significantly from the passage of time, then on the basis of the expected timing of
incurred insurance service expenses.
An entity should change the basis of allocation between the two methods above as necessary
if facts and circumstances change. [IFRS 17.B127]. As discussed at 9.3 above, any change in the
basis of allocation is a change in accounting estimate and applied prospectively.
15.1.3
Revenue and expense from reinsurance contracts held
IFRS 17 permits an entity to present income or expenses from a group of reinsurance
contracts held, other than insurance finance income or expense, either:
• as a single amount; or
• separately, the amounts recovered from the reinsurer and an allocation of the
premiums paid that together give a net amount equal to that single amount.
[IFRS 17.86].
Consistent with this, IAS 1 requires only a net figure of income or expenses from
reinsurance contracts held to be presented separately from insurance revenue and
insurance service expenses in profit or loss. [IAS 1.82(ac)].
If an entity presents separately the amounts recovered from the reinsurer and an
allocation of the premiums paid, it should: [IFRS 17.86]
• treat reinsurance cash flows that are contingent on claims on the underlying
contracts (which would include profit commission payable or receivable) as part of
the claims that are expected to be reimbursed under the reinsurance contract held;
• treat amounts from the reinsurer that it expects to receive that are not contingent
on the claims of the underlying contracts (for example, some types of ceding
commissions) as a reduction in the premiums to be paid to the reinsurer; and
• not present the allocation of premiums paid as a reduction in revenue.
15.2 Insurance service expenses
Insurance service expenses comprise the following: [IFRS 17.84]
• incurred claims (excluding repayments of investment components);
• other incurred service expenses;
• amortisation of insurance acquisition cash flows;
• changes that relate to past services, i.e. changes in fulfilment cash flows relating to
the liability for incurred claims; and
• changes that relate to future service, i.e. losses on onerous groups of contracts and
reversals of such losses.
As discussed at 15 above, an entity should disaggregate this information (for example to show
insurance acquisition cash flows separately from other insurance service expenses) when
such presentation is relevant to an understanding of the entity’s financial performance.
4572 Chapter 52
15.3 Insurance finance income or expenses
Insurance finance income or expenses comprises the change in the carrying amount of
the group of insurance contracts arising from: [IFRS 17.87]
• the effect of the time value of money and changes in the time value of money; and
• the effect of financial risk and changes in financial risk; but
• excluding any such changes for groups of insurance contracts with direct
participation features that would adjust the contractual service margin but do not
do so in certain circumstances. These circumstances are when the entity’s share of
a decrease in the fair value of the underlying items exceeds the carrying amount of
the contractual margin and gives rise to a loss (or a reversal of that loss), increases
in the fulfilment cash flows which exceed the carrying amount of the contractual
margin and give rise to a loss and decreases in fulfilment cash flows which are
allocated to the loss component of the liability for remaining coverage. These are
included in insurance service expenses.
Insurance finance income or expenses does not include income or expense related to
financial assets or liabilities within the scope of IFRS 9 such as investment finance income
on underlying items. This is disclosed separately under IAS 1 (see Chapter 3 at 3.2.2).
Assumptions about inflation based on an index of prices or rates or on prices of assets
with inflation-linked returns are assumptions that relate to financial risk. However,
assumptions about inflation based on an entity’s expectation of specific price changes
are not assumptions that relate to financial risk. [IFRS 17.B128].
Exchange differences on changes in the carrying amount of groups of insurance
contracts, including the contractual service margin, are included in the statement of
profit or loss, unless they relate to changes in the carrying amount of groups of insurance
contracts in other comprehensive income in which case they should be included in
other comprehensive income. [IFRS 17.92]. IFRS 17 does not specify where in profit or loss
exchange differences should be presented – see 7.3 above.
Entities have an accounting policy choice between presenting insurance finance income
or expenses in profit or loss or disaggregated between profit or loss and other
comprehensive income. [IFRS 17.88]. An entity shall apply its choice of accounting policy
to portfolios of insurance contracts. The choice is then applied to all groups of contracts
within that portfolio. In assessing the appropriate accounting policy for a portfolio of
insurance contracts, applying the requirements of IAS 8 (see Chapter 3 at 4.3) the entity
shall consider for each portfolio the assets that the entity holds and how it accounts for
those assets. [IFRS 17.B129].
