ED/Ind AS/2018/03
Exposure Draft
Indian Accounting Standard (Ind AS) 117, Insurance
Contracts
(Last date for Comments: March 31, 2018)
Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India
Exposure Draft
Ind AS 117, Insurance Contracts
Following is the Exposure Draft of Ind AS 117, Insurance Contracts, issued by the
Accounting Standards Board of the Institute of Chartered Accountants of India, for
comments. The Board invites comments on any aspect of this Exposure Draft.
Comments are most helpful if they indicate the specific paragraph or group of
paragraphs to which they relate, contain a clear rationale and, where applicable, provide
suggestions for alternative wording.
How to comment
Comments can be submitted using one of the following methods, so as to be received
not later than March 31, 2018.
1. Electronically: Visit the following link http://www.icai.org/comments/asb/
(Preferred method)
2. Email: Comments can be sent to commentsasb@icai.in
3. Postal: Secretary, Accounting Standards Board,
The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110002.
Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to
asb@icai.in.
Indian Accounting Standard (Ind AS 117) Insurance Contracts
(This Indian Accounting Standard includes paragraphs set in bold type and plain type, which
have equal authority. Paragraphs in bold type indicate the main principles)
Objective
1. Ind AS 117 Insurance Contracts establishes principles for the recognition,
measurement, presentation and disclosure of insurance contracts within the
scope of the Standard. The objective of Ind AS 117 is to ensure that an entity
provides relevant information that faithfully represents those contracts. This
information gives a basis for users of financial statements to assess the effect that
insurance contracts have on the entity's financial position, financial performance
and cash flows.
2. An entity shall consider its substantive rights and obligations, whether they arise from
a contract, law or regulation, when applying Ind AS 117. A contract is an agreement
between two or more parties that creates enforceable rights and obligations.
Enforceability of the rights and obligations in a contract is a matter of law. Contracts
can be written, oral or implied by an entity's customary business practices.
Contractual terms include all terms in a contract, explicit or implied, but an entity
shall disregard terms that have no commercial substance (ie no discernible effect on
the economics of the contract). Implied terms in a contract include those imposed by
law or regulation. The practices and processes for establishing contracts with
customers vary across legal jurisdictions, industries and entities. In addition, they may
vary within an entity (for example, they may depend on the class of customer or the
nature of the promised goods or services).
Scope
3. An entity shall apply Ind AS 117 to:
(a) insurance contracts, including reinsurance contracts, it issues;
(b) reinsurance contracts it holds; and
(c) investment contracts with discretionary participation features it issues,
provided the entity also issues insurance contracts.
4. All references in Ind AS 117 to insurance contracts also apply to:
(a) reinsurance contracts held, except:
(i) for references to insurance contracts issued; and
(ii) as described in paragraphs 6070.
(b) investment contracts with discretionary participation features as set out in
paragraph 3(c), except for the reference to insurance contracts in paragraph
3(c) and as described in paragraph 71.
5. All references in Ind AS 117 to insurance contracts issued also apply to insurance
contracts acquired by the entity in a transfer of insurance contracts or a business
combination other than reinsurance contracts held.
6. Appendix A defines an insurance contract and paragraphs B2B30 of Appendix B
provide guidance on the definition of an insurance contract.
7. An entity shall not apply Ind AS 117 to:
(a) warranties provided by a manufacturer, dealer or retailer in connection with
the sale of its goods or services to a customer (see Ind AS 115 Revenue from
Contracts with Customers).
(b) employers' assets and liabilities from employee benefit plans (see Ind AS 19
Employee Benefits and Ind AS 102 Share-based Payment) and retirement
benefit obligations reported by defined benefit retirement plans.
(c) contractual rights or contractual obligations contingent on the future use of, or
the right to use, a non-financial item (for example, some licence fees, royalties,
variable and other contingent lease payments and similar items: see Ind AS
115, Ind AS 38 Intangible Assets and Ind AS 116 Leases).
(d) residual value guarantees provided by a manufacturer, dealer or retailer and a
lessee's residual value guarantees when they are embedded in a lease (see Ind
AS 115 and Ind AS 116).
(e) 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. The issuer shall choose to apply
either Ind AS 117 or Ind AS 32 Financial Instruments: Presentation, Ind AS
107 Financial Instruments: Disclosures and Ind AS 109 Financial Instruments
to such financial guarantee contracts. The issuer may make that choice
contract by contract, but the choice for each contract is irrevocable.
(f) contingent consideration payable or receivable in a business combination (see
Ind AS 103 Business Combinations).
(g) insurance contracts in which the entity is the policyholder, unless those
contracts are reinsurance contracts held (see paragraph 3(b)).
8. Some contracts meet the definition of an insurance contract but have as their primary
purpose the provision of services for a fixed fee. An entity may choose to apply Ind
AS 115 instead of Ind AS 117 to such contracts that it issues if, and only if, specified
conditions are met. The entity may make that choice contract by contract, but the
choice for each contract is irrevocable. The conditions are:
(a) the entity does not reflect an assessment of the risk associated with an
individual customer in setting the price of the contract with that customer;
(b) the contract compensates the customer by providing services, rather than by
making cash payments to the customer; and
(c) the insurance risk transferred by the contract arises primarily from the
customer's use of services rather than from uncertainty over the cost of those
services.
Combination of insurance contracts
9. A set or series of insurance contracts with the same or a related counterparty may
achieve, or be designed to achieve, an overall commercial effect. In order to report the
substance of such contracts, it may be necessary to treat the set or series of contracts
as a whole. For example, if the rights or obligations in one contract do nothing other
than entirely negate the rights or obligations in another contract entered into at the
same time with the same counterparty, the combined effect is that no rights or
obligations exist.
Separating components from an insurance contract (paragraphs
B31B35)
10. An insurance contract may contain one or more components that would be within the
scope of another Standard if they were separate contracts. For example, an insurance
contract may include an investment component or a service component (or both). An
entity shall apply paragraphs 1113 to identify and account for the components of the
contract.
11. An entity shall:
(a) apply Ind AS 109 to determine whether there is an embedded derivative to be
separated and, if there is, how to account for that derivative.
(b) separate from a host insurance contract an investment component if, and only
if, that investment component is distinct (see paragraphs B31B32). The entity
shall apply Ind AS 109 to account for the separated investment component.
