International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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entity uses reasonable and supportable information to achieve the closest outcome to retrospective application.
Analysis
The entity determines the contractual service margin at the transition date by estimating the fulfilment cash
flows on initial recognition as follows:
• the future cash flows at the date of initial recognition of the group of insurance contracts are estimated
to be the sum of the estimates of future cash flows of €770 at the transition date and cash flows of €800
that are known to have occurred between the date of initial recognition of the group of insurance
contracts and transition date (including premiums paid on initial recognition of €1,000 and cash outflows
of €200 paid during the period). This amount includes cash flows resulting from contracts that ceased to
exist before the transition date.
• the entity determines the effect of discounting at the date of initial recognition of the group of insurance
contracts to equal €(200) calculated as the discounting effect on estimates of future cash flows at the
date of initial recognition determined above. The entity determines the effect of discounting by using a
Insurance contracts (IFRS 17) 4605
yield curve that, for at least 3 years immediately before the transition date, approximates the yield curve
estimated applying the methodology described at 8.2 above. The entity estimates this amount to equal
€50 reflecting the fact that the premium was received on initial recognition, hence, the discounting effect
relates only to future cash outflows.
• the entity determines the risk adjustment for non-financial risk on initial recognition of €120 as the risk
adjustment for the non-financial risk at the transition date of €100 adjusted by €20 to reflect the expected
release of risk before the transition date. The entity determines the expected release of risk by reference
to the release of risk for similar insurance contracts that the entity issues at the transition date.
• the contractual service margin on initial recognition is €110, the amount that would result in no profit or
loss on initial recognition of the fulfilment cash flows of €110. The subsequent movement in the
contractual margin, using the discount rates derived above to accrete interest and recognising the amount
in profit or loss because of the transfer of services, by comparing the remaining coverage units at the
transition date with the coverage units provided by the group before the transition date, is €90.
Consequently, the contractual service margin on transition date is €20.
This is illustrated as follows:
Transition
Adjustment
Initial
date
to initial
recognition
recognition
€
€
€
Estimates of future cash flows
770
(800)
(30)
Effect of discounting
(150)
(50)
(200)
Risk adjustment for non-financial risk
100
20
120
Fulfilment cash flows
720
(830)
(110)
Contractual service margin:
20
90
110
Liability for remaining coverage
740
–
17.3.3
The contractual service margin or loss component for groups of
insurance contracts with direct participation features
When it is impracticable for an entity to apply the retrospective approach at initial
recognition to determine the contractual service margin or the loss component of the
liability for remaining coverage for groups of contracts with direct participation
features, these should be determined as: [IFRS 17.C17]
• the total fair value of the underlying items at the transition date (a); minus
• the fulfilment cash flows at the transition date (b); plus or minus
• an adjustment for (c):
• amounts charged by the entity to the policyholders (including amounts
deducted from the underlying items) before that date;
• amounts paid before that date that would not have varied based on the
underlying items; and
• the change in the risk adjustment for non-financial risk caused by the release
from risk before that date. An entity should estimate this amount by reference
to the release of risk for similar insurance contracts that the entity issues at
the transition date.
• if the sum of (a) – (c) above result in a contractual service margin – minus the amount
of the contractual service margin that relates to services provided before that date.
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The sum of (a)–(c) above is a proxy for the total contractual service margin for all
services to be provided under the group of contracts, i.e. before any amounts that
would have been recognised in profit or loss for services provided. An entity should
estimate the amounts that would have been recognised in profit or loss for services
provided by comparing the remaining coverage units at the transition date with the
coverage units provided under the group of contracts before the transition date; or
• if the sum of (a) – (c) result in a loss component, adjust the loss component to nil
and increase the liability for remaining coverage excluding the loss component by
the same amount.
The following example, based on Example 18 in the Illustrative Examples to IFRS 17,
shows the transition requirements for a group of insurance contracts with direct
participation features when applying the modified retrospective approach.