An entity should consider, for each portfolio, the assets that it holds and how it
accounts for them. Entities will seek to minimise accounting mismatches between
assets and liabilities. We expect that entities with a tradition of recording the effect of
market fluctuations in other comprehensive income will choose the same approach
for insurance contract liabilities, if unavoidable mismatches in profit or loss are at a
level that is acceptable to them. Entities that have classified equities as available-for-
sale under IAS 39 may be reluctant to classify equities at fair value through other
comprehensive income. This is because under IFRS 9 fair value gains and losses on
Insurance contracts (IFRS 17) 4573
fair value through other comprehensive income equities are not recycled to income
on disposal. An entity might choose a fair value through profit or loss (FVPL) approach
to assets and liabilities for portfolios of insurance contracts where assets backing
liabilities include substantial amounts of equity instruments. Entities that have
traditionally measured assets at FVPL and used current discount rates to measure
insurance contract liabilities might elect not to disaggregate insurance finance
expense and to invoke the fair value option for financial assets that otherwise would
be measured in accordance with IFRS 9 at amortised cost or fair value through other
comprehensive income.
The disaggregation approaches for each type of insurance contract are discussed
at 15.3.1 to 15.3.3 below. In summary, the approaches are as follows:
Yes
No
Do the contracts have direct
participation features?
Do changes in
financial risk
No
Does the entity hold
assumptions have a
the underlying items?
substantial effect
on
amounts paid to the
policyholder?
Yes
No
Yes
Discount rates
Effective yield or
Current period book
determined at initial
projected crediting
yield approach
recognition
approach
15.3.1
Allocating insurance finance income or expenses for contracts for
which the entity does not hold the underlying items
For insurance contracts without direct participation features and contracts with direct
participation features where the entity does not hold the underlying items (i.e. all
insurance contracts except those with direct participation features for which the entity
holds the underlying items), an entity should make an accounting policy choice
between: [IFRS 17.88]
• including insurance finance income or expenses for the period in profit or loss; and
• disaggregating insurance finance income or expenses for the period to include in
profit in loss an amount determined by a systematic allocation of the expected total
insurance finance income or expenses over the duration of the group of contracts.
4574 Chapter 52
This approach applies to both the liability for remaining coverage and the liability for
incurred claims under the general model. Under the premium allocation model, it
applies only to the liability for incurred claims. Disaggregating discount rates for the
liability for incurred claims under the premium allocation approach is discussed
at 15.3.2 below.
When an entity chooses the disaggregation policy set out above, it should include in
other comprehensive income the difference between the insurance finance income or
expenses measured on a systematic allocation basis (as explained below) and the total
finance income or expenses in the period. [IFRS 17.90].
A systematic allocation means an allocation of the total expected finance income or
expenses of a group of insurance contracts over the duration of the group that:
[IFRS 17.B130]
• is based on characteristics of the contracts, without reference to factors that do not
affect the cash flows expected to arise under the contracts. For example, the
allocation of the finance income or expenses should not be based on expected
recognised returns on assets if those expected recognised returns do not affect the
cash flows of the contracts in the group; and
• results in the amounts recognised in other comprehensive income over the
duration of the group of contracts totalling zero. The cumulative amount
recognised in other comprehensive income at any date is the difference between
the carrying amount of the group of contracts and the amount that the group would
be measured at when applying the systematic allocation.
For groups of insurance contracts for which changes in assumptions that relate to
financial risk do not have a substantial effect on the amounts paid to the policyholder,
the systematic allocation (i.e. the amount presented in profit or loss) is determined using
the discount rates determined at the date of initial recognition of the group of contracts.
[IFRS 17.B131].