12. After applying paragraph 11 to separate any cash flows related to embedded
derivatives and distinct investment components, an entity shall separate from the host
insurance contract any promise to transfer distinct goods or non-insurance services to
a policyholder, applying paragraph 7 of Ind AS 115. The entity shall account for such
promises applying Ind AS 115. In applying paragraph 7 of Ind AS 115 to separate the
promise, the entity shall apply paragraphs B33B35 of Ind AS 117 and, on initial
recognition, shall:
(a) apply Ind AS 115 to attribute the cash inflows between the insurance
component and any promises to provide distinct goods or non-insurance
services; and
(b) attribute the cash outflows between the insurance component and any
promised goods or non-insurance services accounted for applying Ind AS 115
so that:
(i) cash outflows that relate directly to each component are attributed to that
component; and
(ii) any remaining cash outflows are attributed on a systematic and rational
basis, reflecting the cash outflows the entity would expect to arise if that
component were a separate contract.
13. After applying paragraphs 1112, an entity shall apply Ind AS 117 to all remaining
components of the host insurance contract. Hereafter, all references in Ind AS 117 to
embedded derivatives refer to derivatives that have not been separated from the host
insurance contract and all references to investment components refer to investment
components that have not been separated from the host insurance contract (except
those references in paragraphs B31B32).
Level of aggregation of insurance contracts
14. An entity shall identify portfolios of insurance contracts. A portfolio comprises
contracts subject to similar risks and managed together. Contracts within a
product line would be expected to have similar risks and hence would be
expected to be in the same portfolio if they are managed together. Contracts in
different product lines (for example single premium fixed annuities compared
with regular term life assurance) would not be expected to have similar risks and
hence would be expected to be in different portfolios.
15. Paragraphs 1624 apply to insurance contracts issued. The requirements for the
level of aggregation of reinsurance contracts held are set out in paragraph 61.
16. An entity shall divide a portfolio of insurance contracts issued into a minimum
of:
(a) a group of contracts that are onerous at initial recognition, if any;
(b) a group of contracts that at initial recognition have no significant
possibility of becoming onerous subsequently, if any; and
(c) a group of the remaining contracts in the portfolio, if any.
17. If an entity has reasonable and supportable information to conclude that a set of
contracts will all be in the same group applying paragraph 16, it may measure the set
of contracts to determine if the contracts are onerous (see paragraph 47) and assess
the set of contracts to determine if the contracts have no significant possibility of
becoming onerous subsequently (see paragraph 19). If the entity does not have
reasonable and supportable information to conclude that a set of contracts will all be
in the same group, it shall determine the group to which contracts belong by
considering individual contracts.
18. For contracts issued to which an entity applies the premium allocation approach (see
paragraphs 5359), the entity shall assume no contracts in the portfolio are onerous at
initial recognition, unless facts and circumstances indicate otherwise. An entity shall
assess whether contracts that are not onerous at initial recognition have no significant
possibility of becoming onerous subsequently by assessing the likelihood of changes
in applicable facts and circumstances.
19. For contracts issued to which an entity does not apply the premium allocation
approach (see paragraphs 5359), an entity shall assess whether contracts that are not
onerous at initial recognition have no significant possibility of becoming onerous:
(a) based on the likelihood of changes in assumptions which, if they occurred,
would result in the contracts becoming onerous.
(b) using information about estimates provided by the entity's internal reporting.
Hence, in assessing whether contracts that are not onerous at initial recognition
have no significant possibility of becoming onerous:
(i) an entity shall not disregard information provided by its internal
reporting about the effect of changes in assumptions on different
contracts on the possibility of their becoming onerous; but
(ii) an entity is not required to gather additional information beyond that
provided by the entity's internal reporting about the effect of changes in
assumptions on different contracts.
20. If, applying paragraphs 1419, contracts within a portfolio would fall into different
groups only because law or regulation specifically constrains the entity's practical
ability to set a different price or level of benefits for policyholders with different
characteristics, the entity may include those contracts in the same group. The entity
shall not apply this paragraph by analogy to other items.
21. An entity is permitted to subdivide the groups described in paragraph 16. For
example, an entity may choose to divide the portfolios into:
(a) more groups that are not onerous at initial recognition--if the entity's internal
reporting provides information that distinguishes:
(i) different levels of profitability; or
(ii) different possibilities of contracts becoming onerous after initial
recognition; and
(b) more than one group of contracts that are onerous at initial recognition--if the
entity's internal reporting provides information at a more detailed level about
the extent to which the contracts are onerous.
22. An entity shall not include contracts issued more than one year apart in the same
group. To achieve this the entity shall, if necessary, further divide the groups
described in paragraphs 1621.
23. A group of insurance contracts shall comprise a single contract if that is the result of
applying paragraphs 1422.
24. An entity shall apply the recognition and measurement requirements of Ind AS 117 to
the groups of contracts issued determined by applying paragraphs 1423. An entity
shall establish the groups at initial recognition, and shall not reassess the composition
of the groups subsequently. To measure a group of contracts, an entity may estimate
the fulfilment cash flows at a higher level of aggregation than the group or portfolio,
provided the entity is able to include the appropriate fulfilment cash flows in the
measurement of the group, applying paragraphs 32(a), 40(a)(i) and 40(b), by
allocating such estimates to groups of contracts.
Recognition
25. An entity shall recognise a group of insurance contracts it issues from the earliest
of the following:
(a) the beginning of the coverage period of the group of contracts;
(b) the date when the first payment from a policyholder in the group becomes
due; and
(c) for a group of onerous contracts, when the group becomes onerous.
26. If there is no contractual due date, the first payment from the policyholder is deemed
to be due when it is received. An entity is required to determine whether any contracts
form a group of onerous contracts applying paragraph 16 before the earlier of the
dates set out in paragraphs 25(a) and 25(b) if facts and circumstances indicate there is
such a group.
27. An entity shall recognise an asset or liability for any insurance acquisition cash flows
relating to a group of issued insurance contracts that the entity pays or receives before
the group is recognised, unless it chooses to recognise them as expenses or income
applying paragraph 59(a). An entity shall derecognise the asset or liability resulting
from such insurance acquisition cash flows when the group of insurance contracts to
which the cash flows are allocated is recognised (see paragraph 38(b)).