Example 52.54: Measurement of groups of insurance contracts with direct
participation features applying the modified retrospective approach
An entity issues 100 insurance contracts with direct participation features five years before the transition date
and aggregates these contracts into a group.
Under the terms of the contracts:
• a single premium is paid at the beginning of the coverage period of 10 years;
• the entity maintains account balances for policyholders and deducts charges from those account balances
at the end of each year;
• a policyholder will receive an amount equal to the higher of the account balance and the minimum death
benefit if an insured person dies during the coverage period; and
• if an insured person survives the coverage period, the policyholder receives the value of the
account balance.
The following events occurred in the five year period prior to the transition date:
• the entity paid death benefits and other expenses of £239 comprising:
• £216 of cash flows that vary based on the returns from underlying items; and
• £23 of cash flows that do not vary based on the returns from underlying items; and
• The entity deducted charges from the underlying items of £55.
The entity estimates the fulfilment cash flows at the transition date to be £922, comprising the estimates of
the present value of the future cash flows of £910 and a risk adjustment for non-financial risk of £12. The fair
value of the underlying items at that date is £948.
The entity makes the following estimates:
• Based on an analysis of si
milar contracts that the entity issues at transition date, the estimated change in
the risk adjustment for non-financial risk caused by the release from risk in the five year period before
transition date is £14; and
• The units of coverage provided before the transition date is approximately 60% of the total coverage
units of the group of contracts.
Analysis
The entity applies a modified retrospective approach to determine the contractual service margin at transition
date and determines that the contractual service margin that relates to services provided before transition date
of £26 as the percentage of the coverage units provided before the transition date and the total coverage units
of 60% multiplied by the contractual service margin before recognition in profit or loss of £44. This is
illustrated as follows:
Insurance contracts (IFRS 17) 4607
£
Fair value of the underlying items at transition date
948
Fulfilment cash flows at the transition date
(922)
Adjustments:
– Charges deducted from underlying items before the
55
transition date
– Amounts paid before transition date that would not have
(23)
varied based on the returns on underlying items
–
Estimated change in the risk adjustment for non-financial
(14)
risk caused by the release from risk before transition date
Contractual service margin of the group of contracts before
44
recognition in profit or loss
Estimated amount of the contractual service margin that
(26)
relates to services provided before the transition date
Estimated contractual service margin at the transition date
18
The total insurance contract liability at the transition date is £940, which is the sum of the fulfilment cash
flows of £922 and the contractual service margin of £18.
17.3.4
Insurance finance income or expenses
The modified requirements for insurance finance income or expenses are different
depending on whether, as a result of applying the modified retrospective approach,
groups of insurance contracts include contracts issued more than one year apart
(see 17.3.1 above).
17.3.4.A
Groups of insurance contracts that include contracts issued more than
one year apart
When an entity has aggregated a group of insurance contracts on a basis that includes
contracts issued more than one year apart in the same group: [IFRS 17.C18]
• the entity is permitted to determine the discount rates at the date of initial recognition
for the contractual service margin, the liability for remaining coverage and for
incurred claims for contracts applying the premium allocation approach, as at the
transition date instead of at the date of initial recognition or incurred claim date;
• if an entity chooses to disaggregate insurance finance income or expenses between
amounts included in profit or loss and amounts included in other comprehensive
income (see 15.3.1 to 15.3.3 above) the entity needs to determine the cumulative amount
of insurance finance income or expenses recognised in other comprehensive income
at the transition date in order to be able to reclassify any remaining amounts from other
comprehensive income to profit or loss upon subsequent transfer or derecognition. The
entity is permitted to determine that cumulative difference on transition either by:
• applying the requirements for groups of contracts that do not include
contracts issued more than one year apart – see 17.3.4.B below; or
• as nil; except for
• insurance contracts with direct participation features where the entity holds
the underlying items when the cumulative difference is equal to the cumulative
amount recognised in other comprehensive income on the underlying items.
