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Insurance contracts

Date recorded:

At the 28 February 2012 meeting, the IASB discussed whether financial instruments with discretionary participation features ("DPF") that do not meet the definition of insurance contracts should be included within the scope of the insurance contracts standard. FASB will discuss this issue at a separate FASB meeting given that they believe the focus and issues are different in the US.

The IASB Staff introduced the papers and set out their recommendations. The papers give some background and analyse the arguments for and against including these instruments within the scope of the insurance contracts standard. As well as asking the Board what should the applicable accounting standard be for financial instruments with DPF, a decision on how they should be defined also has to be taken if they are to be in scope of the insurance contracts standard.

Financial instruments with DPF are currently in the scope of IFRS 4 and the exposure draft proposed to keep it that way, but added the additional criteria that "there exist insurance contracts that provide similar contractual rights to participate in the performance of the same pool of contracts, assets or the profit or loss of the same company, fund or other entity". The FASB Staff on the other hand, recommend that financial instruments with DPF be outside the scope of the new insurance standard.

Staff noted that feedback from the exposure draft has identified that many insurers issue financial instruments with DPF that do not meet the additional criteria.

Following some debate and questions, the Board came to the conclusion that it would support the staff recommendation to include financial instruments with DPF within the scope of the revised IFRS 4, as long as the application is limited to the insurance industry.

Only seven Board members were in favour of the Staff recommendation as presented in Papers 14A to 14C (i.e. as in IFRS 4 without the additional criteria included in the exposure draft). When the Chair proposed to add wording that would limit the application to the insurance industry only, the number of Board members in favour increased to twelve. Paper 14 C recommends a definition for financial instruments with DPF but this was not accepted by the Board and it was noted that the exposure draft criteria would restrict the scope to contracts issued only by a sub-set of the insurance industry.

The Staff agreed to bring back a paper to a later meeting that improves the wording on the scope of the revised IFRS 4 to include both insurance contracts and financial instruments with DPF that do not meet the definition of an insurance contract but are issued by entities that operate within the insurance industry.

Board members noted that the future paper will need to consider also financial conglomerate groups comprising both insurers and other entities that may issue financial instruments with DPF.

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