28. In recognising a group of insurance contracts in a reporting period, an entity shall
include only contracts issued by the end of the reporting period and shall make
estimates for the discount rates at the date of initial recognition (see paragraph B73)
and the coverage units provided in the reporting period (see paragraph B119). An
entity may issue more contracts in the group after the end of a reporting period,
subject to paragraph 22. An entity shall add the contracts to the group in the reporting
period in which the contracts are issued. This may result in a change to the
determination of the discount rates at the date of initial recognition applying
paragraph B73. An entity shall apply the revised rates from the start of the reporting
period in which the new contracts are added to the group.
Measurement (paragraphs B36B119)
29. An entity shall apply paragraphs 3052 to all groups of insurance contracts within the
scope of Ind AS 117, with the following exceptions:
(a) for groups of insurance contracts meeting either of the criteria specified in
paragraph 53, an entity may simplify the measurement of the group using the
premium allocation approach in paragraphs 5559.
(b) for groups of reinsurance contracts held, an entity shall apply paragraphs 32
46 as required by paragraphs 6370. Paragraphs 45 (on insurance contracts
with direct participation features) and 4752 (on onerous contracts) do not
apply to groups of reinsurance contracts held.
(c) for groups of investment contracts with discretionary participation features, an
entity shall apply paragraphs 3252 as modified by paragraph 71.
30. When applying Ind AS 21 The Effects of Changes in Foreign Exchange Rates to a
group of insurance contracts that generate cash flows in a foreign currency, an entity
shall treat the group of contracts, including the contractual service margin, as a
monetary item.
31. In the financial statements of an entity that issues insurance contracts, the fulfilment
cash flows shall not reflect the non-performance risk of that entity (non-performance
risk is defined in Ind AS 113 Fair Value Measurement).
Measurement on initial recognition (paragraphs B36B95)
32. On initial recognition, an entity shall measure a group of insurance contracts at
the total of:
(a) the fulfilment cash flows, which comprise:
(i) estimates of future cash flows (paragraphs 3335);
(ii) an adjustment to reflect the time value of money and the financial
risks related to the future cash flows, to the extent that the financial
risks are not included in the estimates of the future cash flows
(paragraph 36); and
(iii) a risk adjustment for non-financial risk (paragraph 37).
(b) the contractual service margin, measured applying paragraphs 3839.
Estimates of future cash flows (paragraphs B36B71)
33. An entity shall include in the measurement of a group of insurance contracts all
the future cash flows within the boundary of each contract in the group (see
paragraph 34). Applying paragraph 24, an entity may estimate the future cash
flows at a higher level of aggregation and then allocate the resulting fulfilment
cash flows to individual groups of contracts. The estimates of future cash flows
shall:
(a) incorporate, in an unbiased way, all reasonable and supportable
information available without undue cost or effort about the amount,
timing and uncertainty of those future cash flows (see paragraphs B37
B41). To do this, an entity shall estimate the expected value (ie the
probability-weighted mean) of the full range of possible outcomes.
(b) reflect the perspective of the entity, provided that the estimates of any
relevant market variables are consistent with observable market prices
for those variables (see paragraphs B42B53).
(c) be current--the estimates shall reflect conditions existing at the
measurement date, including assumptions at that date about the future
(see paragraphs B54B60).
(d) be explicit--the entity shall estimate the adjustment for non-financial risk
separately from the other estimates (see paragraph B90). The entity also
shall estimate the cash flows separately from the adjustment for the time
value of money and financial risk, unless the most appropriate
measurement technique combines these estimates (see paragraph B46).
34. Cash flows are within the boundary of an insurance contract if they arise from
substantive rights and obligations that exist during the reporting period in which the
entity can compel the policyholder to pay the premiums or in which the entity has a
substantive obligation to provide the policyholder with services (see paragraphs B61
B71). A substantive obligation to provide services ends when:
(a) the entity has the practical ability to reassess the risks of the particular
policyholder and, as a result, can set a price or level of benefits that fully
reflects those risks; or
(b) both of the following criteria are satisfied:
(i) the entity has the practical ability to reassess the risks of the portfolio of
insurance contracts that contains the contract and, as a result, can set a
price or level of benefits that fully reflects the risk of that portfolio; and
(ii) the pricing of the premiums for coverage up to the date when the risks
are reassessed does not take into account the risks that relate to periods
after the reassessment date.
35. An entity shall not recognise as a liability or as an asset any amounts relating to
expected premiums or expected claims outside the boundary of the insurance contract.
Such amounts relate to future insurance contracts.
Discount rates (paragraphs B72B85)
36. An entity shall adjust the estimates of future cash flows to reflect the time value
of money and the financial risks related to those cash flows, to the extent that the
financial risks are not included in the estimates of cash flows. The discount rates
applied to the estimates of the future cash flows described in paragraph 33 shall:
(a) reflect the time value of money, the characteristics of the cash flows and
the liquidity characteristics of the insurance contracts;
(b) be consistent with observable current market prices (if any) for financial
instruments with cash flows whose characteristics are consistent with
those of the insurance contracts, in terms of, for example, timing,
currency and liquidity; and
(c) exclude the effect of factors that influence such observable market prices
but do not affect the future cash flows of the insurance contracts.
Risk adjustment for non-financial risk (paragraphs B86B92)
37. An entity shall adjust the estimate of the present value of the future cash flows to
reflect the compensation that the entity requires for bearing the uncertainty
about the amount and timing of the cash flows that arises from non-financial
risk.
Contractual service margin
38. The contractual service margin is a component of the asset or liability for the
group of insurance contracts that represents the unearned profit the entity will
recognise as it provides services in the future. An entity shall measure the
contractual service margin on initial recognition of a group of insurance
contracts at an amount that, unless paragraph 47 (on onerous contracts) applies,
results in no income or expenses arising from:
(a) the initial recognition of an amount for the fulfilment cash flows,
measured by applying paragraphs 3237;
(b) the derecognition at the date of initial recognition of any asset or liability
recognised for insurance acquisition cash flows applying paragraph 27;
and
(c) any cash flows arising from the contracts in the group at that date.
