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March 2004 IFRS 4

INTERNATIONAL FINANCIAL REPORTING STANDARD

IFRS 4 Insurance Contracts

InternationalAccounting Standards

Board®

International Financial Reporting Standard 4

Insurance Contracts

INTERNATIONAL FINANCIAL REPORTING STANDARD MARCH 2004

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IFRS 4 Insurance Contracts together with its accompanying documents (seeseparate booklets) is issued by the International Accounting Standards Board,30 Cannon Street, London EC4M 6XH, United Kingdom.

Tel: +44 (0)20 7246 6410Fax: +44 (0)20 7246 6411Email: [email protected]: www.iasb.org

The IASB, the IASCF, the authors and the publishers do not accept responsibility for losscaused to any person who acts or refrains from acting in reliance on the material in thispublication, whether such loss is caused by negligence or otherwise.

ISBN for this part: 1-904230-50-4

ISBN for complete publication (three parts): 1-904230-49-0

Copyright © 2004 International Accounting Standards Committee Foundation (IASCF)

International Financial Reporting Standards (including International AccountingStandards and SIC and IFRIC Interpretations), Exposure Drafts, and other IASBpublications are copyright of the International Accounting Standards CommitteeFoundation (IASCF). The approved text of International Financial Reporting Standardsand other IASB publications is that published by the IASB in the English language andcopies may be obtained from the IASCF. Please address publications and copyrightmatters to:

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IFRS 4 INSURANCE CONTRACTS

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Contents

paragraphs

INTRODUCTION IN1-IN13

Reasons for issuing the IFRS IN1-IN2

Main features of the IFRS IN3-IN12

Potential impact of future proposals IN13

International Financial Reporting Standard 4Insurance Contracts

OBJECTIVE 1

SCOPE 2-12

Embedded derivatives 7-9

Unbundling of deposit components 10-12

RECOGNITION AND MEASUREMENT 13-35

Temporary exemption from some other IFRSs 13-20

Liability adequacy test 15-19

Impairment of reinsurance assets 20

Changes in accounting policies 21-30

Current market interest rates 24

Continuation of existing practices 25

Prudence 26

Future investment margins 27-29

Shadow accounting 30

Insurance contracts acquired in a business combination or portfolio transfer 31-33

Discretionary participation features 34-35

Discretionary participation features in insurance contracts 34

Discretionary participation features in financial instruments 35

DISCLOSURE 36-39

Explanation of recognised amounts 36-37

Amount, timing and uncertainty of cash flows 38-39

continued...


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EFFECTIVE DATE AND TRANSITION 40-45

Disclosure 42-44

Redesignation of financial assets 45

APPENDICES

A Defined terms

B Definition of an insurance contract

C Amendments to other IFRSs

APPROVAL OF IFRS 4 BY THE BOARD

BASIS FOR CONCLUSIONS (see separate booklet)

IMPLEMENTATION GUIDANCE (see separate booklet)


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International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is setout in paragraphs 1-45 and Appendices A-C. All the paragraphs have equalauthority. Paragraphs in bold type state the main principles. Terms defined inAppendix A are in italics the first time they appear in the Standard. Definitions ofother terms are given in the Glossary for International Financial ReportingStandards. IFRS 4 should be read in the context of its objective and the Basisfor Conclusions, the Preface to International Financial Reporting Standards andthe Framework for the Preparation and Presentation of Financial Statements.IAS 8 Accounting Policies, Changes in Accounting Estimates and Errorsprovides a basis for selecting and applying accounting policies in the absenceof explicit guidance.


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INTRODUCTION

Reasons for issuing the IFRS

IN1 This is the first IFRS to deal with insurance contracts. Accountingpractices for insurance contracts have been diverse, and have oftendiffered from practices in other sectors. Because many entities will adoptIFRSs in 2005, the International Accounting Standards Board has issuedthis IFRS:

(a) to make limited improvements to accounting for insurance contractsuntil the Board completes the second phase of its project oninsurance contracts.

(b) to require any entity issuing insurance contracts (an insurer) todisclose information about those contracts.

IN2 This IFRS is a stepping stone to phase II of this project. The Board iscommitted to completing phase II without delay once it has investigated allrelevant conceptual and practical questions and completed its full dueprocess.

Main features of the IFRS

IN3 The IFRS applies to all insurance contracts (including reinsurancecontracts) that an entity issues and to reinsurance contracts that it holds,except for specified contracts covered by other IFRSs. It does not applyto other assets and liabilities of an insurer, such as financial assets andfinancial liabilities within the scope of IAS 39 Financial Instruments:Recognition and Measurement. Furthermore, it does not addressaccounting by policyholders.

IN4 The IFRS exempts an insurer temporarily (ie during phase I of this project)from some requirements of other IFRSs, including the requirement toconsider the Framework in selecting accounting policies for insurancecontracts. However, the IFRS:

(a) prohibits provisions for possible claims under contracts that are notin existence at the reporting date (such as catastrophe andequalisation provisions).

(b) requires a test for the adequacy of recognised insurance liabilitiesand an impairment test for reinsurance assets.


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(c) requires an insurer to keep insurance liabilities in its balance sheetuntil they are discharged or cancelled, or expire, and to presentinsurance liabilities without offsetting them against relatedreinsurance assets.

IN5 The IFRS permits an insurer to change its accounting policies for insurancecontracts only if, as a result, its financial statements present informationthat is more relevant and no less reliable, or more reliable and no lessrelevant. In particular, an insurer cannot introduce any of the followingpractices, although it may continue using accounting policies that involvethem:

(a) measuring insurance liabilities on an undiscounted basis.

(b) measuring contractual rights to future investment management feesat an amount that exceeds their fair value as implied by acomparison with current fees charged by other market participantsfor similar services.

(c) using non-uniform accounting policies for the insurance liabilities ofsubsidiaries.

IN6 The IFRS permits the introduction of an accounting policy that involvesremeasuring designated insurance liabilities consistently in each period toreflect current market interest rates (and, if the insurer so elects, othercurrent estimates and assumptions). Without this permission, an insurerwould have been required to apply the change in accounting policiesconsistently to all similar liabilities.

IN7 An insurer need not change its accounting policies for insurance contractsto eliminate excessive prudence. However, if an insurer already measuresits insurance contracts with sufficient prudence, it should not introduceadditional prudence.

IN8 There is a rebuttable presumption that an insurer’s financial statements willbecome less relevant and reliable if it introduces an accounting policy thatreflects future investment margins in the measurement of insurancecontracts.

IN9 When an insurer changes its accounting policies for insurance liabilities, itmay reclassify some or all financial assets as ‘at fair value through profit orloss’.


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IN10 The IFRS:

(a) clarifies that an insurer need not account for an embeddedderivative separately at fair value if the embedded derivative meetsthe definition of an insurance contract.

(b) requires an insurer to unbundle (ie account separately for) depositcomponents of some insurance contracts, to avoid the omission ofassets and liabilities from its balance sheet.

(c) clarifies the applicability of the practice sometimes known as‘shadow accounting’

(d) permits an expanded presentation for insurance contracts acquiredin a business combination or portfolio transfer.

(e) addresses limited aspects of discretionary participation featurescontained in insurance contracts or financial instruments.

IN11 The IFRS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise frominsurance contracts.

(b) the amount, timing and uncertainty of future cash flows frominsurance contracts.

IN12 Entities should apply the IFRS for annual periods beginning on or after1 January 2005, but earlier application is encouraged. An insurer need notapply some aspects of the IFRS to comparative information that relates toannual periods beginning before 1 January 2005.

Potential impact of future proposals

IN13 The Board expects to approve Exposure Drafts in the second quarter of2004 that will propose amendments to:

(a) the treatment of financial guarantees and credit insurance contracts;and

(b) the option in IAS 39 that permits an entity to designate financialassets and financial liabilities as ‘at fair value through profit or loss’.


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International Financial Reporting Standard 4

Insurance Contracts

OBJECTIVE

1 The objective of this IFRS is to specify the financial reporting for insurancecontracts by any entity that issues such contracts (described in this IFRSas an insurer) until the Board completes the second phase of its project oninsurance contracts. In particular, this IFRS requires:

(a) limited improvements to accounting by insurers for insurancecontracts.

(b) disclosure that identifies and explains the amounts in an insurer’sfinancial statements arising from insurance contracts and helpsusers of those financial statements understand the amount, timingand uncertainty of future cash flows from insurance contracts.

SCOPE

2 An entity shall apply this IFRS to:

(a) insurance contracts (including reinsurance contracts) that it issuesand reinsurance contracts that it holds.

(b) financial instruments that it issues with a discretionary participationfeature (see paragraph 35). IAS 32 Financial Instruments: Disclosureand Presentation requires disclosure about financial instruments,including financial instruments that contain such features.

3 This IFRS does not address other aspects of accounting by insurers, suchas accounting for financial assets held by insurers and financial liabilitiesissued by insurers (see IAS 32 and IAS 39 Financial Instruments:Recognition and Measurement), except in the transitional provisions inparagraph 45.

