Insurance Contracts Phase I

Date recorded:

The Board continued its review of comments received on ED 5, Insurance Contracts.

Measurement of Investment Contracts

The Board discussed which costs should be capitalised for investment contracts and concluded that there should be symmetry between the final standard on insurance and the requirements in IAS 39. That is, only items that are integral to the effective yield should be recognised. The asset should be written-off over the life of the contract.

Discretionary Participation Features

The Board discussed the accounting for discretionary participation features. The Board concluded that a minimum liability be recorded equal to the determinable participation amount. The Board further noted that the remainder should also be recorded as a liability-unless an entity can prove that an amount relates to equity. The Board noted that consideration of whether a constructive obligation exists should be considered.

There was concern about how to measure the liability under IAS 39 after initial recognition (which requires fair value or amortised cost). The Board concluded that companies can continue using the method used for initial recognition (similar to an IAS 37 amount). The Board noted that a company should disclose its accounting policy for discretionary participation features.

Assets Backing Insurance Contracts

The staff provided a summary of the potential approaches previously discussed. The staff noted that discussions with a number of insurance entity CFOs had indicated that they did not want to use the held to maturity classification for investments with credit risk exposure as these may need to be sold if there was an anticipated deterioration in the credit rating of the investment. In addition they were concerned about potential sales to meet cash flows arising from a high level of unanticipated lapses or a catastrophe.

The staff recommended that the Board not pursue further any specific treatments to eliminate the effect of the 'mismatch' caused by the use of fair value for some assets backing insurance liabilities and cost-based measurements for some insurance liabilities.

The Board agreed with the staff recommendation (11 - 3).

They further agreed to incorporate guidance on alternative treatments, which would be directionally towards fair value for liabilities, in line with the allowance to adopt a better accounting treatment assessed in accordance with the framework. It was discussed that this may include applying a current interest to some but not all of the insurance liabilities. The Board agreed that this could be done.

The staff proposed an amendment to IAS 40, Investment Property, to allow a different election to be made between the cost and fair value models in respect of investment property backing contracts that pay a return linked directly to the fair value of, or returns from, assets including that investment property and other investment property.

The Board agreed and noted that this did not need to be re-exposed.

The staff noted that if an insurer elects to use shadow accounting in respect of owner-occupied property, changes in the liability relating to revaluations of the property would be recognised directly in equity, through the statement of changes in equity.

The staff proposed that no exemption should be provided in respect of the elimination of internal transactions. The Board agreed.

Financial Guarantees and Credit Insurance

The staff proposed that a financial guarantee contract should be within the scope of IAS 39 if it is not an insurance contract. A financial guarantee will qualify as an insurance contract if it requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument, provided that the resulting risk transfer is significant. The Board agreed with the staff proposal but required the accounting treatment stipulated for financial guarantees in IAS 39. (Initially at fair value and subsequently under IAS 37 if higher.)

Embedded Derivatives

The staff proposed that the loss recognition test should not require an insurer to consider cash flows from all embedded guarantees and options. The staff noted that they believed this was consistent with the interpretation of ED 5. Certain Board members expressed concern that this was not what they believed had been proposed in ED 5.

The Board agreed with the staff's proposal provided there is disclosure of whether they have been included or not.

In addition the staff proposed that a derivative embedded in an insurance contract should be regarded as closely related to the host insurance contract if the embedded derivative and host insurance contract are so interdependent that an entity cannot measure the embedded derivative separately (ie without considering the host contract).

The Board agreed.

Discretionary Participation Features

The staff recommended giving no specific guidance on the treatment of unallocated deficit. The Board agreed.

The staff recommended that the continued presentation of the premium for contracts with discretionary participation features, as revenue, both for insurance contracts and for investment contracts be permitted.

It was noted that this would allow the inclusion of the receipt of a premium in respect of a financial instrument in Revenue. The Board agreed.

It was also noted that this would allow the inclusion of both the liability and equity component in Revenue. The Board agreed that the equity component should not be in Revenue.


The staff tabled proposed disclosures as currently drafted (see IASB observer notes). It was noted that further changes would be made.

Income Tax

The staff recommended that standard not deal with issue of the tax on the 'policyholder portion' of investment income being included within income taxes in the income statement. The Board agreed.

The staff recommended that the standard not allow discounting of deferred tax relating to insurance contracts. The Board agreed and noted it was already discounted.

Transition and Effective Date

The staff recommended the following for both entities already applying IFRSs and first-time adopters:

  • The standard should be mandatory for annual periods beginning on or after 1 January 2005. Early adoption should be encouraged.
  • There should be an exemption from applying the standard to comparative information that relates to annual periods beginning before 1 January 2005. Entities should be permitted to adopt the recognition and measurement components of the proposed standard early as a complete package.
  • An entity need not disclose information about claims development that occurred earlier than five years before the end of the first financial year in which it applies the standard. Furthermore, it may be impracticable to disclose information about claims development that occurred before the beginning of the earliest period for which an entity presents full comparative information under the standard. If so, an entity should disclose that fact. IAS 8 (revised) explains the meaning of the term 'impracticable'.
  • When an insurer changes its accounting policies for insurance liabilities, it should be permitted, but not required, to reclassify some or all financial assets as 'at fair value through profit or loss'. This reclassification should be permitted if an insurer changes accounting policies when it first applies the standard and if it makes a subsequent policy change permitted by the standard. The reclassification is a change in accounting policy and IAS 8 should apply.

The Board agreed but would only apply the exemption in respect of comparative information to certain limited items and would add an impracticable allowance.

The Board considered the changes to ED 5 both individually and collectively and decided that no re-exposure was necessary (13-1).

Five Board members indicated that they would dissent from the standard and one Board member indicated uncertainty as to whether they would dissent or not.

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