39. For insurance contracts acquired in a transfer of insurance contracts or a business
combination, an entity shall apply paragraph 38 in accordance with paragraphs B93
B95.
Subsequent measurement
40. The carrying amount of a group of insurance contracts at the end of each
reporting period shall be the sum of:
(a) the liability for remaining coverage comprising:
(i) the fulfilment cash flows related to future service allocated to the
group at that date, measured applying paragraphs 3337 and B36
B92;
(ii) the contractual service margin of the group at that date, measured
applying paragraphs 4346; and
(b) the liability for incurred claims, comprising the fulfilment cash flows
related to past service allocated to the group at that date, measured
applying paragraphs 3337 and B36B92.
41. An entity shall recognise income and expenses for the following changes in the
carrying amount of the liability for remaining coverage:
(a) insurance revenue--for the reduction in the liability for remaining
coverage because of services provided in the period, measured applying
paragraphs B120B124;
(b) insurance service expenses--for losses on groups of onerous contracts,
and reversals of such losses (see paragraphs 4752); and
(c) insurance finance income or expenses--for the effect of the time value of
money and the effect of financial risk as specified in paragraph 87.
42. An entity shall recognise income and expenses for the following changes in the
carrying amount of the liability for incurred claims:
(a) insurance service expenses--for the increase in the liability because of
claims and expenses incurred in the period, excluding any investment
components;
(b) insurance service expenses--for any subsequent changes in fulfilment
cash flows relating to incurred claims and incurred expenses; and
(c) insurance finance income or expenses--for the effect of the time value of
money and the effect of financial risk as specified in paragraph 87.
Contractual service margin (paragraphs B96--B119)
43. The contractual service margin at the end of the reporting period represents the
profit in the group of insurance contracts that has not yet been recognised in
profit or loss because it relates to the future service to be provided under the
contracts in the group.
44. For insurance contracts without direct participation features, the carrying amount of
the contractual service margin of a group of contracts at the end of the reporting
period equals the carrying amount at the start of the reporting period adjusted for:
(a) the effect of any new contracts added to the group (see paragraph 28);
(b) interest accreted on the carrying amount of the contractual service margin
during the reporting period, measured at the discount rates specified in
paragraph B72(b);
(c) the changes in fulfilment cash flows relating to future service as specified in
paragraphs B96B100, except to the extent that:
(i) such increases in the fulfilment cash flows exceed the carrying amount
of the contractual service margin, giving rise to a loss (see paragraph
48(a)); or
(ii) such decreases in the fulfilment cash flows are allocated to the loss
component of the liability for remaining coverage applying paragraph
50(b).
(d) the effect of any currency exchange differences on the contractual service
margin; and
(e) the amount recognised as insurance revenue because of the transfer of services
in the period, determined by the allocation of the contractual service margin
remaining at the end of the reporting period (before any allocation) over the
current and remaining coverage period applying paragraph B119.
45. For insurance contracts with direct participation features (see paragraphs B101
B118), the carrying amount of the contractual service margin of a group of contracts
at the end of the reporting period equals the carrying amount at the start of the
reporting period adjusted for the amounts specified in subparagraphs (a)(e) below.
An entity is not required to identify these adjustments separately. Instead, a combined
amount may be determined for some, or all, of the adjustments. The adjustments are:
(a) the effect of any new contracts added to the group (see paragraph 28);
(b) the entity's share of the change in the fair value of the underlying items (see
paragraph B104(b)(i)), except to the extent that:
(i) paragraph B115 (on risk mitigation) applies;
(ii) the entity's share of a decrease in the fair value of the underlying items
exceeds the carrying amount of the contractual service margin, giving
rise to a loss (see paragraph 48); or
(iii) the entity's share of an increase in the fair value of the underlying items
reverses the amount in (ii).
(c) the changes in fulfilment cash flows relating to future service, as specified in
paragraphs B101B118, except to the extent that:
(i) paragraph B115 (on risk mitigation) applies;
(ii) such increases in the fulfilment cash flows exceed the carrying amount
of the contractual service margin, giving rise to a loss (see paragraph
48); or
(iii) such decreases in the fulfilment cash flows are allocated to the loss
component of the liability for remaining coverage applying paragraph
50(b).
(d) the effect of any currency exchange differences arising on the contractual
service margin; and
(e) the amount recognised as insurance revenue because of the transfer of services
in the period, determined by the allocation of the contractual service margin
remaining at the end of the reporting period (before any allocation) over the
current and remaining coverage period, applying paragraph B119.
46. Some changes in the contractual service margin offset changes in the fulfilment cash
flows for the liability for remaining coverage, resulting in no change in the total
carrying amount of the liability for remaining coverage. To the extent that changes in
the contractual service margin do not offset changes in the fulfilment cash flows for
the liability for remaining coverage, an entity shall recognise income and expenses for
the changes, applying paragraph 41.
Onerous contracts
47. An insurance contract is onerous at the date of initial recognition if the fulfilment cash
flows allocated to the contract, any previously recognised acquisition cash flows and
any cash flows arising from the contract at the date of initial recognition in total are a
net outflow. Applying paragraph 16(a), an entity shall group such contracts separately
from contracts that are not onerous. To the extent that paragraph 17 applies, an entity
may identify the group of onerous contracts by measuring a set of contracts rather
than individual contracts. An entity shall recognise a loss in profit or loss for the net
outflow for the group of onerous contracts, resulting in the carrying amount of the
liability for the group being equal to the fulfilment cash flows and the contractual
service margin of the group being zero.
48. A group of insurance contracts becomes onerous (or more onerous) on subsequent
measurement if the following amounts exceed the carrying amount of the contractual
service margin:
(a) unfavourable changes in the fulfilment cash flows allocated to the group
arising from changes in estimates of future cash flows relating to future
service; and
(b) for a group of insurance contracts with direct participation features, the
entity's share of a decrease in the fair value of the underlying items. Applying
paragraphs 44(c)(i), 45(b)(ii) and 45(c)(ii), an entity shall recognise a loss in
profit or loss to the extent of that excess.
49. An entity shall establish (or increase) a loss component of the liability for remaining
coverage for an onerous group depicting the losses recognised applying paragraphs
4748. The loss component determines the amounts that are presented in profit or loss
as reversals of losses on onerous groups and are consequently excluded from the
determination of insurance revenue.
