1. The Long and Winding Road: IFRS 2013 Revised Exposure Draft

Question 1

2010 Exposure Draft

Answer 1

• proposed a current value approach to measure contract liabilities
• all changes in measurement of insurance contracts to be reported in profit or loss

Question 2

2013 Revised Exposure Draft

Answer 2

Three proposals on how to:

1. report discount rate changes
2. present insurance contract and expense revenue
3. report changes in estimates of contract CFs: adjust CSM

Goal is to create financial reporting that better portrays the economics of insurance contracts and to provide better insights into the drivers of earnings and CFs

Balance understandability and complexity

Question 3

2013 Revised Exposure Draft: Proposal 1 is on how to report discount rate changes

Answer 3

1. An insurance contract would be discounted using a current rate at the end of every reporting period.
2. The effects of using a current value measure for the balance sheet would be separate into two elements (P/L and OCI) for presentation in the statement of comprehensive income

a) in profit or loss: the original rate applied to discount the insurance contract liability
b) in OCI: represents the difference between the effects of discounting using a current rate and the effects of discounting using the original rate in P or L

Question 4

2013 Revised Exposure Draft: Proposal 2 is on presenting insurance contract revenue and expense

Answer 4

1. requires insurers to present insurance contract revenue in the statement of comprehensive income
2. the revenue measure should reflect the value of services provided in each period, and NOT the amount of cash collected or the amount of cash due from a customer

Disclose measures of gross performance (premiums) in the notes

Adv:
Aligns the reporting with concepts adopted by IASB/FASB

Insurance contract revenue would be shown consistently across all kinds of insurance contracts

Question 5

2013 Revised Exposure Draft: Proposal 3 is on changes in estimates of contract CFs: adjust the CSM

Answer 5

Two components to measure an insurance contract:

1. Fulfillment CFs: estimated CFs adjusted for time value of money and risk
2. Contractual service margin: recognized to eliminate any day 1 gain. The “unearned profit in a contract”

Key change: require the CSM to be updated at the end of each reporting period (previously locked in at contract inception)

*excepted to reduce the effect of earnings volatility

Extra requirements:

1. provide reconciliations from the opening to closing balances of the RM & CSM
2. Explanation of the methods and inputs used to estimate the risk margin and the pattern of recognition of the CSM

Question 6

Two drivers of earnings

Answer 6

1. Risk margin: recognized directly in P or L as estimates of risk decline
2. CSM: recognized in a systematic way that reflects the other services in the contract