4 An entity shall not apply this IFRS to:

(a) product warranties issued directly by a manufacturer, dealer orretailer (see IAS 18 Revenue and IAS 37 Provisions, ContingentLiabilities and Contingent Assets).


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(b) employers’ assets and liabilities under employee benefit plans(see IAS 19 Employee Benefits and IFRS 2 Share-based Payment)and retirement benefit obligations reported by defined benefitretirement plans (see IAS 26 Accounting and Reporting byRetirement Benefit Plans).

(c) contractual rights or contractual obligations that are contingent onthe future use of, or right to use, a non-financial item (for example,some licence fees, royalties, contingent lease payments and similaritems), as well as a lessee’s residual value guarantee embedded in afinance lease (see IAS 17 Leases, IAS 18 Revenue and IAS 38Intangible Assets).

(d) financial guarantees that an entity enters into or retains ontransferring to another party financial assets or financial liabilitieswithin the scope of IAS 39, regardless of whether the financialguarantees are described as financial guarantees, letters of credit orinsurance contracts (see IAS 39).

(e) contingent consideration payable or receivable in a businesscombination (see IFRS 3 Business Combinations).

(f) direct insurance contracts that the entity holds (ie direct insurancecontracts in which the entity is the policyholder). However, a cedantshall apply this IFRS to reinsurance contracts that it holds.

5 For ease of reference, this IFRS describes any entity that issues aninsurance contract as an insurer, whether or not the issuer is regarded asan insurer for legal or supervisory purposes.

6 A reinsurance contract is a type of insurance contract. Accordingly, allreferences in this IFRS to insurance contracts also apply to reinsurancecontracts.

Embedded derivatives

7 IAS 39 requires an entity to separate some embedded derivatives fromtheir host contract, measure them at fair value and include changes in theirfair value in profit or loss. IAS 39 applies to derivatives embedded in aninsurance contract unless the embedded derivative is itself an insurancecontract.

8 As an exception to the requirement in IAS 39, an insurer need not separate,and measure at fair value, a policyholder’s option to surrender an insurancecontract for a fixed amount (or for an amount based on a fixed amount andan interest rate), even if the exercise price differs from the carrying amount


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of the host insurance liability. However, the requirement in IAS 39 doesapply to a put option or cash surrender option embedded in an insurancecontract if the surrender value varies in response to the change in afinancial variable (such as an equity or commodity price or index), or anon-financial variable that is not specific to a party to the contract.Furthermore, that requirement also applies if the holder’s ability to exercisea put option or cash surrender option is triggered by a change in such avariable (for example, a put option that can be exercised if a stock marketindex reaches a specified level).

9 Paragraph 8 applies equally to options to surrender a financial instrumentcontaining a discretionary participation feature.

Unbundling of deposit components

10 Some insurance contracts contain both an insurance component and adeposit component. In some cases, an insurer is required or permitted tounbundle those components:

(a) unbundling is required if both the following conditions are met:

(i) the insurer can measure the deposit component (includingany embedded surrender options) separately (ie withoutconsidering the insurance component).

(ii) the insurer’s accounting policies do not otherwise require it torecognise all obligations and rights arising from the depositcomponent.

(b) unbundling is permitted, but not required, if the insurer can measurethe deposit component separately as in (a)(i) but its accountingpolicies require it to recognise all obligations and rights arising fromthe deposit component, regardless of the basis used to measurethose rights and obligations.

(c) unbundling is prohibited if an insurer cannot measure the depositcomponent separately as in (a)(i).

11 The following is an example of a case when an insurer’s accounting policiesdo not require it to recognise all obligations arising from a depositcomponent. A cedant receives compensation for losses from a reinsurer,but the contract obliges the cedant to repay the compensation in futureyears. That obligation arises from a deposit component. If the cedant’saccounting policies would otherwise permit it to recognise thecompensation as income without recognising the resulting obligation,unbundling is required.


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12 To unbundle a contract, an insurer shall:

(a) apply this IFRS to the insurance component.

(b) apply IAS 39 to the deposit component.

RECOGNITION AND MEASUREMENT

Temporary exemption from some other IFRSs

13 Paragraphs 10-12 of IAS 8 Accounting Policies, Changes in AccountingEstimates and Errors specify criteria for an entity to use in developing anaccounting policy if no IFRS applies specifically to an item. However, thisIFRS exempts an insurer from applying those criteria to its accountingpolicies for:

(a) insurance contracts that it issues (including related acquisition costsand related intangible assets, such as those described inparagraphs 31 and 32); and

(b) reinsurance contracts that it holds.

14 Nevertheless, this IFRS does not exempt an insurer from some implicationsof the criteria in paragraphs 10-12 of IAS 8. Specifically, an insurer:

(a) shall not recognise as a liability any provisions for possible futureclaims, if those claims arise under insurance contracts that are not inexistence at the reporting date (such as catastrophe provisions andequalisation provisions).

(b) shall carry out the liability adequacy test described in paragraphs15-19.

(c) shall remove an insurance liability (or a part of an insurance liability)from its balance sheet when, and only when, it is extinguished—ie when the obligation specified in the contract is discharged orcancelled or expires.

(d) shall not offset:

(i) reinsurance assets against the related insurance liabilities; or

(ii) income or expense from reinsurance contracts against theexpense or income from the related insurance contracts.

(e) shall consider whether its reinsurance assets are impaired (seeparagraph 20).


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Liability adequacy test

15 An insurer shall assess at each reporting date whether its recognisedinsurance liabilities are adequate, using current estimates of futurecash flows under its insurance contracts. If that assessment showsthat the carrying amount of its insurance liabilities (less relateddeferred acquisition costs and related intangible assets, such asthose discussed in paragraphs 31 and 32) is inadequate in the light ofthe estimated future cash flows, the entire deficiency shall berecognised in profit or loss.

16 If an insurer applies a liability adequacy test that meets specified minimumrequirements, this IFRS imposes no further requirements. The minimumrequirements are the following:

(a) The test considers current estimates of all contractual cash flows,and of related cash flows such as claims handling costs, as well ascash flows resulting from embedded options and guarantees.

(b) If the test shows that the liability is inadequate, the entire deficiencyis recognised in profit or loss.

17 If an insurer’s accounting policies do not require a liability adequacy testthat meets the minimum requirements of paragraph 16, the insurer shall:

(a) determine the carrying amount of the relevant insuranceliabilities**less the carrying amount of:

(i) any related deferred acquisition costs; and

(ii) any related intangible assets, such as those acquired in abusiness combination or portfolio transfer (see paragraphs 31and 32). However, related reinsurance assets are notconsidered because an insurer accounts for them separately(see paragraph 20).

(b) determine whether the amount described in (a) is less than thecarrying amount that would be required if the relevant insuranceliabilities were within the scope of IAS 37 Provisions, ContingentLiabilities and Contingent Assets. If it is less, the insurer shallrecognise the entire difference in profit or loss and decrease the

* The relevant insurance liabilities are those insurance liabilities (and related deferredacquisition costs and related intangible assets) for which the insurer’s accountingpolicies do not require a liability adequacy test that meets the minimum requirementsof paragraph 16.


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carrying amount of the related deferred acquisition costs or relatedintangible assets or increase the carrying amount of the relevantinsurance liabilities.

18 If an insurer’s liability adequacy test meets the minimum requirements ofparagraph 16, the test is applied at the level of aggregation specified in thattest. If its liability adequacy test does not meet those minimumrequirements, the comparison described in paragraph 17 shall be made atthe level of a portfolio of contracts that are subject to broadly similar risksand managed together as a single portfolio.

19 The amount described in paragraph 17(b) (ie the result of applying IAS 37)shall reflect future investment margins (see paragraphs 27-29) if, and onlyif, the amount described in paragraph 17(a) also reflects those margins.

Impairment of reinsurance assets

20 If a cedant’s reinsurance asset is impaired, the cedant shall reduce itscarrying amount accordingly and recognise that impairment loss in profit orloss. A reinsurance asset is impaired if, and only if:

(a) there is objective evidence, as a result of an event that occurredafter initial recognition of the reinsurance asset, that the cedant maynot receive all amounts due to it under the terms of the contract;and

(b) that event has a reliably measurable impact on the amounts that thecedant will receive from the reinsurer.

Changes in accounting policies

21 Paragraphs 22-30 apply both to changes made by an insurer that alreadyapplies IFRSs and to changes made by an insurer adopting IFRSs for thefirst time.

22 An insurer may change its accounting policies for insurancecontracts if, and only if, the change makes the financial statementsmore relevant to the economic decision-making needs of users andno less reliable, or more reliable and no less relevant to those needs.An insurer shall judge relevance and reliability by the criteria in IAS 8.

23 To justify changing its accounting policies for insurance contracts, aninsurer shall show that the change brings its financial statements closer tomeeting the criteria in IAS 8, but the change need not achieve fullcompliance with those criteria. The following specific issues are discussedbelow:


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(a) current interest rates (paragraph 24);

(b) continuation of existing practices (paragraph 25);

(c) prudence (paragraph 26);

(d) future investment margins (paragraphs 27-29); and

(e) shadow accounting (paragraph 30).