50. After an entity has recognised a loss on an onerous group of insurance contracts, it
shall allocate:
(a) the subsequent changes in fulfilment cash flows of the liability for remaining
coverage specified in paragraph 51 on a systematic basis between:
(i) the loss component of the liability for remaining coverage; and
(ii) the liability for remaining coverage, excluding the loss component.
(b) any subsequent decrease in fulfilment cash flows allocated to the group arising
from changes in estimates of future cash flows relating to future service and
any subsequent increases in the entity's share in the fair value of the
underlying items solely to the loss component until that component is reduced
to zero. Applying paragraphs 44(c)(ii), 45(b)(iii) and 45(c)(iii), an entity shall
adjust the contractual service margin only for the excess of the decrease over
the amount allocated to the loss component.
51. The subsequent changes in the fulfilment cash flows of the liability for remaining
coverage to be allocated applying paragraph 50(a) are:
(a) estimates of the present value of future cash flows for claims and expenses
released from the liability for remaining coverage because of incurred
insurance service expenses;
(b) changes in the risk adjustment for non-financial risk recognised in profit or
loss because of the release from risk; and
(c) insurance finance income or expenses.
52. The systematic allocation required by paragraph 50(a) shall result in the total amounts
allocated to the loss component in accordance with paragraphs 4850 being equal to
zero by the end of the coverage period of a group of contracts.
Premium allocation approach
53. An entity may simplify the measurement of a group of insurance contracts using the
premium allocation approach set out in paragraphs 5559 if, and only if, at the
inception of the group:
(a) the entity reasonably expects that such simplification would produce a
measurement of the liability for remaining coverage for the group that would
not differ materially from the one that would be produced applying the
requirements in paragraphs 3252; or
(b) the coverage period of each contract in the group (including coverage arising
from all premiums within the contract boundary determined at that date
applying paragraph 34) is one year or less.
54. The criterion in paragraph 53(a) is not met if at the inception of the group an entity
expects significant variability in the fulfilment cash flows that would affect the
measurement of the liability for remaining coverage during the period before a claim
is incurred. Variability in the fulfilment cash flows increases with, for example:
(a) the extent of future cash flows relating to any derivatives embedded in the
contracts; and
(b) the length of the coverage period of the group of contracts.
55. Using the premium allocation approach, an entity shall measure the liability for
remaining coverage as follows:
(a) on initial recognition, the carrying amount of the liability is:
i. the premiums, if any, received at initial recognition;
ii. minus any insurance acquisition cash flows at that date, unless the entity
chooses to recognise the payments as an expense applying paragraph
59(a); and
iii. plus or minus any amount arising from the derecognition at that date of
the asset or liability recognised for insurance acquisition cash flows
applying paragraph 27.
(b) at the end of each subsequent reporting period, the carrying amount of the
liability is the carrying amount at the start of the reporting period:
(i) plus the premiums received in the period;
(ii) minus insurance acquisition cash flows; unless the entity chooses to
recognise the payments as an expense applying paragraph 59(a);
(iii) plus any amounts relating to the amortisation of insurance acquisition
cash flows recognised as an expense in the reporting period; unless the
entity chooses to recognise insurance acquisition cash flows as an
expense applying paragraph 59(a);
(iv) plus any adjustment to a financing component, applying paragraph 56;
(v) minus the amount recognised as insurance revenue for coverage
provided in that period (see paragraph B126); and
(vi) minus any investment component paid or transferred to the liability for
incurred claims.
56. If insurance contracts in the group have a significant financing component, an entity
shall adjust the carrying amount of the liability for remaining coverage to reflect the
time value of money and the effect of financial risk using the discount rates specified
in paragraph 36, as determined on initial recognition. The entity is not required to
adjust the carrying amount of the liability for remaining coverage to reflect the time
value of money and the effect of financial risk if, at initial recognition, the entity
expects that the time between providing each part of the coverage and the related
premium due date is no more than a year.
57. If at any time during the coverage period, facts and circumstances indicate that a
group of insurance contracts is onerous, an entity shall calculate the difference
between:
(a) the carrying amount of the liability for remaining coverage determined
applying paragraph 55; and
(b) the fulfilment cash flows that relate to remaining coverage of the group,
applying paragraphs 3337 and B36B92. However, if, in applying paragraph
59(b), the entity does not adjust the liability for incurred claims for the time
value of money and the effect of financial risk, it shall not include in the
fulfilment cash flows any such adjustment.
58. To the extent that the fulfilment cash flows described in paragraph 57(b) exceed the
carrying amount described in paragraph 57(a), the entity shall recognise a loss in
profit or loss and increase the liability for remaining coverage.
59. In applying the premium allocation approach, an entity:
(a) may choose to recognise any insurance acquisition cash flows as expenses
when it incurs those costs, provided that the coverage period of each contract
in the group at initial recognition is no more than one year.
(b) shall measure the liability for incurred claims for the group of insurance
contracts at the fulfilment cash flows relating to incurred claims, applying
paragraphs 3337 and B36B92. However, the entity is not required to adjust
future cash flows for the time value of money and the effect of financial risk if
those cash flows are expected to be paid or received in one year or less from
the date the claims are incurred.
Reinsurance contracts held
60. The requirements in Ind AS 117 are modified for reinsurance contracts held, as set out
in paragraphs 6170.
61. An entity shall divide portfolios of reinsurance contracts held applying paragraphs
1424, except that the references to onerous contracts in those paragraphs shall be
replaced with a reference to contracts on which there is a net gain on initial
recognition. For some reinsurance contracts held, applying paragraphs 1424 will
result in a group that comprises a single contract.
Recognition
62. Instead of applying paragraph 25, an entity shall recognise a group of reinsurance
contracts held:
(a) if the reinsurance contracts held provide proportionate coverage--at the
beginning of the coverage period of the group of reinsurance contracts held or
at the initial recognition of any underlying contract, whichever is the later; and
(b) in all other cases--from the beginning of the coverage period of the group of
reinsurance contracts held.
