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17 March 2015

IASB's update on insurance contracts project

The IASB has published an overview of the tentative decisions on the general model that would apply to insurance contracts without participation features, and the IASB’s reasons for reaching those decisions.

Insurance contracts often expose entities to long-term and uncertain obligations. However, existing insurance contracts accounting does not provide existing and potential investors, lenders and other creditors with the information they need to:

  • Understand the financial statements of entities that issue insurance contracts
  • Make meaningful comparisons between such entities

The proposals would improve financial reporting by providing more transparent, comparable information about:

  • The effect of the insurance contracts that an entity issues on the entity’s financial performance
  • The way by which entities earn profits, or incur losses, through underwriting services and investing premiums from customers
  • The nature and extent of risks that companies are exposed to as a result of issuing insurance contracts

The proposed Standard describes a measurement and presentation model for insurance contracts. To apply the Standard, an entity would apply the following steps:

Identify and recognise the contract:

  • An insurance contract is defined by the presence of significant insurance risk, consistent with existing IFRS 4
  • Some distinct non-insurance components should be separated from the contract and accounted for using other Standards
  • An entity recognises an insurance contract when the coverage periods begins, unless the contract is onerous, in which case an entity recognises the insurance contract when it discovers that the contract is onerous

Measure the contract at initial recognition:

  • The measurement of an insurance contract incorporates all available information about the expected cash flows related to fulfiling the insurance contract
  • The measurement must be consistent with observable market information
  • An entity may apply a simplified approach to measure part of the insurance contract in some circumstances.

Remeasure in subsequent periods:

  • In each reporting period, an entity re-measures insurance contracts using updated assumptions about cash flows, discount rate and risk
  • An entity recognises the effect of changes in estimates relating to future service in the periods in which the service is provided, rather than in the current period

Present results in financial statements:

  • Revenue and expense for insurance contracts is consistent with that for non-insurance contracts
  • An entity may choose to split the interest expense and present cost-based interest expense in profit or loss and the effect of changes in discount rates on the insurance contract in other comprehensive income
  • Disclosures provide information about the amounts recognised in the financial statements, the significant judgements used and the risks that arise from insurance contracts

Project update document

© IASB - International Accounting Standards Board

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