising
from the group of insurance contracts at an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those services. [IFRS 17.83].
Insurance contracts (IFRS 17) 4569
Insurance revenue from a group of insurance contracts is therefore the consideration
for the contracts, i.e. the amount of premiums paid to the entity: [IFRS 17.B120]
• adjusted for financing effect (i.e. adjusted for the time value of money); and
• excluding any investment components.
Investment components are accounted for separately and are not part of the insurance
service result.
The amount of insurance revenue recognised in a period depicts the transfer of
promised services at an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those services. The total consideration for a group
of contracts covers the following amounts: [IFRS 17.B121]
• amounts related to the provision of services, comprising:
• insurance service expenses, excluding any amounts allocated to the loss
component of the liability for remaining coverage;
• the risk adjustment for non-financial risk, excluding any amounts allocated to
the loss component of the liability for remaining coverage; and
• the contractual service margin; and
• amounts related to insurance acquisition cash flows.
15.1.1
Insurance revenue related to the provision of services in a period
When an entity provides services in a period, it reduces the liability for remaining
coverage for the services provided and recognises insurance revenue. This is consistent
with IFRS 15 in which revenue is recognised when an entity derecognises the
performance obligation for services that it provides. [IFRS 17.B123].
The reduction in the liability for remaining coverage that gives rise to insurance revenue
excludes changes in the liability that do not relate to services expected to be covered
by the consideration received by the entity. Those changes are: [IFRS 17.B123]
• changes that do not relate to services provided in the period, for example:
• changes resulting from cash inflows from premiums received;
• changes that relate to investment components in that period;
• changes that relate to transaction-based taxes collected on behalf of third parties
(such as premium taxes, value added taxes and goods and services taxes);
• insurance finance income or expenses;
• insurance acquisition cash flows; and
• derecognition of liabilities transferred to a third party; and
• changes that relate to services, but for which the entity does not expect
consideration, i.e. increases and decreases in the loss component of the liability for
remaining coverage.
Additionally, any insurance revenue present in profit or loss should exclude any
investment components. [IFRS 17.85].
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After having explained what insurance revenue is not, IFRS 17 then explains which
changes in the liability for remaining coverage in the period relates to services for which
the entity expects to receive compensation. Those changes are: [IFRS 17.B124]
• insurance service expenses incurred in the period (measured at the amounts
expected at the beginning of the period), excluding:
• amounts allocated to the loss component of the liability for remaining coverage;
• repayments of investment components;
• amounts that relate to transaction-based taxes collected on behalf of third
parties (such as premium taxes, value added taxes and goods and services
taxes); and
• insurance acquisition expenses;
• the change in the risk adjustment for non-financial risk, excluding:
• changes included in insurance finance income or expenses;
• changes that adjust the contractual service margin because they relate to
future service; and
• amounts allocated to the loss component of the liability for remaining
coverage; and
• the amount of the contractual service margin recognised in profit or loss in the period.
Insurance revenue related to insurance acquisition cash flows should be determined by
allocating the portion of the premiums that relate to recovering those cash flows to each
reporting period on a systematic way on the basis of passage of time. An entity should
recognise the same amount as insura
nce service expenses. [IFRS 17.B125]. The following
example illustrates how insurance acquisition cash flows are allocated to revenue.
Example 52.50: Allocating a portion of premiums to insurance acquisition cash
flows
An entity issues a group of insurance contracts with a coverage period of four years. The entity pays initial
acquisition expenses of £200 and expects to pay trail commission of £50 at the end of year 4. The group of
contracts is not determined to be onerous. The entity estimates, at the time of initial recognition of the group
of contracts, that the discount rate that applies to nominal cash flows that do not vary based on the returns on
any underlying items is 3% per year.
Applying paragraph B125 of IFRS 17, the entity determines the insurance revenue related to insurance
acquisition cash flows by allocating the portion of the premiums that relates to recovering those cash flows
to each accounting period in a systematic way on the basis of the passage of time. The entity recognises the
same amount as insurance service expenses. The entity chooses to reflect financing effects in determining the
expense and offsetting amount in revenue in each year.
The present value of expected insurance acquisition cash flows at initial recognition is £244 [£200 + (£50 ÷
1.03^4)]. The entity estimates the portion of premiums that relates to the recovery of insurance acquisition
cash flows in each of the four years of coverage to be £63, £65, £67 and £68. The entity recognises the same
amounts as insurance service expenses in each year.
15.1.2
Revenue under the premium allocation approach
When an entity applies the premium allocation approach, insurance revenue for the period
is the amount of expected premium receipts (excluding any investment component and
adjusted to reflect the time value of money and the effect of financial risk, if applicable)
Insurance contracts (IFRS 17) 4571
allocated to the period. The entity should allocate the expected premium receipts to each
period of coverage: [IFRS 17.B126]
• on the basis of the passage of time; but
• if the expected pattern of release of risk during the coverage period differs