Current market interest rates

24 An insurer is permitted, but not required, to change its accounting policiesso that it remeasures designated insurance liabilities* to reflect currentmarket interest rates and recognises changes in those liabilities in profit orloss. At that time, it may also introduce accounting policies that requireother current estimates and assumptions for the designated liabilities. Theelection in this paragraph permits an insurer to change its accountingpolicies for designated liabilities, without applying those policiesconsistently to all similar liabilities as IAS 8 would otherwise require. If aninsurer designates liabilities for this election, it shall continue to applycurrent market interest rates (and, if applicable, the other current estimatesand assumptions) consistently in all periods to all these liabilities until theyare extinguished.

Continuation of existing practices

25 An insurer may continue the following practices, but the introduction of anyof them does not satisfy paragraph 22:

(a) measuring insurance liabilities on an undiscounted basis.

(b) measuring contractual rights to future investment management feesat an amount that exceeds their fair value as implied by acomparison with current fees charged by other market participantsfor similar services. It is likely that the fair value at inception of thosecontractual rights equals the origination costs paid, unless futureinvestment management fees and related costs are out of line withmarket comparables.

(c) using non-uniform accounting policies for the insurance contracts(and related deferred acquisition costs and related intangible assets,if any) of subsidiaries, except as permitted by paragraph 24. If those

* In this paragraph, insurance liabilities include related deferred acquisition costs andrelated intangible assets, such as those discussed in paragraphs 31 and 32.


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accounting policies are not uniform, an insurer may change them ifthe change does not make the accounting policies more diverse andalso satisfies the other requirements in this IFRS.

Prudence

26 An insurer need not change its accounting policies for insurance contractsto eliminate excessive prudence. However, if an insurer already measuresits insurance contracts with sufficient prudence, it shall not introduceadditional prudence.

Future investment margins

27 An insurer need not change its accounting policies for insurance contractsto eliminate future investment margins. However, there is a rebuttablepresumption that an insurer’s financial statements will become less relevantand reliable if it introduces an accounting policy that reflects futureinvestment margins in the measurement of insurance contracts, unlessthose margins affect the contractual payments. Two examples ofaccounting policies that reflect those margins are:

(a) using a discount rate that reflects the estimated return on theinsurer’s assets; or

(b) projecting the returns on those assets at an estimated rate of return,discounting those projected returns at a different rate and includingthe result in the measurement of the liability.

28 An insurer may overcome the rebuttable presumption described inparagraph 27 if, and only if, the other components of a change inaccounting policies increase the relevance and reliability of its financialstatements sufficiently to outweigh the decrease in relevance and reliabilitycaused by the inclusion of future investment margins. For example,suppose that an insurer’s existing accounting policies for insurancecontracts involve excessively prudent assumptions set at inception and adiscount rate prescribed by a regulator without direct reference to marketconditions, and ignore some embedded options and guarantees. Theinsurer might make its financial statements more relevant and no lessreliable by switching to a comprehensive investor-oriented basis ofaccounting that is widely used and involves:

(a) current estimates and assumptions;

(b) a reasonable (but not excessively prudent) adjustment to reflect riskand uncertainty;


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(c) measurements that reflect both the intrinsic value and time value ofembedded options and guarantees; and

(d) a current market discount rate, even if that discount rate reflects theestimated return on the insurer’s assets.

29 In some measurement approaches, the discount rate is used to determinethe present value of a future profit margin. That profit margin is thenattributed to different periods using a formula. In those approaches, thediscount rate affects the measurement of the liability only indirectly.In particular, the use of a less appropriate discount rate has a limited or noeffect on the measurement of the liability at inception. However, in otherapproaches, the discount rate determines the measurement of the liabilitydirectly. In the latter case, because the introduction of an asset-baseddiscount rate has a more significant effect, it is highly unlikely that an insurercould overcome the rebuttable presumption described in paragraph 27.

Shadow accounting

30 In some accounting models, realised gains or losses on an insurer’s assetshave a direct effect on the measurement of some or all of (a) its insuranceliabilities, (b) related deferred acquisition costs and (c) related intangibleassets, such as those described in paragraphs 31 and 32. An insurer ispermitted, but not required, to change its accounting policies so that arecognised but unrealised gain or loss on an asset affects thosemeasurements in the same way that a realised gain or loss does. Therelated adjustment to the insurance liability (or deferred acquisition costs orintangible assets) shall be recognised in equity if, and only if, the unrealisedgains or losses are recognised directly in equity. This practice is sometimesdescribed as ‘shadow accounting’.

Insurance contracts acquired in a business combination or portfolio transfer

31 To comply with IFRS 3 Business Combinations, an insurer shall, at theacquisition date, measure at fair value the insurance liabilities assumed andinsurance assets acquired in a business combination. However, an insureris permitted, but not required, to use an expanded presentation that splitsthe fair value of acquired insurance contracts into two components:

(a) a liability measured in accordance with the insurer’s accountingpolicies for insurance contracts that it issues; and


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(b) an intangible asset, representing the difference between (i) the fairvalue of the contractual insurance rights acquired and insuranceobligations assumed and (ii) the amount described in (a). Thesubsequent measurement of this asset shall be consistent with themeasurement of the related insurance liability.

32 An insurer acquiring a portfolio of insurance contracts may use theexpanded presentation described in paragraph 31.

33 The intangible assets described in paragraphs 31 and 32 are excludedfrom the scope of IAS 36 Impairment of Assets and IAS 38 IntangibleAssets. However, IAS 36 and IAS 38 apply to customer lists and customerrelationships reflecting the expectation of future contracts that are not partof the contractual insurance rights and contractual insurance obligationsthat existed at the date of a business combination or portfolio transfer.

Discretionary participation features

Discretionary participation features in insurance contracts

34 Some insurance contracts contain a discretionary participation feature aswell as a guaranteed element. The issuer of such a contract:

(a) may, but need not, recognise the guaranteed element separatelyfrom the discretionary participation feature. If the issuer does notrecognise them separately, it shall classify the whole contract as aliability. If the issuer classifies them separately, it shall classify theguaranteed element as a liability.

(b) shall, if it recognises the discretionary participation feature separatelyfrom the guaranteed element, classify that feature as either a liabilityor a separate component of equity. This IFRS does not specify howthe issuer determines whether that feature is a liability or equity. Theissuer may split that feature into liability and equity components andshall use a consistent accounting policy for that split. The issuershall not classify that feature as an intermediate category that isneither liability nor equity.

(c) may recognise all premiums received as revenue without separatingany portion that relates to the equity component. The resultingchanges in the guaranteed element and in the portion of thediscretionary participation feature classified as a liability shall berecognised in profit or loss. If part or all of the discretionaryparticipation feature is classified in equity, a portion of profit or lossmay be attributable to that feature (in the same way that a portion


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may be attributable to minority interests). The issuer shall recognisethe portion of profit or loss attributable to any equity component of adiscretionary participation feature as an allocation of profit or loss,not as expense or income (see IAS 1 Presentation of FinancialStatements).

(d) shall, if the contract contains an embedded derivative within thescope of IAS 39, apply IAS 39 to that embedded derivative.

(e) shall, in all respects not described in paragraphs 14-20 and34(a)-(d), continue its existing accounting policies for suchcontracts, unless it changes those accounting policies in a way thatcomplies with paragraphs 21-30.

Discretionary participation features in financial instruments

35 The requirements in paragraph 34 also apply to a financial instrument thatcontains a discretionary participation feature. In addition:

(a) if the issuer classifies the entire discretionary participation feature asa liability, it shall apply the liability adequacy test in paragraphs 15-19to the whole contract (ie both the guaranteed element and thediscretionary participation feature). The issuer need not determinethe amount that would result from applying IAS 39 to theguaranteed element.

(b) if the issuer classifies part or all of that feature as a separatecomponent of equity, the liability recognised for the whole contractshall not be less than the amount that would result from applyingIAS 39 to the guaranteed element. That amount shall include theintrinsic value of an option to surrender the contract, but need notinclude its time value if paragraph 9 exempts that option frommeasurement at fair value. The issuer need not disclose the amountthat would result from applying IAS 39 to the guaranteed element,nor need it present that amount separately. Furthermore, the issuerneed not determine that amount if the total liability recognised isclearly higher.

(c) although these contracts are financial instruments, the issuer maycontinue to recognise the premiums for those contracts as revenueand recognise as an expense the resulting increase in the carryingamount of the liability.


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DISCLOSURE

Explanation of recognised amounts

36 An insurer shall disclose information that identifies and explains theamounts in its financial statements arising from insurance contracts.

37 To comply with paragraph 36, an insurer shall disclose:

(a) its accounting policies for insurance contracts and related assets,liabilities, income and expense.

