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Reasons for issuing the IFRS standards 4

Reasons for issuing the IFRS standards 4

Reasons for issuing the IFRS standards 4: is an International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) providing guidance for the accounting of insurance contracts. The standard was issued in March 2004, and was amended in 2005 to clarify that the standard covers most financial guarantee contracts. IFRS also applies the standard to financial instruments with discretionary participation features.

IFRS 4 was intended to provide limited improvements to accounting for insurance contracts until the IASB completed the second, more comprehensive phase of its insurance accounting project.The replacement standard, IFRS 17 was issued in M

Generally, IFRS 4 permitted companies to continue previous accounting practices for insurance contracts, but did enhance the disclosure requirements. IFRS 4 defines an insurance contract as a “contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.” The standard provides definitions to distinguish “insurance risk” from “financial risk.” IFRS 4 exempts insurance companies from certain other IFRS standards, including IAS 8 on changes in accounting policies, until phase II is complete, but IFRS 4 does introduce its own requirements for changes in accounting policies.

Among the accounting requirements IFRS 4 introduced are a requirement to test that insurance liabilities are adequate and that reinsurance assets are not impaired. It also prohibits setting up a liability for insurance claims that have not been incurred.Although insurance contracts are subject to the requirements of IFRS 9 that embedded derivatives within other contracts be measured separately at fair value, IFRS 4 makes a limited exception for embedded derivatives that meet the definition of an insurance contract. Such embedded derivatives within insurance contracts do not need to be measured separately

May 2017 and will become effective on January 1, 2021, supplanting IFRS 4 at that time.

Reasons for issuing the IFRS standards 4 : IFRS 2 applies to transactions in which an entity or an entity’s shareholders have granted equity instruments* or incurred a liability to transfer cash or other assets for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity. This Interpretation applies to such transactions when the identifiable consideration received (or to be received) by the entity, including cash and the fair value of identifiable non-cash consideration (if any), appears to be less than the fair value of the equity instruments granted or liability incurred. However, this Interpretation does not apply to transactions excluded from the scope of IFRS 2 in accordance with paragraphs 3–6 of that IFRS.

Objective

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

(a) limited improvements to accounting by insurers for insurance contracts.

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

Reasons for issuing the IFRS standards 4

An entity shall apply this IFRS to:

(a) insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.

(b) financial instruments that it issues with a discretionary participation feature (see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires disclosure about financial instruments, including financial instruments that contain such features.

This IFRS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 and IFRS 9 Financial Instruments), except in the transitional.

An entity shall not apply this IFRS to:

(a) product warranties issued directly by a manufacturer, dealer or retailer .

(b) employers’ assets and liabilities under employee benefit plans  and retirement benefit obligations reported by defined benefit retirement plans .

(c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item , as well as a lessee’s residual value guarantee embedded in a finance lease.

(d) financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.

(e) contingent consideration payable or receivable in a business combination .

(f) direct insurance contracts that the entity holds. However, a decant shall apply this IFRS to reinsurance contracts that it holds.

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

A reinsurance contract is a type of insurance contract. Accordingly, all references in this IFRS to insurance contracts also apply to reinsurance contracts.

Reasons for issuing the IFRS standards 4

Embedded derivatives

IFRS 9 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. IFRS 9 applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract.

As an exception to the requirements in IFRS 9, an insurer need not separate, and measure at fair value, a policyholder’s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability.

However, the requirements in IFRS 9 do apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract. Furthermore, those requirements also apply if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).

applies equally to options to surrender a financial instrument containing a discretionary participation feature.

Reasons for issuing the IFRS standards 4

Unbundling of deposit components

Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:

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

(i) the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).

(ii) the insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.

(b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations. (c) unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).

Reasons for issuing the IFRS standards 4

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