PFRS 4 Flashcards
Scope
An entity shall apply this IFRS to:
A. insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
B. financial instruments that it issues with a discretionary participation feature
Not part of the scope
An entity shall not apply this IFRS to
-product warranties issued directly by a manufacturer, dealer or retailer
- employers’ assets and liabilities under employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans
- contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item as well as a lessee’s residual value guarantee embedded in a finance lease
- financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.
- contingent consideration payable or receivable in a business combination
- direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policyholder).
However, a cedant shall apply this IFRS to reinsurance contracts that it holds.
Objectives of PFRS4
-to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts.
In particular, this IFRS requires:
a. limited improvements to accounting by insurers for insurance contracts.
b. disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.
Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:
(a) unbundling is required if both the following conditions are met: (i) the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component) (ii) the insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.
(b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.
(c) unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).
To unbundle a contract, an insurer shall:
apply this IFRS to the insurance component. apply IFRS 9 to the deposit component.
This IFRS exempts an insurer from applying those criteria to its accounting policies for:
insurance contracts that it issues (including related acquisition costs and related intangible assets)
reinsurance contracts that it holds
When shall an insurer assess whether its recognised insurance liabilities are adequate (using current estimates of future cash flows under its insurance contracts)?
at the end of each reporting period
If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in?
profit or loss
If an insurer applies a liability adequacy test that meets specified minimumrequirements, this IFRS imposes no further requirements. The minimum requirements are the following:
The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees.
If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.
If an insurer’s accounting policies do not require a liability adequacy test that meets the minimum requirements, the insurer shall:
(a) determine the carrying amount of the relevant insurance liabilities less the carrying amount of:
- any related deferred acquisition costs
- any related intangible assets, such as those acquired in a business combination or portfolio transfer (see paragraphs 31 and 32). However, related reinsurance assets are not considered because an insurer accounts for them separately
(b) determine whether the amount described in (a) is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of IAS 37. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities.
If a cedant’s reinsurance asset is impaired, what will the cedant do?
the cedant shall reduce its carrying amount accordingly and recognise that impairment loss in profit or loss.
A reinsurance asset is impaired if, and only if:
there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract
that event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer
When can an insurer change its accounting policies for insurance contracts?
if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs
An insurer is required to change its accounting policies so that it remeasures designated insurance liabilities to reflect current market interest rates and recognises changes in those liabilities in profit or loss. T/F
permitted, but not required
An insurer needs to change its accounting policies for insurance contracts to eliminate excessive prudence. T/F
An insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it shall not introduce additional prudence.