(b) the recognised assets, liabilities, income and expense (and, if itpresents its cash flow statement using the direct method, cashflows) arising from insurance contracts. Furthermore, if the insurer isa cedant, it shall disclose:

(i) gains and losses recognised in profit or loss on buyingreinsurance; and

(ii) if the cedant defers and amortises gains and losses arising onbuying reinsurance, the amortisation for the period and theamounts remaining unamortised at the beginning and end ofthe period.

(c) the process used to determine the assumptions that have thegreatest effect on the measurement of the recognised amountsdescribed in (b). When practicable, an insurer shall also givequantified disclosure of those assumptions.

(d) the effect of changes in assumptions used to measure insuranceassets and insurance liabilities, showing separately the effect ofeach change that has a material effect on the financial statements.

(e) reconciliations of changes in insurance liabilities, reinsurance assetsand, if any, related deferred acquisition costs.

Amount, timing and uncertainty of cash flows

38 An insurer shall disclose information that helps users to understandthe amount, timing and uncertainty of future cash flows frominsurance contracts.

39 To comply with paragraph 38, an insurer shall disclose:

(a) its objectives in managing risks arising from insurance contracts andits policies for mitigating those risks.


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(b) those terms and conditions of insurance contracts that have amaterial effect on the amount, timing and uncertainty of the insurer’sfuture cash flows.

(c) information about insurance risk (both before and after riskmitigation by reinsurance), including information about:

(i) the sensitivity of profit or loss and equity to changes invariables that have a material effect on them.

(ii) concentrations of insurance risk.

(iii) actual claims compared with previous estimates (ie claimsdevelopment). The disclosure about claims development shallgo back to the period when the earliest material claim arosefor which there is still uncertainty about the amount and timingof the claims payments, but need not go back more than tenyears. An insurer need not disclose this information for claimsfor which uncertainty about the amount and timing of claimspayments is typically resolved within one year.

(d) the information about interest rate risk and credit risk that IAS 32would require if the insurance contracts were within the scope ofIAS 32.

(e) information about exposures to interest rate risk or market risk underembedded derivatives contained in a host insurance contract if theinsurer is not required to, and does not, measure the embeddedderivatives at fair value.

EFFECTIVE DATE AND TRANSITION

40 The transitional provisions in paragraphs 41-45 apply both to an entity thatis already applying IFRSs when it first applies this IFRS and to an entity thatapplies IFRSs for the first-time (a first-time adopter).

41 An entity shall apply this IFRS for annual periods beginning on or after1 January 2005. Earlier application is encouraged. If an entity applies thisIFRS for an earlier period, it shall disclose that fact.


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Disclosure

42 An entity need not apply the disclosure requirements in this IFRS tocomparative information that relates to annual periods beginning before1 January 2005, except for the disclosures required by paragraph 37(a)and (b) about accounting policies, and recognised assets, liabilities,income and expense (and cash flows if the direct method is used).

43 If it is impracticable to apply a particular requirement of paragraphs 10-35to comparative information that relates to annual periods beginning before1 January 2005, an entity shall disclose that fact. Applying the liabilityadequacy test (paragraphs 15-19) to such comparative information mightsometimes be impracticable, but it is highly unlikely to be impracticable toapply other requirements of paragraphs 10-35 to such comparativeinformation. IAS 8 explains the term ‘impracticable’.

44 In applying paragraph 39(c)(iii), an entity need not disclose informationabout claims development that occurred earlier than five years before theend of the first financial year in which it applies this IFRS. Furthermore, if itis impracticable, when an entity first applies this IFRS, to prepareinformation about claims development that occurred before the beginningof the earliest period for which an entity presents full comparativeinformation that complies with this IFRS, the entity shall disclose that fact.

Redesignation of financial assets

45 When an insurer changes its accounting policies for insurance liabilities, itis permitted, but not required, to reclassify some or all of its financial assetsas ‘at fair value through profit or loss’. This reclassification is permitted ifan insurer changes accounting policies when it first applies this IFRS andif it makes a subsequent policy change permitted by paragraph 22. Thereclassification is a change in accounting policy and IAS 8 applies.


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Appendix ADefined terms

This appendix is an integral part of the IFRS.

cedant The policyholder under a reinsurance contract.

deposit component A contractual component that is not accounted for as aderivative under IAS 39 and would be within the scope ofIAS 39 if it were a separate instrument.

direct insurance contract

An insurance contract that is not a reinsurancecontract.

discretionary participation feature

A contractual right to receive, as a supplementto guaranteed benefits, additional benefits:

(a) that are likely to be a significant portion of the totalcontractual benefits;

(b) whose amount or timing is contractually at thediscretion of the issuer; and

(c) that are contractually based on:

(i) the performance of a specified pool of contracts ora specified type of contract;

(ii) realised and/or unrealised investment returns on aspecified pool of assets held by the issuer; or

(iii) the profit or loss of the company, fund or otherentity that issues the contract.

fair value The amount for which an asset could be exchanged, or aliability settled, between knowledgeable, willing parties inan arm’s length transaction.

financial risk The risk of a possible future change in one or more of aspecified interest rate, financial instrument price,commodity price, foreign exchange rate, index of pricesor rates, credit rating or credit index or other variable,provided in the case of a non-financial variable that thevariable is not specific to a party to the contract.

guaranteed benefits Payments or other benefits to which a particularpolicyholder or investor has an unconditional right that isnot subject to the contractual discretion of the issuer.


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guaranteed element An obligation to pay guaranteed benefits, included in acontract that contains a discretionary participationfeature.

insurance asset An insurer’s net contractual rights under an insurancecontract.

insurance contract A contract under which one party (the insurer) acceptssignificant insurance risk from another party (thepolicyholder) by agreeing to compensate thepolicyholder if a specified uncertain future event (theinsured event) adversely affects the policyholder.(See Appendix B for guidance on this definition.)

insurance liability An insurer’s net contractual obligations under aninsurance contract.

insurance risk Risk, other than financial risk, transferred from the holderof a contract to the issuer.

insured event An uncertain future event that is covered by an insurancecontract and creates insurance risk.

insurer The party that has an obligation under an insurancecontract to compensate a policyholder if an insuredevent occurs.

liability adequacy test

An assessment of whether the carrying amount of aninsurance liability needs to be increased (or the carryingamount of related deferred acquisition costs or relatedintangible assets decreased), based on a review of futurecash flows.

policyholder A party that has a right to compensation under aninsurance contract if an insured event occurs.

reinsurance assets A cedant’s net contractual rights under a reinsurancecontract.

reinsurance contract

An insurance contract issued by one insurer(the reinsurer) to compensate another insurer(the cedant) for losses on one or more contracts issuedby the cedant.

reinsurer The party that has an obligation under a reinsurancecontract to compensate a cedant if an insured eventoccurs.

unbundle Account for the components of a contract as if they wereseparate contracts.


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Appendix BDefinition of an insurance contract

This appendix is an integral part of the IFRS.

B1 This appendix gives guidance on the definition of an insurance contract inAppendix A. It addresses the following issues:

(a) the term ‘uncertain future event’ (paragraphs B2-B4);

(b) payments in kind (paragraphs B5-B7);

(c) insurance risk and other risks (paragraphs B8-B17);

(d) examples of insurance contracts (paragraphs B18-B21);

(e) significant insurance risk (paragraphs B22-B28); and

(f) changes in the level of insurance risk (paragraphs B29 and B30).

Uncertain future event

B2 Uncertainty (or risk) is the essence of an insurance contract. Accordingly,at least one of the following is uncertain at the inception of an insurancecontract:

(a) whether an insured event will occur;

(b) when it will occur; or

(c) how much the insurer will need to pay if it occurs.

B3 In some insurance contracts, the insured event is the discovery of a lossduring the term of the contract, even if the loss arises from an event thatoccurred before the inception of the contract. In other insurancecontracts, the insured event is an event that occurs during the term of thecontract, even if the resulting loss is discovered after the end of thecontract term.

B4 Some insurance contracts cover events that have already occurred, butwhose financial effect is still uncertain. An example is a reinsurancecontract that covers the direct insurer against adverse development ofclaims already reported by policyholders. In such contracts, the insuredevent is the discovery of the ultimate cost of those claims.


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Payments in kind

B5 Some insurance contracts require or permit payments to be made in kind.An example is when the insurer replaces a stolen article directly, instead ofreimbursing the policyholder. Another example is when an insurer uses itsown hospitals and medical staff to provide medical services covered by thecontracts.

B6 Some fixed-fee service contracts in which the level of service depends onan uncertain event meet the definition of an insurance contract in this IFRSbut are not regulated as insurance contracts in some countries. Oneexample is a maintenance contract in which the service provider agrees torepair specified equipment after a malfunction. The fixed service fee isbased on the expected number of malfunctions, but it is uncertain whethera particular machine will break down. The malfunction of the equipmentadversely affects its owner and the contract compensates the owner(in kind, rather than cash). Another example is a contract for carbreakdown services in which the provider agrees, for a fixed annual fee, toprovide roadside assistance or tow the car to a nearby garage. The lattercontract could meet the definition of an insurance contract even if theprovider does not agree to carry out repairs or replace parts.

