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Insurance contracts project
Accounting practices for insurance contracts have been diverse, and have often differed from practices in other industries. IFRS 4, ‘Insurance contracts’, (IFRS 4) deals with insurance contracts. It was intended to make limited improvements to accounting for insurance contracts and to provide disclosure requirements. IFRS 4 is an interim standard and it will be replaced by IFRS 17 ‘Insurance contracts’ (previously known as IFRS 4 phase II).
On 12 September 2016, the IASB published an amendment to IFRS 4 which addresses the concerns of insurance companies about the different effective dates of IFRS 9, ‘Financial instruments’, and IFRS 17. The amendment to IFRS 4 provides two different solutions for insurance companies: a temporary exemption from IFRS 9 for some entities that meet specific requirements (applied at the reporting entity level) and the ‘overlay approach’. Both approaches are optional.
IFRS 4 (including the amendments that now have been issued) will be superseded by IFRS 17. Accordingly, both the temporary exemption and the ‘overlay approach’ are expected to cease to be applicable when the new insurance standard becomes mandatory for periods beginning on or after 1 January 2023.
Insurance contracts are contracts where an entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if the insured event adversely affects the policyholder. The risk transferred in the contract must be insurance risk, which is any risk except for financial risk.
IFRS 4 applies to all issuers of insurance contracts whether or not the entity is legally an insurance company. It does not apply to accounting for insurance contracts by policyholders.
IFRS 4 was designed as an interim standard. It allows entities to continue with their existing accounting policies for insurance contracts if those policies meet certain minimum criteria. One of the minimum criteria is that the amount of the insurance liability is subject to a liability adequacy test. This test considers current estimates of all contractual and related cash flows. If the liability adequacy test identifies that the insurance liability is inadequate, the entire deficiency is recognised in the income statement. IFRS 17 will replace IFRS 4 and will apply to annual periods beginning on or after 1 January 2023.
Accounting policies modelled on IAS 37, 'Provisions, contingent liabilities and contingent assets', are appropriate in cases where the issuer is not an insurance company and where there is no specific local GAAP for insurance contracts (or the local GAAP is only directed at insurance companies).
Disclosure is particularly important for information relating to insurance contracts, as entities can continue to use local GAAP accounting policies for measurement. IFRS 4 has two main principles for disclosure. Entities should disclose:
- Information that identifies and explains the amounts in its financial statements arising from insurance contracts.
- Information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts.