Insurance Contracts Phase I
The Board discussed certain aspects of investment contracts that do not expose the issuer to significant insurance risk and that, therefore, should be accounted for under the financial instruments standards. The two areas discussed were:
(a) performance-linking features; (b) cancellation or renewal options held by the policyholder.
The discussion concerned how to classify the amounts to be paid to investors where the timing and amount of the return, or a portion of the return, is at the discretion of the issuer, but a fixed portion will be distributed to whoever is an investee at the time of distribution.
As the staff believed that there would not be sufficient time to discuss whether these should be equity or liabilities, they proposed that they be scoped out of the liability/equity classification sections of IAS 32 and treated under the same principle adopted for insurance contracts. It was noted that this would not apply to contracts that specify an asset-linked return.
The Board had a lengthy discussion as whether this should apply only to insurance entities and were reluctant to apply an exemption on an industry specific basis. Some Board members were unsure as to why there was a difficulty in this area and why an exemption should be provided.
It was agreed that the staff would identify the feature of these contracts that causes classification difficulties such that an exemption could be worded that would apply to all entities. This proposal will be discussed again.
Investment contracts with cancellation and renewal options
The Board discussed whether guidance should be provided on measuring liabilities arising under investment contracts where the policyholder may either cancel the contract early or extend the contract at favourable terms. In these cases the liability could be measured at:
- Surrender value;
- A range of surrender possibilities discounted to present value;
- The value of the contract assuming no surrender.
It was agreed that the staff would identify the feature of these contracts that is different from those in other industries such that it causes unique problems and that a proposal should be developed that could be applied to all contracts of this type, not only those in the insurance industry.