B7 Applying the IFRS to the contracts described in paragraph B6 is likely tobe no more burdensome than applying the IFRSs that would be applicableif such contracts were outside the scope of this IFRS:

(a) There are unlikely to be material liabilities for malfunctions andbreakdowns that have already occurred.

(b) If IAS 18 Revenue applied, the service provider would recogniserevenue by reference to the stage of completion (and subject toother specified criteria). That approach is also acceptable under thisIFRS, which permits the service provider (i) to continue its existingaccounting policies for these contracts unless they involve practicesprohibited by paragraph 14 and (ii) to improve its accounting policiesif so permitted by paragraphs 22-30.

(c) The service provider considers whether the cost of meeting itscontractual obligation to provide services exceeds the revenuereceived in advance. To do this, it applies the liability adequacy testdescribed in paragraphs 15-19 of this IFRS. If this IFRS did notapply to these contracts, the service provider would apply IAS 37Provisions, Contingent Liabilities and Contingent Assets todetermine whether the contracts are onerous.


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(d) For these contracts, the disclosure requirements in this IFRS areunlikely to add significantly to disclosures required by other IFRSs.

Distinction between insurance risk and other risks

B8 The definition of an insurance contract refers to insurance risk, which thisIFRS defines as risk, other than financial risk, transferred from the holder ofa contract to the issuer. A contract that exposes the issuer to financial riskwithout significant insurance risk is not an insurance contract.

B9 The definition of financial risk in Appendix A includes a list of financial andnon-financial variables. That list includes non-financial variables that are notspecific to a party to the contract, such as an index of earthquake lossesin a particular region or an index of temperatures in a particular city.It excludes non-financial variables that are specific to a party to thecontract, such as the occurrence or non-occurrence of a fire that damagesor destroys an asset of that party. Furthermore, the risk of changes in thefair value of a non-financial asset is not a financial risk if the fair valuereflects not only changes in market prices for such assets (a financialvariable) but also the condition of a specific non-financial asset held by aparty to a contract (a non-financial variable). For example, if a guaranteeof the residual value of a specific car exposes the guarantor to the risk ofchanges in the car’s physical condition, that risk is insurance risk, notfinancial risk.

B10 Some contracts expose the issuer to financial risk, in addition to significantinsurance risk. For example, many life insurance contracts both guaranteea minimum rate of return to policyholders (creating financial risk) andpromise death benefits that at some times significantly exceed thepolicyholder’s account balance (creating insurance risk in the form ofmortality risk). Such contracts are insurance contracts.

B11 Under some contracts, an insured event triggers the payment of anamount linked to a price index. Such contracts are insurance contracts,provided the payment that is contingent on the insured event can besignificant. For example, a life-contingent annuity linked to a cost-of-livingindex transfers insurance risk because payment is triggered by anuncertain event—the survival of the annuitant. The link to the price indexis an embedded derivative, but it also transfers insurance risk. If theresulting transfer of insurance risk is significant, the embedded derivativemeets the definition of an insurance contract, in which case it need not beseparated and measured at fair value (see paragraph 7 of this IFRS).


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B12 The definition of insurance risk refers to risk that the insurer accepts fromthe policyholder. In other words, insurance risk is a pre-existing risktransferred from the policyholder to the insurer. Thus, a new risk createdby the contract is not insurance risk.

B13 The definition of an insurance contract refers to an adverse effect on thepolicyholder. The definition does not limit the payment by the insurer to anamount equal to the financial impact of the adverse event. For example,the definition does not exclude ‘new-for-old’ coverage that pays thepolicyholder sufficient to permit replacement of a damaged old asset by anew asset. Similarly, the definition does not limit payment under a term lifeinsurance contract to the financial loss suffered by the deceased’sdependants, nor does it preclude the payment of predetermined amountsto quantify the loss caused by death or an accident.

B14 Some contracts require a payment if a specified uncertain event occurs,but do not require an adverse effect on the policyholder as a preconditionfor payment. Such a contract is not an insurance contract even if theholder uses the contract to mitigate an underlying risk exposure. Forexample, if the holder uses a derivative to hedge an underlyingnon-financial variable that is correlated with cash flows from an asset of theentity, the derivative is not an insurance contract because payment is notconditional on whether the holder is adversely affected by a reduction inthe cash flows from the asset. Conversely, the definition of an insurancecontract refers to an uncertain event for which an adverse effect on thepolicyholder is a contractual precondition for payment. This contractualprecondition does not require the insurer to investigate whether the eventactually caused an adverse effect, but permits the insurer to deny paymentif it is not satisfied that the event caused an adverse effect.

B15 Lapse or persistency risk (ie the risk that the counterparty will cancel thecontract earlier or later than the issuer had expected in pricing the contract)is not insurance risk because the payment to the counterparty is notcontingent on an uncertain future event that adversely affects thecounterparty. Similarly, expense risk (ie the risk of unexpected increases inthe administrative costs associated with the servicing of a contract, ratherthan in costs associated with insured events) is not insurance risk becausean unexpected increase in expenses does not adversely affect thecounterparty.

B16 Therefore, a contract that exposes the issuer to lapse risk, persistency riskor expense risk is not an insurance contract unless it also exposes theissuer to insurance risk. However, if the issuer of that contract mitigatesthat risk by using a second contract to transfer part of that risk to anotherparty, the second contract exposes that other party to insurance risk.


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B17 An insurer can accept significant insurance risk from the policyholder onlyif the insurer is an entity separate from the policyholder. In the case of amutual insurer, the mutual accepts risk from each policyholder and poolsthat risk. Although policyholders bear that pooled risk collectively in theircapacity as owners, the mutual has still accepted the risk that is theessence of an insurance contract.

Examples of insurance contracts

B18 The following are examples of contracts that are insurance contracts, if thetransfer of insurance risk is significant:

(a) insurance against theft or damage to property.

(b) insurance against product liability, professional liability, civil liability orlegal expenses.

(c) life insurance and prepaid funeral plans (although death is certain, itis uncertain when death will occur or, for some types of lifeinsurance, whether death will occur within the period covered by theinsurance).

(d) life-contingent annuities and pensions (ie contracts that providecompensation for the uncertain future event—the survival of theannuitant or pensioner—to assist the annuitant or pensioner inmaintaining a given standard of living, which would otherwise beadversely affected by his or her survival).

(e) disability and medical cover.

(f) surety bonds, fidelity bonds, performance bonds and bid bonds(ie contracts that provide compensation if another party fails toperform a contractual obligation, for example an obligation toconstruct a building).

(g) credit insurance that provides for specified payments to be made toreimburse the holder for a loss it incurs because a specified debtorfails to make payment when due under the original or modifiedterms of a debt instrument. These contracts could have variouslegal forms, such as that of a financial guarantee, letter of credit,credit derivative default product or insurance contract. However,these contracts are outside the scope of this IFRS if the entityentered into them, or retained them, on transferring to another partyfinancial assets or financial liabilities within the scope of IAS 39(see paragraph 4(d)).


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(h) product warranties. Product warranties issued by another party forgoods sold by a manufacturer, dealer or retailer are within the scopeof this IFRS. However, product warranties issued directly by amanufacturer, dealer or retailer are outside its scope, because theyare within the scope of IAS 18 Revenue and IAS 37 Provisions,Contingent Liabilities and Contingent Assets.

(i) title insurance (ie insurance against the discovery of defects in title toland that were not apparent when the insurance contract waswritten). In this case, the insured event is the discovery of a defect inthe title, not the defect itself.

(j) travel assistance (ie compensation in cash or in kind to policyholdersfor losses suffered while they are travelling). Paragraphs B6 and B7discuss some contracts of this kind.

(k) catastrophe bonds that provide for reduced payments of principal,interest or both if a specified event adversely affects the issuer of thebond (unless the specified event does not create significantinsurance risk, for example if the event is a change in an interest rateor foreign exchange rate).

(l) insurance swaps and other contracts that require a payment basedon changes in climatic, geological or other physical variables that arespecific to a party to the contract.

(m) reinsurance contracts.

B19 The following are examples of items that are not insurance contracts:

(a) investment contracts that have the legal form of an insurancecontract but do not expose the insurer to significant insurance risk,for example life insurance contracts in which the insurer bears nosignificant mortality risk (such contracts are non-insurance financialinstruments or service contracts, see paragraphs B20 and B21).

(b) contracts that have the legal form of insurance, but pass allsignificant insurance risk back to the policyholder throughnon-cancellable and enforceable mechanisms that adjust futurepayments by the policyholder as a direct result of insured losses, forexample some financial reinsurance contracts or some groupcontracts (such contracts are normally non-insurance financialinstruments or service contracts, see paragraphs B20 and B21).

(c) self-insurance, in other words retaining a risk that could have beencovered by insurance (there is no insurance contract because thereis no agreement with another party).


