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Insurance Contracts Phase I

Date recorded:


The Board discussed on the three proposed high level principles:

Principle 1

An insurer shall disclose information that identifies and explains the insurance-contract-related amounts reported in the balance sheet, income statement and cash flow statement.

Principle 2

An insurer shall disclose information that helps users understand the estimated amount, timing and uncertainty of future cash flows from insurance contracts

Principle 3

An insurer shall disclose the fair value of its insurance assets and insurance liabilities (obligations and rights arising under insurance contracts). However, disclosure would not be required for dates before 31 December 2005. Thus, an insurer adopting IFRSs for calendar year 2005 would disclose the fair value of its insurance assets and insurance liabilities at 31 December 2005, but would not need to disclose their fair values at 31 December 2004.

The staff explained that the philosophy of Principles 1 and 2 is to require disclosure of assumptions underlying measurements of insurance contracts. Board members noted that there is no proposed disclosure relating to the cash-flow statement; that the term 'significant' should be explained; that the level of detail and aggregation should be specified; and that claims should be disclosed as well.

Concerning the principle 3, the Board discussed:

  • fair value measurement
  • effective date
Fair value. As the fair value calculation is a part of Phase II of the Insurance Contracts project, some Board members expressed concern about whether the disclosures under Principle 3 would be meaningful and consistent, and whether Principle 3 is premature. However, other members supported this disclosure because it will make the entities aware of the measurement at fair value and will be a reasonable transition to Phase II. Moreover, if Phase II is ready before 2005 (even if only effective in 2010), the entities will have to disclose the impact of the application of the fair value measurement.

Effective date. The staff will develop a revised proposal for consideration by the Board.


The Board agreed with the following staff recommendations:

(a) the derecognition requirements for an insurer's insurance liabilities (its obligations under insurance contracts) should be the same as those for financial liabilities as set out in the June 2002 Exposure Draft of improvements to IAS 39: "An entity should remove a financial liability (or a portion of a financial liability) from its balance sheet when, and only when, it is extinguished - that is, when the obligation specified in the contract is discharged or cancelled, or expires."

(b) Phase I should address derecognition of an insurer's insurance assets - the rights that it holds under insurance contracts.

Business Combinations

The Board discussed the following:

(a) Should Phase I exclude insurance liabilities and insurance assets (and related reinsurance) from the long-standing general requirement for an acquirer to fair value assets and liabilities assumed in a business combination? Should Phase I include guidance on how to determine those fair values? Should Phase I permit, prohibit, or require an expanded presentation that splits the fair value of acquired insurance contracts into two components:

— (i) a liability measured in accordance with the insurer's accounting policies for insurance contracts that it originated; and

— (ii) an intangible asset, representing the fair value of the rights and obligations associated with the closed book of insurance contracts assumed, to the extent that the liability does not already reflect that fair value?

The Board decided to permit, but not require, an expanded presentation that splits the fair value of acquired insurance contracts into the two components.

(b) Should Phase I address accounting by the transferee for portfolio transfers (the acquisition of a block of existing contracts)? The Board concluded that this subject should not be addressed in Phase I.

(c) The scope of IAS 38, Intangible Assets, excludes intangible assets arising in insurance enterprises from contracts with policyholders. Should this be modified in Phase 1?

(d) The Board agreed tentatively in October 2002 that Phase I should include a loss recognition test (based on IAS 37, Provisions, Contingent Liabilities and Contingent Assets) that would apply if an insurer's existing accounting policies do not require the immediate recognition of a loss when current estimates of future cash flows indicate the existence of a loss. Should this test also cover intangible assets arising from the rights and obligations associated with the closed book of insurance contracts assumed in a business combination or portfolio transfer? If so, should these intangible assets be excluded from the scope of IAS 36 Impairment of Assets? The Board decided that the other Standards should not be amended, but instead these different points should addressed in the Phase I insurance contracts Standard.

This subject relates to the proposed amendments to IAS 22 (ED3) and therefore further amendments will be needed.

Scope and Related Issues

The Board discussed two aspects of the draft guidance:

  • whether a contract that is not an insurance contract at the inception could become one, and
  • whether a significant insurance risk at the inception could become insignificant. Embedded Derivatives An embedded derivative in an insurance contract is subject to the requirements of IAS 39. The Board decided to change the definition of an insurance contract to clarify that an insurance contract itself can be an embedded derivative and therefore subject to IAS 39. Two specific types of components embedded in some insurance contracts (guaranteed annuity options and guaranteed minimum death benefits) will be identified as two exceptions. Discretionary Performance Features The Board concluded that the entire insurance contract should be accounted for under IAS 39. However, the Board has not resolved the measurement issues. The Board's tentative conclusion is that the measurement should be at least equal to the guarantee.

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