Insurance Contracts Phase I

Date recorded:

Definition of an insurance contract

Financial risk is defined as the "risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or similar variable". This list of variables in Phase I is the same as the list of variables in IAS 39's definition of a derivative, except that it uses "similar variable" (per current IAS 39) rather than "other variable" (per the Exposure Draft of amendments to IAS 39).

The Board noted that a residual value guarantee on an individual's house would be considered a derivative if the value of the guarantee is based on a broad market index versus the actual condition of the house (which would be considered an insurance contract). The Board agreed to conform the language by using the word "other" for clarification.

The Board agreed that the insurance risk has to be significant from the policyholder's view, and therefore the definition will be amended to include that phrase.


The current pre-ballot draft of the ED has much of the disclosure requirements in the implementation guidance as opposed to the standard itself. Several Board members expressed concern that the requirements for disclosure in the standard could not be understood without reference to the implementation guidance and the basis for conclusions. The staff suggested that the standard should remain principle-based and therefore not have detaild specific disclosure requirements. One Board member noted that because insurance products differ significantly, it would be inappropriate for the standard to prescribe specific disclosure requirements.

The Board decided to retain this format. However, a question will be asked in the Exposure Draft for comment.

Financial liabilities with a demand feature

At its April meeting, the IASB decided to require that financial liabilities with a demand feature (such as demand deposits) be measured at an amount not less than the actual demand amount. Therefore, this amount will not consider timing of estimated payouts.

The staff noted that this conclusion creates a measurement problem, as IAS 39 requires that transaction costs be deducted from the initial measurement of the financial liability. For example, if an entity incurs a financial liability for 100 with related transaction costs of 20, that contract would be initially recognised at 80 under the pre-ballot Exposure Draft. If a demand feature were present, the liability to perform under that contract would need to be increased to 100. Therefore, the 20 of transaction costs would be reversed out.

The Board noted this issue and that it relates to a fundamental issue of measurement - one that can not be solved in Phase I. Some Board members believe this topic should be discussed in IAS 39. However, there was concern that this issue would significantly slow down the amendments to IAS 32 and IAS 39. The Board agreed to retain the current decisions without any further guidance.

Dissenting views

The Board briefly discussed the views of the 4 members who will dissent to the pre-ballot draft and the various reasons for their dissent.

One Board member expressed concern that the "authoritativeness hierarchy" in IAS 8 is being suspended in this project and that a "sunset" provision be added. That is, if Phase II is not completed by 1 January 2007, all companies must follow the hierarchy established in IAS 8 for insurance contracts. The Board agreed to add this provision.

A ballot Draft should be sent next week to the Board members. The Exposure Draft is expected to be sent to the printers on 3 July 2003. Comments will be requested by 31 October 2003.

Correction list for hyphenation

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