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(d) contracts (such as gambling contracts) that require a payment if aspecified uncertain future event occurs, but do not require, as acontractual precondition for payment, that the event adverselyaffects the policyholder. However, this does not preclude thespecification of a predetermined payout to quantify the loss causedby a specified event such as death or an accident (see alsoparagraph B13).

(e) derivatives that expose one party to financial risk but not insurancerisk, because they require that party to make payment based solelyon changes in one or more of a specified interest rate, financialinstrument price, commodity price, foreign exchange rate, index ofprices or rates, credit rating or credit index or other variable,provided in the case of a non-financial variable that the variable isnot specific to a party to the contract (see IAS 39).

(f) a financial guarantee contract (or letter of credit, credit derivativedefault product or credit insurance contract) that requires paymentseven if the holder has not incurred a loss on the failure of the debtorto make payments when due (see IAS 39).

(g) contracts that require a payment based on a climatic, geological orother physical variable that is not specific to a party to the contract(commonly described as weather derivatives).

(h) catastrophe bonds that provide for reduced payments of principal,interest or both, based on a climatic, geological or other physicalvariable that is not specific to a party to the contract.

B20 If the contracts described in paragraph B19 create financial assets orfinancial liabilities, they are within the scope of IAS 39. Among other things,this means that the parties to the contract use what is sometimes calleddeposit accounting, which involves the following:

(a) one party recognises the consideration received as a financialliability, rather than as revenue.

(b) the other party recognises the consideration paid as a financialasset, rather than as an expense.

B21 If the contracts described in paragraph B19 do not create financial assetsor financial liabilities, IAS 18 applies. Under IAS 18, revenue associatedwith a transaction involving the rendering of services is recognised byreference to the stage of completion of the transaction if the outcome ofthe transaction can be estimated reliably.


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Significant insurance risk

B22 A contract is an insurance contract only if it transfers significant insurancerisk. Paragraphs B8-B21 discuss insurance risk. The followingparagraphs discuss the assessment of whether insurance risk issignificant.

B23 Insurance risk is significant if, and only if, an insured event could cause aninsurer to pay significant additional benefits in any scenario, excludingscenarios that lack commercial substance (ie have no discernible effect onthe economics of the transaction). If significant additional benefits wouldbe payable in scenarios that have commercial substance, the condition inthe previous sentence may be met even if the insured event is extremelyunlikely or even if the expected (ie probability-weighted) present value ofcontingent cash flows is a small proportion of the expected present valueof all the remaining contractual cash flows.

B24 The additional benefits described in paragraph B23 refer to amounts thatexceed those that would be payable if no insured event occurred(excluding scenarios that lack commercial substance). Those additionalamounts include claims handling and claims assessment costs, butexclude:

(a) the loss of the ability to charge the policyholder for future services.For example, in an investment-linked life insurance contract, thedeath of the policyholder means that the insurer can no longerperform investment management services and collect a fee fordoing so. However, this economic loss for the insurer does notreflect insurance risk, just as a mutual fund manager does not takeon insurance risk in relation to the possible death of the client.Therefore, the potential loss of future investment management feesis not relevant in assessing how much insurance risk is transferredby a contract.

(b) waiver on death of charges that would be made on cancellation orsurrender. Because the contract brought those charges intoexistence, the waiver of these charges does not compensate thepolicyholder for a pre-existing risk. Hence, they are not relevant inassessing how much insurance risk is transferred by a contract.

(c) a payment conditional on an event that does not cause a significantloss to the holder of the contract. For example, consider a contractthat requires the issuer to pay one million currency units if an assetsuffers physical damage causing an insignificant economic loss ofone currency unit to the holder. In this contract, the holder transfersto the insurer the insignificant risk of losing one currency unit. At the


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same time, the contract creates non-insurance risk that the issuerwill need to pay 999,999 currency units if the specified event occurs.Because the issuer does not accept significant insurance risk fromthe holder, this contract is not an insurance contract.

(d) possible reinsurance recoveries. The insurer accounts for theseseparately.

B25 An insurer shall assess the significance of insurance risk contract bycontract, rather than by reference to materiality to the financialstatements.* Thus, insurance risk may be significant even if there is aminimal probability of material losses for a whole book of contracts. Thiscontract-by-contract assessment makes it easier to classify a contract asan insurance contract. However, if a relatively homogeneous book of smallcontracts is known to consist of contracts that all transfer insurance risk,an insurer need not examine each contract within that book to identify afew non-derivative contracts that transfer insignificant insurance risk.

B26 It follows from paragraphs B23-B25 that if a contract pays a death benefitexceeding the amount payable on survival, the contract is an insurancecontract unless the additional death benefit is insignificant (judged byreference to the contract rather than to an entire book of contracts).As noted in paragraph B24(b), the waiver on death of cancellation orsurrender charges is not included in this assessment if this waiver does notcompensate the policyholder for a pre-existing risk. Similarly, an annuitycontract that pays out regular sums for the rest of a policyholder’s life is aninsurance contract, unless the aggregate life-contingent payments areinsignificant.

B27 Paragraph B23 refers to additional benefits. These additional benefitscould include a requirement to pay benefits earlier if the insured eventoccurs earlier and the payment is not adjusted for the time value of money.An example is whole life insurance for a fixed amount (in other words,insurance that provides a fixed death benefit whenever the policyholderdies, with no expiry date for the cover). It is certain that the policyholderwill die, but the date of death is uncertain. The insurer will suffer a loss onthose individual contracts for which policyholders die early, even if there isno overall loss on the whole book of contracts.

* For this purpose, contracts entered into simultaneously with a single counterparty(or contracts that are otherwise interdependent) form a single contract.


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B28 If an insurance contract is unbundled into a deposit component and aninsurance component, the significance of insurance risk transfer isassessed by reference to the insurance component. The significance ofinsurance risk transferred by an embedded derivative is assessed byreference to the embedded derivative.

Changes in the level of insurance risk

B29 Some contracts do not transfer any insurance risk to the issuer atinception, although they do transfer insurance risk at a later time. Forexample, consider a contract that provides a specified investment returnand includes an option for the policyholder to use the proceeds of theinvestment on maturity to buy a life-contingent annuity at the currentannuity rates charged by the insurer to other new annuitants when thepolicyholder exercises the option. The contract transfers no insurance riskto the issuer until the option is exercised, because the insurer remains freeto price the annuity on a basis that reflects the insurance risk transferred tothe insurer at that time. However, if the contract specifies the annuity rates(or a basis for setting the annuity rates), the contract transfers insurancerisk to the issuer at inception.

B30 A contract that qualifies as an insurance contract remains an insurancecontract until all rights and obligations are extinguished or expire.


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Appendix CAmendments to other IFRSs

The amendments in this appendix shall be applied for annual periods beginningon or after 1 January 2005. If an entity adopts this IFRS for an earlier period,these amendments shall be applied for that earlier period.

Amendments to IAS 32 and IAS 39

C1 In IAS 32 Financial Instruments: Disclosure and Presentation (as revised in2003), paragraph 4(d) is renumbered as 4(c). Paragraph 4(c) isrenumbered as 4(d) and amended as set out in paragraph C4.

Paragraph 6 is deleted.

The following sentence is added to the end of paragraph AG8:

Some of these contingent rights and obligations may be insurancecontracts within the scope of IFRS 4.

C2 In IAS 39 Financial Instruments: Recognition and Measurement (as revisedin 2003), paragraph 2(e) is renumbered as paragraph 2(d). Paragraph 2(d)is renumbered as 2(e) and amended as set out in paragraph C5.Paragraph AG4 is amended to read as follows:

AG4. This Standard applies to the financial assets and financial liabilitiesof insurers, other than rights and obligations that paragraph 2(e)excludes because they arise under contracts within the scope ofIFRS 4.

C3 Paragraphs 4(e) of IAS 32 and 2(h) of IAS 39 contain scope exclusions forderivatives based on climatic, geological, or other physical variables.Those paragraphs are deleted. As a result, such derivatives are within thescope of IAS 32 and IAS 39, unless they meet the definition of an insurancecontract and are within the scope of IFRS 4. Furthermore, paragraph AG1of IAS 39 is amended to read as follows:

AG1. Some contracts require a payment based on climatic, geological orother physical variables. (Those based on climatic variables aresometimes referred to as ‘weather derivatives’.) If those contractsare not within the scope of IFRS 4 Insurance Contracts, they arewithin the scope of this Standard.

In Question B.2 of the Guidance on Implementing IAS 39, the phrase‘IAS 39.2(h) and’ is deleted from the last paragraph.


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C4 In IAS 32, a new paragraph 4(e) is inserted. Following this change andchanges made by paragraphs C1 and C3, and by IFRS 3 BusinessCombinations, paragraph 4(c)-(e) reads as follows:

(c) contracts for contingent consideration in a businesscombination (see IFRS 3 Business Combinations). Thisexemption applies only to the acquirer.

(d) insurance contracts as defined in IFRS 4 Insurance Contracts.However, this Standard applies to derivatives that areembedded in insurance contracts if IAS 39 requires the entity toaccount for them separately.