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17.3.4.B
Groups of insurance contracts that do not include contracts issued more
than one year apart
When an entity has aggregated a group of insurance contracts on a basis that does not
include contracts issued more than one year apart in the same group: [IFRS 17.C19]
• if an entity applies the requirements at 17.3.2 above for groups of insurance
contracts without direct participation features to estimate the discount rates that
applied at initial recognition (or subsequently), it should also determine the
discount rates specified for accreting the interest on the contractual service
margin, measuring the changes in the contractual service margin, discounting the
liability for remaining coverage under the premium allocation approach and for
disaggregated insurance finance and income in the same way; and
• if an entity chooses to disaggregate insurance finance income or expenses between
amounts included in profit or loss and amounts included in other comprehensive
income (see 15.3.1 to 15.3.3 above), the entity needs to determine the cumulative amount
of insurance finance income or expenses recognised in other comprehensive income
at the transition date in order to be able to reclassify any remaining amounts from other
comprehensive income to profit or loss upon subsequent transfer or derecognition in
future periods. The entity should determine that cumulative difference;
• for insurance contracts for which changes in assumptions that relate to
financial risk do not have a substantial effect on the amounts paid to
policyholders – if it applies the requirements at 17.3.2 above to estimate the
discount rates at initial recognition – using the discount rates that applied at
the date of initial recognition, also applying the requirements at 17.3.2 above;
• for groups of insurance contracts for which changes in assumptions that relate
to financial risk have a substantial effect on the amounts paid to policyholders,
on the basis that the assumptions that relate to financial risk that applied at the
date of initial recognition are those that apply on the transition date, i.e. as nil;
• for insurance contracts for which an entity will apply the premium allocation
approach to discount the liability for incurred claims – if the entity applies
the requirements at 17.3.2 above to estimate the discount rates at initial
recognition (or subsequently) – using the discount rates that applied at the
date of the incurred claim, also applying the requirements at 17.3.2 above; and
• for insurance contracts with direct participation features where the entity
holds the underlying items – as equal to the cumulative amount recognised in
other comprehensive income on the underlying items.
17.4 The fair value approach
The fair value approach is:
• permitted as an alternative to the modified retrospective approach for a group of
contracts when full retrospective application of that group of contracts is
impracticable (see 17.2 above); or
• required when full retrospective application of a group of contracts is impracticable
and an entity cannot obtain reasonable and supportable information for that group
of contracts necessary to use the modified retrospective approach (see 17.3 above).
Insurance contracts (IFRS 17) 4609
To apply the fair value approach, an entity should determine the contractual service
margin or loss component of the liability for remaining coverage at the transition date
as the difference between the fair value of a group of insurance contracts at that date
and the fulfilment cash flows measured at that date. In determining fair value, an entity
must apply the requirements of IFRS 13 except for the requirement that the fair value
of a financial liability with a demand feature (e.g. a demand deposit) cannot be less than
the amount payable on demand, discounted from the first date that the amount could
be required to be paid. [IFRS 17.C20]. This means that insurance contract liabilities can be
measured at an amount lower than the discounted amount repayable on demand.
In applying the fair value approach an entity may use reasonable and supportable information
for what the entity would have determined given the terms of the contract and the market
conditions at the date of inception or initial recognition, as appropriate or, alternatively,
reasonable and supportable information at the transition date in determining: [IFRS 17.C21-22]
• how to identify groups of insurance contracts;
• whether an insurance contract meets the definition of an insurance contract with
direct participation features; and
• how to identify discretionary cash flows for insurance contracts without direct
participation features.
In addition, the general requirements of IFRS 17 are modified as follows when the fair
value approach is used:
• When determining groups of insurance contracts, an entity may include as a group
contracts issued more than one year apart. An entity is only allowed to divide
groups into those only including contracts issued within a year or less if it has
reasonable and supportable information to make the decision. This reflects the
Board’s expectation that grouping of contracts issued within a year (or less) will be
challenging in situations where the fair value approach is applied; [IFRS 17.C23]
• An entity determines the discount rate at the date of initial recognition of a group of
contracts and the discount rates of the date of the incurred claims under the premium