For groups of insurance contracts for which changes in assumptions that relate to
financial risk have a substantial effect on the amounts paid to the policyholders:
[IFRS 17.B132]
• a systematic allocation for the finance income or expenses arising from the
estimates of future cash flows can be determined in one of the following ways:
• using a rate that allocates the remaining revised expected finance income or
expenses over the remaining duration of the group of contracts at a constant
rate (‘effective yield approach’); or
• for contracts that use a crediting rate to determine amounts due to the
policyholders, using an allocation that is based on the amounts credited in
the period and expected to be credited in future periods (‘projected
crediting approach’);
• a systematic allocation for the finance income or expenses arising from the risk
adjustment for non-financial risk, if separately disaggregated from other changes
in the risk adjustment for non-financial risk, is determined using an allocation
Insurance contracts (IFRS 17) 4575
consistent with that used for the allocation for the finance income or expenses
arising from the future cash flows;
• a systematic allocation for the finance income or expenses arising from the
contractual service margin is determined:
• for insurance contracts that do not have direct participation features, using
the discount rates determined at the date of initial recognition of the group of
contracts; and
• for insurance contracts with direct participation features, using an allocation
consistent with that used for the allocation for the interest income or
expenses arising from future cash flows.
When an entity which has disaggregated the finance income or expenses of a group of
insurance contracts transfers that group of insurance contracts or derecognises an
insurance contract (see 12.3.1 to 12.3.3 above) it should reclassify to profit or loss as a
reclassification adjustment any remaining amounts for the group (or contract) that were
previously recognised in other comprehensive income as a result of its accounting
policy choice. [IFRS 17.91(a)].
15.3.2
Allocating insurance finance income or expenses for incurred claims
when applying the premium allocation approach
When the premium allocation approach is applied (see 9 above), an entity may be
required, or may choose to discount the liability for incurred claims (see 9.4 above). In
such cases, it may also choose to disaggregate the insurance finance income or expenses
as discussed at 15.3.1 above. If the entity makes this choice, it should determine the
insurance finance income or expenses in profit or loss using the discount rate
determined at the date of the incurred claim. [IFRS 17.B133].
15.3.3
Allocating finance income or expenses for insurance contracts with
direct participation features for which the entity holds the
underlying items
For insurance contracts with direct participation features, for which the entity holds the
underlying items, an entity should make an accounting policy choice between: [IFRS 17.89]
• including insurance finance income or expenses for the period in profit or loss; or
• disaggregating insurance finance income or expenses for the period to include in
profit or loss an amount that eliminates accounting mismatches with income or
expenses included in profit or loss on the underlying items held.
This means that, when disaggregation is applied, the amount included in profit or loss
finance income or expenses in respect of the insurance contracts with direct
participation features exactly matches the finance income or expenses included in profit
or loss for the underlying items, resulting in the net of the two separately presented
items being nil. [IFRS 17.B134].
An entity may qualify for the accounting policy choice above in some periods but not
in others because of a change in whether it holds
the underlying items. If such a change
occurs, the accounting policy choice available to the entity changes from that set out in
above to that set out at 15.3.1 above or vice versa. Hence, an entity might change its
4576 Chapter 52
accounting policy between that set out above and that set out at 15.3.1 above. In making
such a change an entity should: [IFRS 17.B135]
• include the accumulated amount previously included in other comprehensive
income by the date of the change as a reclassification adjustment in profit or loss
in the period of change and in future periods, as follows:
• if the entity had previously applied the requirements described at 15.3.1 above
the entity should include in profit or loss the accumulated amount included
in other comprehensive income before the change as if the entity were
continuing the approach described at 15.3.1 above based on the assumptions
that applied immediately before the change; and
• if the entity had previously applied the requirements above, the entity should
include in profit or loss the accumulated amount included in other
comprehensive income before the change as if the entity were continuing the
approach above based on the assumptions that applied immediately before
the change; and
• not restate prior period comparative information.
An entity should not recalculate the accumulated amount previously included in other
comprehensive income as if the new disaggregation had always applied; and the
assumptions used for the reclassification in future periods should not be updated after
the date of the change. [IFRS 17.B136].
When an entity which has disaggregated the finance income or expenses of a group of
insurance contracts with direct participation features, transfers that group of insurance
contracts or derecognises an insurance contract (see 12.3.2 and 12.3.3 above) it should
not reclassify to profit or loss as a reclassification adjustment any remaining amounts for
the group (or contract) that were previously recognised in other comprehensive income
as a result of its accounting policy choice. [IFRS 17.91(b)]. This is a different accounting
treatment than for contracts which do not have direct participation features for which
the entity holds the underlying items (see 15.3.1 above).
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 904
