Chapter 6 - Discount Rates

Principle 6.1: The starting point for determining the discount rate for insurance liabilities and insurance assets should be the pre-tax market yield at the balance sheet date on risk-free assets. That starting point should be adjusted to reflect risks not reflected in the cash flows from the insurance contracts. The currency and timing of the cash flows from the risk-free assets should be consistent with the currency and timing of the cash flows from the insurance contracts. Risk-free assets are those assets with readily observable market prices whose cash flows are least variable for a given maturity and currency.

The Board agreed with this principle. They felt that there should be no market override allowances (e.g. as in paragraph 16, when there is reliable and well-documented evidence that current market experience and trends will not continue), but that allowances should be made when there is no market.

It was decided that no guidance should be given on extrapolating yield curves when there are no observable market interest rates.

Principle 6.2: Estimated cash flows in foreign currency should be discounted using the appropriate discount rate for the foreign currency. The resulting present value should be translated into the measurement currency using the spot rate at the reporting date.

The Board agreed with this principle.

Chapter 8 - Reinsurance

Principle 8.1: A reinsurance contract should be defined as an insurance contract issued by one insurer (the reinsurer) to indemnify another insurer (the cedant) against losses on an insurance contract issued by the cedant.

The Board agreed with this principle.

Principle 8.2: Reinsurers and cedants should apply all the recognition, derecognition and measurement requirements in principles 2.1-7.6 to all reinsurance contracts.

The Board agreed with this principle. Whilst it was acknowledged that sometimes reinsurers have less information than insurers, it was felt that enough information was available to price the contract, therefore insufficient information should not preclude treating reinsurance contracts in the same way as insurance contracts.

Principle 8.3: If a reinsurance transaction doesn't qualify for derecognition of the related direct insurance liability under principle 2.3, a cedant should present:

• an insurance asset arising under reinsurance contracts as an asset, not as a deduction from the related direct insurance liability; and
• reinsurance premiums as an expense and the reinsurer's share of claim expense as income.

The Board agreed with this principle.

Chapter 9 - Measurement of Direct Insurance Contracts by Policyholders

Principle 9.1: A policyholder should apply principles 3.1 - 7.6 in measuring its contractual rights and obligations under a direct insurance contract.

The Board rejected this principle. Paragraph 9.6 of the DSOP offered acceptable approximations to measure contractual rights and obligations under direct insurance contracts that are not material to the policy holders financial statements. The Board felt that this would be the case in the majority of situations. Therefore it was decided that these approximations should always be used, rather than introducing arbitrary dividing lines. It was decided that more work and research needed to be done in this area, especially with regard to any investment components of the contracts.

Chapter 10 - Other Assets and Liabilities

Principle 10.1: An entity whose primary business is issuing insurance contracts should measure its:

• investment property using the fair value model in IAS 40; and
• owner-occupied property using the allowed alternative treatment in IAS 16 .

This principle was rejected. It was felt inappropriate to single out insurance entities and remove their choices of accounting treatment. (Better to remove the choices from the standards.) This was especially true in light of the DSOP being drafted for insurance contracts rather than insurance entities.

Principle 10.2: An entity whose primary business is issuing insurance contracts should use discounting in measuring its deferred tax assets and deferred tax liabilities.

This was not discussed.

Chapter 11 - Reporting Entity and Consolidation

Principle 11.1: The insurer, comprising both policyholder and shareholder interests, is a single reporting entity which should prepare a single set of financial statements. In consequence:

• its financial statements should include the assets, liabilities, income and expenses of any separate statutory funds associated with its insurance contracts; and
• the effect of transactions between separate policyholder funds of an insurer should not be recognised in the financial statements as assets, liabilities, income or expenses. Income and expenses from transactions between policyholder funds and shareholder funds should be eliminated. However, where such transactions affect the relative interests of policyholders and shareholders in the assets held in the respective funds, their effect should not be eliminated in determining the balance sheet effect.

Principle 11.2: An insurer should not recognise goodwill when it acquires a block of insurance contracts in a transaction that is not a business combination as defined in IAS 22, Business Combinations. The insurer should recognise any difference between the entity-specific or fair value of the block of contracts at the transaction date and the amount paid as income or expense in the income statement.

This principle was rejected. It was decided that an intangible should be recognised (whether positive or negative), although it was agreed that the intangible is not goodwill as there has been no business combination.

Principle 11.3: The Standard should not prescribe whether a horizontal group that includes an insurer should prepare combined financial statements covering all the entities under unified management.

The Board agreed with this principle.

Chapter 12 - Interim Financial Reports

Principle 12.1: The Standard should not contain guidance on the application of IAS 34 to insurance contracts.

The Board agreed with this principle.