Measurement
63. In applying the measurement requirements of paragraphs 3236 to reinsurance
contracts held, to the extent that the underlying contracts are also measured applying
those paragraphs, the entity shall use consistent assumptions to measure the estimates
of the present value of the future cash flows for the group of reinsurance contracts
held and the estimates of the present value of the future cash flows for the group(s) of
underlying insurance contracts. In addition, the entity shall include in the estimates of
the present value of the future cash flows for the group of reinsurance contracts held
the effect of any risk of non-performance by the issuer of the reinsurance contract,
including the effects of collateral and losses from disputes.
64. Instead of applying paragraph 37, an entity shall determine the risk adjustment for
non-financial risk so that it represents the amount of risk being transferred by the
holder of the group of reinsurance contracts to the issuer of those contracts.
65. The requirements of paragraph 38 that relate to determining the contractual service
margin on initial recognition are modified to reflect the fact that for a group of
reinsurance contracts held there is no unearned profit but instead a net cost or net gain
on purchasing the reinsurance. Hence, on initial recognition:
(a) the entity shall recognise any net cost or net gain on purchasing the group of
reinsurance contracts held as a contractual service margin measured at an
amount equal to the sum of the fulfilment cash flows, the amount derecognised
at that date of any asset or liability previously recognised for cash flows
related to the group of reinsurance contracts held, and any cash flows arising at
that date; unless
(b) the net cost of purchasing reinsurance coverage relates to events that occurred
before the purchase of the group of reinsurance contracts, in which case,
notwithstanding the requirements of paragraph B5, the entity shall recognise
such a cost immediately in profit or loss as an expense.
66. Instead of applying paragraph 44, an entity shall measure the contractual service
margin at the end of the reporting period for a group of reinsurance contracts held as
the carrying amount determined at the start of the reporting period, adjusted for:
(a) the effect of any new contracts added to the group (see paragraph 28);
(b) interest accreted on the carrying amount of the contractual service margin,
measured at the discount rates specified in paragraph B72(b);
(c) changes in the fulfilment cash flows to the extent that the change:
(i) relates to future service; unless
(ii) the change results from a change in fulfilment cash flows allocated to a
group of underlying insurance contracts that does not adjust the
contractual service margin for the group of underlying insurance
contracts.
(d) the effect of any currency exchange differences arising on the contractual
service margin; and
(e) the amount recognised in profit or loss because of services received in the
period, determined by the allocation of the contractual service margin
remaining at the end of the reporting period (before any allocation) over the
current and remaining coverage period of the group of reinsurance contracts
held, applying paragraph B119.
67. Changes in the fulfilment cash flows that result from changes in the risk of non-
performance by the issuer of a reinsurance contract held do not relate to future service
and shall not adjust the contractual service margin.
68. Reinsurance contracts held cannot be onerous. Accordingly, the requirements of
paragraphs 4752 do not apply.
Premium allocation approach for reinsurance contracts held
69. An entity may use the premium allocation approach set out in paragraphs 5556 and
59 (adapted to reflect the features of reinsurance contracts held that differ from
insurance contracts issued, for example the generation of expenses or reduction in
expenses rather than revenue) to simplify the measurement of a group of reinsurance
contracts held, if at the inception of the group:
(a) the entity reasonably expects the resulting measurement would not differ
materially from the result of applying the requirements in paragraphs 6368;
or
(b) the coverage period of each contract in the group of reinsurance contracts held
(including coverage from all premiums within the contract boundary
determined at that date applying paragraph 34) is one year or less.
70. An entity cannot meet the condition in paragraph 69(a) if, at the inception of the
group, an entity expects significant variability in the fulfilment cash flows that would
affect the measurement of the asset for remaining coverage during the period before a
claim is incurred. Variability in the fulfilment cash flows increases with, for example:
(a) the extent of future cash flows relating to any derivatives embedded in the
contracts; and
(b) the length of the coverage period of the group of reinsurance contracts held.
Investment contracts with discretionary participation features
71. An investment contract with discretionary participation features does not include a
transfer of significant insurance risk. Consequently, the requirements in Ind AS 117
for insurance contracts are modified for investment contracts with discretionary
participation features as follows:
(a) the date of initial recognition (see paragraph 25) is the date the entity becomes
party to the contract.
(b) the contract boundary (see paragraph 34) is modified so that cash flows are
within the contract boundary if they result from a substantive obligation of the
entity to deliver cash at a present or future date. The entity has no substantive
obligation to deliver cash if it has the practical ability to set a price for the
promise to deliver the cash that fully reflects the amount of cash promised and
related risks.
(c) the allocation of the contractual service margin (see paragraphs 44(e) and
45(e)) is modified so that the entity shall recognise the contractual service
margin over the duration of the group of contracts in a systematic way that
reflects the transfer of investment services under the contract.
Modification and derecognition
Modification of an insurance contract
72. If the terms of an insurance contract are modified, for example by agreement between
the parties to the contract or by a change in regulation, an entity shall derecognise the
original contract and recognise the modified contract as a new contract, applying Ind
AS 117 or other applicable Standards if, and only if, any of the conditions in (a)(c)
are satisfied. The exercise of a right included in the terms of a contract is not a
modification. The conditions are that:
(a) if the modified terms had been included at contract inception:
(i) the modified contract would have been excluded from the scope of Ind
AS 117, applying paragraphs 38;
(ii) an entity would have separated different components from the host
insurance contract applying paragraphs 1013, resulting in a different
insurance contract to which Ind AS 117 would have applied;
(iii) the modified contract would have had a substantially different contract
boundary applying paragraph 34; or
(iv) the modified contract would have been included in a different group of
contracts applying paragraphs 1424.
(b) the original contract met the definition of an insurance contract with direct
participation features, but the modified contract no longer meets that
definition, or vice versa; or
(c) the entity applied the premium allocation approach in paragraphs 5359 or
paragraphs 6970 to the original contract, but the modifications mean that the
contract no longer meets the eligibility criteria for that approach in paragraph
53 or paragraph 69.
73. If a contract modification meets none of the conditions in paragraph 72, the entity
shall treat changes in cash flows caused by the modification as changes in estimates
of fulfilment cash flows by applying paragraphs 4052.
Derecognition
74. An entity shall derecognise an insurance contract when, and only when:
(a) it is extinguished, ie when the obligation specified in the insurance
contract expires or is discharged or cancelled; or
(b) any of the conditions in paragraph 72 are met.