(e) financial instruments that are within the scope of IFRS 4because they contain a discretionary participation feature. Theissuer of these instruments is exempt from applying to thesefeatures paragraphs 15-32 and AG25-AG35 of this Standardregarding the distinction between financial liabilities and equityinstruments. However, these instruments are subject to allother requirements of this Standard. Furthermore, thisStandard applies to derivatives that are embedded in theseinstruments (see IAS 39).

Paragraph 4(f), inserted by IFRS 2 Share-based Payment, remainsunchanged.

C5 In IAS 39, paragraph 2(f) is deleted. Following this change and changesmade by paragraphs C2 and C3, and by IFRS 3 Business Combinations,paragraph 2(d)-(g) reads as follows:

(d) financial instruments issued by the entity that meet thedefinition of an equity instrument in IAS 32 (including optionsand warrants). However, the holder of such equity instrumentsshall apply this Standard to those instruments, unless theymeet the exception in (a) above.

(e) rights and obligations under an insurance contract as definedin IFRS 4 Insurance Contracts or under a contract that is withinthe scope of IFRS 4 because it contains a discretionaryparticipation feature. However, this Standard applies to aderivative that is embedded in such a contract if the derivativeis not itself a contract within the scope of IFRS 4 (seeparagraphs 10-13 and Appendix A paragraphs AG23-AG33).Furthermore, if an insurance contract is a financial guaranteecontract entered into, or retained, on transferring to another


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party financial assets or financial liabilities within the scope ofthis Standard, the issuer shall apply this Standard to thecontract (see paragraph 3 and Appendix A paragraph AG4A).

(f) contracts for contingent consideration in a businesscombination (see IFRS 3 Business Combinations). Thisexemption applies only to the acquirer.

(g) contracts between an acquirer and a vendor in a businesscombination to buy or sell an acquiree at a future date.

Paragraph 2(i) and (j) is renumbered as 2(h) and (i). Paragraph 2(i) wasinserted by IFRS 2 Share-based Payment.

Paragraph IN5 is amended, paragraph 3 is deleted and replaced by a newparagraph 3 and paragraph AG4A is added, as follows:

IN5. The treatment of financial guarantee contracts has been reviewed.Such a contract is within the scope of this Standard if it is not aninsurance contract, as defined in IFRS 4 Insurance Contracts.Furthermore, if an entity entered into, or retained, a financialguarantee on transferring to another party financial assets orfinancial liabilities within the scope of the Standard, the entityapplies the Standard to that contract, even if the contract meetsthe definition of an insurance contract. The Board expects to issuein the near future an Exposure Draft proposing amendments to thetreatment of financial guarantees within the scope of IFRS 4.

3. Some financial guarantee contracts require the issuer to makespecified payments to reimburse the holder for a loss it incursbecause a specified debtor fails to make payment when due underthe original or modified terms of a debt instrument. If thatrequirement transfers significant risk to the issuer, the contract isan insurance contract as defined in IFRS 4 (see paragraphs 2(e)and AG4A). Other financial guarantee contracts require paymentsto be made in response to changes in a specified interest rate,financial instrument price, commodity price, foreign exchange rate,index of prices or rates, credit rating or credit index, or othervariable, provided in the case of a non-financial variable that thevariable is not specific to a party to the contract. Such contractsare within the scope of this Standard.

AG4A. Financial guarantee contracts may have various legal forms, suchas a financial guarantee, letter of credit, credit default contract orinsurance contract. Their accounting treatment does not dependon their legal form. The following are examples of the appropriatetreatment (see paragraphs 2(e) and 3):


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(a) If the contract is not an insurance contract, as defined inIFRS 4, the issuer applies this Standard. Thus, a financialguarantee contract that requires payments if the credit ratingof a debtor falls below a particular level is within the scope ofthis Standard.

(b) If the issuer incurred or retained the financial guarantee ontransferring to another party financial assets or financialliabilities within the scope of this Standard, the issuer appliesthis Standard.

(c) If the contract is an insurance contract, as defined in IFRS 4,the issuer applies IFRS 4 unless (b) applies.

(d) If the issuer gave a financial guarantee in connection with thesale of goods, the issuer applies IAS 18 in determining when itrecognises the resulting revenue.

In paragraph IN6, the phrase ‘in the same way as a financial guaranteethat is outside the scope of IAS 39 (see paragraph IN5)’ is replaced by thephrase ‘at the higher of (a) the amount that would be recognised underIAS 37 and (b) the amount initially recognised less, where appropriate,cumulative amortisation recognised in accordance with IAS 18 Revenue.’

In paragraph BC20 of the Basis for Conclusions, the phrase ‘in the sameway as financial guarantees (see paragraph BC23)’ is replaced by thephrase inserted in paragraph IN6.

The heading preceding paragraph BC21 is amended to read as follows:

Financial Guarantee Contracts (paragraphs 2(e), 3 and AG4A)

Paragraph BC23 is amended to read as follows:

BC23. In finalising IFRS 4 Insurance Contracts, the Board decided that afinancial guarantee should, regardless of its legal form (eg financialguarantee, letter of credit, credit default contract, insurancecontract) be within the scope of:

(a) this Standard if it is not an insurance contract, as defined inIFRS 4.

(b) this Standard, for accounting by the issuer, if the issuerincurred or retained the financial guarantee when it transferredto another party financial assets or financial liabilities within thescope of this Standard.

(c) IFRS 4 if it is an insurance contract, as defined in IFRS 4,unless (b) applies. However, the Board also decided todevelop an Exposure Draft proposing that financial guarantees


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within the scope of IFRS 4 should be measured initially at fairvalue and subsequently in the same way as commitments toprovide a loan at a below-market interest rate (see paragraphBC20).

C6 In IAS 39, paragraph 9, the phrase ‘other variable’ in the definition of aderivative is replaced by the phrase ‘other variable, provided in the case ofa non-financial variable that the variable is not specific to a party to thecontract’. The same change is made in paragraph 10 of IAS 39 andQuestion B.2 of the Guidance on Implementing IAS 39. The following newparagraph AG12A is added to IAS 39:

AG12A. The definition of a derivative refers to non-financial variables thatare not specific to a party to the contract. These include anindex of earthquake losses in a particular region and an index oftemperatures in a particular city. Non-financial variables specificto a party to the contract include the occurrence ornon-occurrence of a fire that damages or destroys an asset of aparty to the contract. A change in the fair value of anon-financial asset is specific to the owner if the fair valuereflects not only changes in market prices for such assets(a financial variable) but also the condition of the specificnon-financial asset held (a non-financial variable). For example,if a guarantee of the residual value of a specific car exposes theguarantor to the risk of changes in the car’s physical condition,the change in that residual value is specific to the owner ofthe car.

C7 In IAS 32, the following new paragraph 91A is inserted, and inparagraph 86 the cross-reference to paragraph 90 is extended to includeparagraph 91A:

91A. Some financial assets and financial liabilities contain adiscretionary participation feature as described in IFRS 4Insurance Contracts. If an entity cannot measure reliably thefair value of that feature, the entity shall disclose that facttogether with a description of the contract, its carrying amount,an explanation of why fair value cannot be measured reliablyand, if possible, the range of estimates within which fair value ishighly likely to lie.

In paragraph 49(e), ‘insurance policy’ is replaced by ‘insurance contract’.

In the first line of paragraph BC7 of the Basis for Conclusions, ‘aninstrument’ is replaced by ‘a financial instrument’.


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C8 In IAS 39, paragraph AG30 gives examples of embedded derivatives thatare regarded as not closely related to a host contract, andparagraph AG33 gives examples of embedded derivatives that areregarded as closely related to a host contract. Paragraphs AG30(g) andAG33 (a), (b) and (d) are amended by the insertion of references toinsurance contracts as follows and in paragraph AG33, (g) and (h) areadded:

AG30(g) A call, put, or prepayment option embedded in a host debtcontract or host insurance contract is not closely related to thehost contract unless the option’s exercise price is approximatelyequal on each exercise date to the amortised cost of the hostdebt instrument or the carrying amount of the host insurancecontract. From the perspective of the issuer of a convertibledebt instrument with an embedded call or put option feature, theassessment of whether the call or put option is closely related tothe host debt contract is made before separating the equityelement under IAS 32.

AG33(a) An embedded derivative in which the underlying is an interestrate or interest rate index that can change the amount of interestthat would otherwise be paid or received on an interest-bearinghost debt contract or insurance contract is closely related to thehost contract unless the combined contract can be settled insuch a way that the holder would not recover substantially all ofits recognised investment or the embedded derivative could atleast double the holder’s initial rate of return on the host contractand could result in a rate of return that is at least twice what themarket return would be for a contract with the same terms asthe host contract.

