IASB issues a revised Exposure Draft for the accounting for Insurance Contracts

The International Accounting Standards Board (IASB) published for public comment a revised Exposure Draft of proposals for the accounting for Insurance Contracts. The Exposure Draft builds upon proposals published in 2010, and reflects feedback received during the extensive public consultation period that followed the publication of those proposals.

This Exposure Draft has been developed to improve the transparency of the effects of insurance contracts on an entity’s financial statements and to reduce diversity in the accounting for insurance. The proposals in this Exposure Draft would supersede IFRS 4 Insurance Contracts.

An insurance contract is 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 IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IFRS 9 Financial Instruments. Furthermore, it does not address accounting by policyholders.

At present, IFRS has no comprehensive Standard that deals with the accounting for insurance contracts. IFRS 4, published in 2004, is an interim Standard that permits a wide range of practices and includes a ‘temporary exemption’, which explicitly states that an entity does not need to ensure that its accounting policies are relevant to the economic decision-making needs of users of financial statements, or that those accounting policies are reliable. This means that companies account for insurance contracts using different accounting models that evolved in each jurisdiction according to the products and regulations prevalent in that jurisdiction. As a result, there are substantial differences in the accounting policies used by different companies to account for insurance contracts.

The Exposure Draft proposes that an entity should measure insurance contracts using a current value approach that incorporates all of the available information in a way that is consistent with observable market information.

This Exposure Draft reflects the IASB’s view that insurance contracts blend financial elements with service elements in various proportions, depending on the type of contract. It proposes that an entity should measure an insurance contract in a way that portrays a current assessment of the combined package of cash inflows and cash outflows generated by those elements, assuming that the entity expects to fulfil the liability by paying benefits and claims to policyholders as they become due. That measurement has two components:

(a) a measurement of the amount, timing and uncertainty of the future cash flows that the entity expects the contract to generate as it fulfils the contract; and

(b) a contractual service margin (known in the IASB’s previous proposal as the ‘residual margin’) that represents a current estimate of the profitability that the entity expects the contract to generate over the coverage period.

While the model presented in the 2010 Exposure Draft was broadly supported, some specific issues were raised that the IASB has sought to address. The revised proposals respond to those issues by introducing enhancements to the presentation and measurement of insurance contracts while seeking to minimise synthetic accounting volatility.

The revised Exposure Draft sets out in full the proposals for the accounting for insurance contracts. However, respondents are asked for comments on the key areas that the IASB has changed as a result of the responses it received to the 2010 Exposure Draft. The revised Exposure Draft is available for comment until 25 October 2013. Further information, including the Exposure Draft, is available on the IASB website.

Source: Various articles and EDs published by the IASB.



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