75. When an insurance contract is extinguished, the entity is no longer at risk and is
therefore no longer required to transfer any economic resources to satisfy the
insurance contract. For example, when an entity buys reinsurance, it shall derecognise
the underlying insurance contract(s) when, and only when, the underlying insurance
contract(s) is or are extinguished.
76. An entity derecognises an insurance contract from within a group of contracts by
applying the following requirements in Ind AS 117:
(a) the fulfilment cash flows allocated to the group are adjusted to eliminate the
present value of the future cash flows and risk adjustment for non-financial
risk relating to the rights and obligations that have been derecognised from the
group, applying paragraphs 40(a)(i) and 40(b);
(b) the contractual service margin of the group is adjusted for the change in
fulfilment cash flows described in (a), to the extent required by paragraphs
44(c) and 45(c), unless paragraph 77 applies; and
(c) the number of coverage units for expected remaining coverage is adjusted to
reflect the coverage units derecognised from the group, and the amount of the
contractual service margin recognised in profit or loss in the period is based on
that adjusted number, applying paragraph B119.
77. When an entity derecognises an insurance contract because it transfers the contract to
a third party or derecognises an insurance contract and recognises a new contract
applying paragraph 72, the entity shall instead of applying paragraph 76(b):
(a) adjust the contractual service margin of the group from which the contract has
been derecognised, to the extent required by paragraphs 44(c) and 45(c), for
the difference between (i) and either (ii) for contracts transferred to a third
party or (iii) for contracts derecognised applying paragraph 72:
(i) the change in the carrying amount of the group of insurance contracts
resulting from the derecognition of the contract, applying paragraph
76(a).
(ii) the premium charged by the third party.
(iii) the premium the entity would have charged had it entered into a contract
with equivalent terms as the new contract at the date of the contract
modification, less any additional premium charged for the modification.
(b) measure the new contract recognised applying paragraph 72 assuming that the
entity received the premium described in (a)(iii) at the date of the
modification.
Presentation in the statement of financial position
78. An entity shall present separately in the statement of financial position the
carrying amount of groups of:
(a) insurance contracts issued that are assets;
(b) insurance contracts issued that are liabilities;
(c) reinsurance contracts held that are assets; and
(d) reinsurance contracts held that are liabilities.
79. An entity shall include any assets or liabilities for insurance acquisition cash flows
recognised applying paragraph 27 in the carrying amount of the related groups of
insurance contracts issued, and any assets or liabilities for cash flows related to
groups of reinsurance contracts held (see paragraph 65(a)) in the carrying amount of
the groups of reinsurance contracts held.
Recognition and presentation in the statement(s) of financial performance
(paragraphs B120B136)
80. Applying paragraphs 41 and 42, an entity shall disaggregate the amounts
recognised in the statement(s) of profit or loss and other comprehensive income
(hereafter referred to as the statement(s) of financial performance) into:
(a) an insurance service result (paragraphs 8386), comprising insurance
revenue and insurance service expenses; and
(b) insurance finance income or expenses (paragraphs 8792).
81. An entity is not required to disaggregate the change in the risk adjustment for non-
financial risk between the insurance service result and insurance finance income or
expenses. If an entity does not make such a disaggregation, it shall include the entire
change in the risk adjustment for non-financial risk as part of the insurance service
result.
82. An entity shall present income or expenses from reinsurance contracts held
separately from the expenses or income from insurance contracts issued.
Insurance service result
83. An entity shall present in profit or loss insurance revenue arising from the
groups of insurance contracts issued. Insurance revenue shall depict the
provision of coverage and other services arising from the group of insurance
contracts at an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those services. Paragraphs B120B127 specify how
an entity measures insurance revenue.
84. An entity shall present in profit or loss insurance service expenses arising from a
group of insurance contracts issued, comprising incurred claims (excluding
repayments of investment components), other incurred insurance service
expenses and other amounts as described in paragraph 103(b).
85. Insurance revenue and insurance service expenses presented in profit or loss
shall exclude any investment components. An entity shall not present premium
information in profit or loss if that information is inconsistent with paragraph
83.
86. An entity may present the income or expenses from a group of reinsurance contracts
held (see paragraphs 6070), other than insurance finance income or expenses, as a
single amount; or the entity may present separately the amounts recovered from the
reinsurer and an allocation of the premiums paid that together give a net amount equal
to that single amount. If an entity presents separately the amounts recovered from the
reinsurer and an allocation of the premiums paid, it shall:
(a) treat reinsurance cash flows that are contingent on claims on the underlying
contracts as part of the claims that are expected to be reimbursed under the
reinsurance contract held;
(b) treat amounts from the reinsurer that it expects to receive that are not
contingent on claims of the underlying contracts (for example, some types of
ceding commissions) as a reduction in the premiums to be paid to the
reinsurer; and
(c) not present the allocation of premiums paid as a reduction in revenue.
Insurance finance income or expenses (see paragraphs B128136)
87. Insurance finance income or expenses comprises the change in the carrying
amount of the group of insurance contracts arising from:
(a) the effect of the time value of money and changes in the time value of
money; and
(b) the effect of financial risk and changes in financial risk; but
(c) excluding any such changes for groups of insurance contracts with direct
participation features that would adjust the contractual service margin
but do not do so when applying paragraphs 45(b)(ii), 45(b)(iii), 45(c)(ii) or
45(c)(iii). These are included in insurance service expenses.
88. Unless paragraph 89 applies, an entity shall make an accounting policy choice
between:
(a) including insurance finance income or expenses for the period in profit or
loss; or
(b) disaggregating insurance finance income or expenses for the period to
include in profit or loss an amount determined by a systematic allocation
of the expected total insurance finance income or expenses over the
duration of the group of contracts, applying paragraphs B130B133.
89. For insurance contracts with direct participation features, for which the entity
holds the underlying items, an entity shall make an accounting policy choice
between:
(a) including insurance finance income or expenses for the period in profit or
loss; or
(b) disaggregating insurance finance income or expenses for the period to
include in profit or loss an amount that eliminates accounting mismatches
with income or expenses included in profit or loss on the underlying items
held, applying paragraphs B134B136.