(b) An embedded floor or cap on the interest rate on a debt contractor insurance contract is closely related to the host contract,provided the cap is at or above the market rate of interest andthe floor is at or below the market rate of interest when thecontract is issued, and the cap or floor is not leveraged inrelation to the host contract. Similarly, provisions included in acontract to purchase or sell an asset (eg a commodity) thatestablish a cap and a floor on the price to be paid or received forthe asset are closely related to the host contract if both the capand floor were out of the money at inception and are notleveraged.

(d) An embedded foreign currency derivative in a host contract thatis an insurance contract or not a financial instrument (such as acontract for the purchase or sale of a non-financial item where


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the price is denominated in a foreign currency) is closely relatedto the host contract provided it is not leveraged, does notcontain an option feature, and requires payments denominatedin one of the following currencies:

(i) the functional currency of any substantial party to thatcontract;

(ii) the currency in which the price of the related good or servicethat is acquired or delivered is routinely denominated incommercial transactions around the world (such as theUS dollar for crude oil transactions); or

(iii) a currency that is commonly used in contracts to purchaseor sell non-financial items in the economic environment inwhich the transaction takes place (eg a relatively stable andliquid currency that is commonly used in local businesstransactions or external trade).

(g) A unit-linking feature embedded in a host financial instrument orhost insurance contract is closely related to the host instrumentor host contract if the unit-denominated payments are measuredat current unit values that reflect the fair values of the assets ofthe fund. A unit-linking feature is a contractual term that requirespayments denominated in units of an internal or externalinvestment fund.

(h) A derivative embedded in an insurance contract is closely relatedto the host insurance contract if the embedded derivative andhost insurance contract are so interdependent that an entitycannot measure the embedded derivative separately (ie withoutconsidering the host contract).


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Amendments to other IFRSs

C9 IAS 18 Revenue is amended as described below.

Paragraph 6(c) is amended to read as follows:

(c) insurance contracts within the scope of IFRS 4 Insurance Contracts;

In the Appendix, paragraph 14(a)(iii) and 14(b)(iii) are added as follows:

(a)(iii) Origination fees received on issuing financial liabilities measured atamortised cost.

These fees are an integral part of generating an involvement with afinancial liability. When a financial liability is not classified as ‘at fairvalue through profit or loss’, the origination fees received areincluded, with the related transaction costs incurred, in the initialcarrying amount of the financial liability and recognised as anadjustment to the effective yield. An entity distinguishes fees andcosts that are an integral part of the effective interest rate for thefinancial liability from origination fees and transaction costs relatingto the right to provide services, such as investment managementservices.

(b)(iii)Investment management fees

Fees charged for managing investments are recognised as revenueas the services are provided.

Incremental costs that are directly attributable to securing aninvestment management contract are recognised as an asset if theycan be identified separately and measured reliably and if it isprobable that they will be recovered. As in IAS 39, an incrementalcost is one that would not have been incurred if the entity had notsecured the investment management contract. The assetrepresents the entity’s contractual right to benefit from providinginvestment management services, and is amortised as the entityrecognises the related revenue. If the entity has a portfolio ofinvestment management contracts, it may assess their recoverabilityon a portfolio basis.

Some financial services contracts involve both the origination of oneor more financial instruments and the provision of investmentmanagement services. An example is a long-term monthly savingcontract linked to the management of a pool of equity securities.The provider of the contract distinguishes the transaction costsrelating to the origination of the financial instrument from the costs ofsecuring the right to provide investment management services.


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C10 In IAS 19 Employee Benefits, the following footnote is added to thedefinition in paragraph 7 of a qualifying insurance policy, after the firstoccurrence of the word ‘policy’:

* A qualifying insurance policy is not necessarily an insurancecontract, as defined in IFRS 4 Insurance Contracts.

C11 In IAS 37 Provisions, Contingent Liabilities and Contingent Assets,paragraphs 1(b) and 4 are deleted and a new paragraph 5(e) is inserted asfollows:

(e) insurance contracts (see IFRS 4). However, this Standard applies toprovisions, contingent liabilities and contingent assets of an insurer,other than those arising from its contractual obligations and rightsunder insurance contracts within the scope of IFRS 4.

In paragraph 2 (as amended in 2003 by IAS 39), the last sentence isdeleted.

In Appendix C, example 9, the following new paragraph is inserted afterthe first paragraph:

This contract meets the definition of an insurance contract in IFRS 4.IFRS 4 permits the issuer to continue its existing accounting policies forinsurance contracts if specified minimum requirements are satisfied.IFRS 4 also permits changes in accounting policies that meet specifiedcriteria. The following is an example of an accounting policy that IFRS 4permits.

C12 In IAS 40 Investment Property (as revised in 2003), paragraphs 32A-32Cand 75(f)(iv) are added and a cross-reference to paragraph 32A is includedin paragraph 30 as follows:

30. With the exceptions noted in paragraphs 32A and 34, an entityshall choose as its accounting policy either the fair value modelin paragraphs 33-55 or the cost model in paragraph 56 andshall apply that policy to all of its investment property.

Investment property linked to liabilities

32A. An entity may:

(a) choose either the fair value model or the cost model for allinvestment property backing liabilities that pay a returnlinked directly to the fair value of, or returns from,specified assets including that investment property; and


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(b) choose either the fair value model or the cost model for allother investment property, regardless of the choice madein (a).

32B. Some insurers and other entities operate an internal property fundthat issues notional units, with some units held by investors in linkedcontracts and others held by the entity. Paragraph 32A does notpermit an entity to measure the property held by the fund partly atcost and partly at fair value.

32C. If an entity chooses different models for the two categoriesdescribed in paragraph 32A, sales of investment property betweenpools of assets measured using different models shall be recognisedat fair value and the cumulative change in fair value shall berecognised in profit or loss. Accordingly, if an investment property issold from a pool in which the fair value model is used into a pool inwhich the cost model is used, the property’s fair value at the date ofthe sale becomes its deemed cost.

75(f)(iv) the cumulative change in fair value recognised in profit orloss on a sale of investment property from a pool of assetsin which the cost model is used into a pool in which the fairvalue model is used (see paragraph 32C).

C13 IFRS 1 First-time Adoption of International Financial Reporting Standardsis amended as described below.

In paragraph 12, the reference to paragraphs 13-25C is amended to referto paragraphs 13-25D.

Paragraph 13(g) and (h) is amended and a new subparagraph (i) is inserted,as follows:

(g) designation of previously recognised financial instruments(paragraph 25A);

(h) share-based payment transactions (paragraphs 25B and25C); and

(i) insurance contracts (paragraph 25D).

After paragraph 25C, a new heading and paragraph 25D are added, asfollows:

Insurance contracts

25D A first-time adopter may apply the transitional provisions in IFRS 4Insurance Contracts. IFRS 4 restricts changes in accountingpolicies for insurance contracts, including changes made by afirst-time adopter.


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Paragraph 36A and the preceding heading are amended by insertingreferences to IFRS 4, to read as follows:

Exemption from the requirement to restate comparative informationfor IAS 39 and IFRS 4

36A In its first IFRS financial statements, an entity that adopts IFRSsbefore 1 January 2006 shall present at least one year of comparativeinformation, but this comparative information need not comply withIAS 32, IAS 39 and IFRS 4. An entity that chooses to presentcomparative information that does not comply with IAS 32, IAS 39and IFRS 4 in its first year of transition shall:

(a) apply its previous GAAP in the comparative information tofinancial instruments within the scope of IAS 32 and IAS 39and to insurance contracts within the scope of IFRS 4;

(b) disclose this fact, together with the basis used to prepare thisinformation; and

(c) disclose the nature of the main adjustments that would makethe information comply with IAS 32, IAS 39 and IFRS 4. Theentity need not quantify those adjustments. However, theentity shall treat any adjustment between the balance sheet atthe comparative period’s reporting date (ie the balance sheetthat includes comparative information under previous GAAP)and the balance sheet at the start of the first IFRS reportingperiod (ie the first period that includes information thatcomplies with IAS 32, IAS 39 and IFRS 4) as arising from achange in accounting policy and give the disclosures requiredby paragraph 28(a)-(e) and (f)(i) of IAS 8.

In the case of an entity that chooses to present comparativeinformation that does not comply with IAS 32, IAS 39 and IFRS 4,references to the ‘date of transition to IFRSs’ shall mean, in the caseof those Standards only, the beginning of the first IFRS reportingperiod.


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Approval of IFRS 4 by the Board

International Financial Reporting Standard 4 Insurance Contracts was approvedfor issue by eight of the fourteen members of the International AccountingStandards Board. Professor Barth and Messrs Garnett, Gélard, Leisenring,Smith and Yamada dissented. Their dissenting opinions are set out after theBasis for Conclusions on IFRS 4.

Sir David Tweedie Chairman

Thomas E Jones Vice-Chairman

Mary E Barth

Hans-Georg Bruns

Anthony T Cope

Robert P Garnett

Gilbert Gélard

James J Leisenring

Warren J McGregor

Patricia L O’Malley

Harry K Schmid

John T Smith

Geoffrey Whittington

Tatsumi Yamada

international financial reporting standard ifrs … · march 2004 ifrs4 international financial...

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