90. If an entity chooses the accounting policy set out in paragraph 88(b) or in
paragraph 89(b), it shall include in other comprehensive income the difference
between the insurance finance income or expenses measured on the basis set out
in those paragraphs and the total insurance finance income or expenses for the
period.
91. If an entity transfers a group of insurance contracts or derecognises an insurance
contract applying paragraph 77:
(a) it shall reclassify to profit or loss as a reclassification adjustment (see Ind
AS 1 Presentation of Financial Statements) any remaining amounts for the
group (or contract) that were previously recognised in other
comprehensive income because the entity chose the accounting policy set
out in paragraph 88(b).
(b) it shall not reclassify to profit or loss as a reclassification adjustment (see
Ind AS 1) any remaining amounts for the group (or contract) that were
previously recognised in other comprehensive income because the entity
chose the accounting policy set out in paragraph 89(b).
92. Paragraph 30 requires an entity to treat an insurance contract as a monetary item
underInd AS 21 for the purpose of translating foreign exchange items into the entity's
functional currency. An entity includes exchange differences on changes in the
carrying amount of groups of insurance contracts in the statement of profit or loss,
unless they relate to changes in the carrying amount of groups of insurance contracts
included in other comprehensive income applying paragraph 90, in which case they
shall be included in other comprehensive income.
Disclosure
93. The objective of the disclosure requirements is for an entity to disclose
information in the notes that, together with the information provided in the
statement of financial position, statement(s) of financial performance and
statement of cash flows, gives a basis for users of financial statements to assess
the effect that contracts within the scope of Ind AS 117 have on the entity's
financial position, financial performance and cash flows. To achieve that
objective, an entity shall disclose qualitative and quantitative information about:
(a) the amounts recognised in its financial statements for contracts within the
scope of Ind AS 117 (see paragraphs 97116);
(b) the significant judgements, and changes in those judgements, made when
applying Ind AS 117 (see paragraphs 117120); and
(c) the nature and extent of the risks from contracts within the scope of Ind
AS 117 (see paragraphs 121132).
94. An entity shall consider the level of detail necessary to satisfy the disclosure objective
and how much emphasis to place on each of the various requirements. If the
disclosures provided, applying paragraphs 97132, are not enough to meet the
objective in paragraph 93, an entity shall disclose additional information necessary to
meet that objective.
95. An entity shall aggregate or disaggregate information so that useful information is not
obscured either by the inclusion of a large amount of insignificant detail or by the
aggregation of items that have different characteristics.
96. Paragraphs 2931 of Ind AS 1 set out requirements relating to materiality and
aggregation of information. Examples of aggregation bases that might be appropriate
for information disclosed about insurance contracts are:
(a) type of contract (for example, major product lines);
(b) geographical area (for example, country or region); or
(c) reportable segment, as defined in Ind AS 108 Operating Segments.
Explanation of recognised amounts
97. Of the disclosures required by paragraphs 98109, only those in paragraphs 98100
and 102105 apply to contracts to which the premium allocation approach has been
applied. If an entity uses the premium allocation approach, it shall also disclose:
(a) which of the criteria in paragraphs 53 and 69 it has satisfied;
(b) whether it makes an adjustment for the time value of money and the effect of
financial risk applying paragraphs 56 and 57(b); and
(c) the method it has chosen to recognise insurance acquisition cash flows
applying paragraph 59(a).
98. An entity shall disclose reconciliations that show how the net carrying amounts of
contracts within the scope of Ind AS 117 changed during the period because of cash
flows and income and expenses recognised in the statement(s) of financial
performance. Separate reconciliations shall be disclosed for insurance contracts issued
and reinsurance contracts held. An entity shall adapt the requirements of paragraphs
100109 to reflect the features of reinsurance contracts held that differ from insurance
contracts issued; for example, the generation of expenses or reduction in expenses
rather than revenue.
99. An entity shall provide enough information in the reconciliations to enable users of
financial statements to identify changes from cash flows and amounts that are
recognised in the statement(s) of financial performance. To comply with this
requirement, an entity shall:
(a) disclose, in a table, the reconciliations set out in paragraphs 100105; and
(b) for each reconciliation, present the net carrying amounts at the beginning and
at the end of the period, disaggregated into a total for groups of contracts that
are assets and a total for groups of contracts that are liabilities, that equal the
amounts presented in the statement of financial position applying paragraph
78.
100. An entity shall disclose reconciliations from the opening to the closing balances
separately for each of:
(a) the net liabilities (or assets) for the remaining coverage component, excluding
any loss component.
(b) any loss component (see paragraphs 4752 and 5758).
(c) the liabilities for incurred claims. For insurance contracts to which the
premium allocation approach described in paragraphs 5359 or 6970 has
been applied, an entity shall disclose separate reconciliations for:
(i) the estimates of the present value of the future cash flows; and
(ii) the risk adjustment for non-financial risk.
101. For insurance contracts other than those to which the premium allocation approach
described in paragraphs 5359 or 6970 has been applied, an entity shall also disclose
reconciliations from the opening to the closing balances separately for each of:
(a) the estimates of the present value of the future cash flows;
(b) the risk adjustment for non-financial risk; and
(c) the contractual service margin.
102. The objective of the reconciliations in paragraphs 100101 is to provide different
types of information about the insurance service result.
103. An entity shall separately disclose in the reconciliations required in paragraph 100
each of the following amounts related to insurance services, if applicable:
(a) insurance revenue.
(b) insurance service expenses, showing separately:
(i) incurred claims (excluding investment components) and other incurred
insurance service expenses;
(ii) amortisation of insurance acquisition cash flows;
(iii) changes that relate to past service, ie changes in fulfilment cash flows
relating to the liability for incurred claims; and
(iv) changes that relate to future service, ie losses on onerous groups of
contracts and reversals of such losses.
(c) investment components excluded from insurance revenue and insurance
service expenses.
104. An entity shall separately disclose in the reconciliations required in paragraph 101
each of the following amounts related to insurance services, if applicable:
(a) changes that relate to future service, applying paragraphs B96B118, showing
separately:
(i) changes in estimates that adjust the contractual service margin;
(ii) changes in estimates that do not adjust the contractual service margin, ie
losses on groups of onerous contracts and reversals of such losses; and
(iii) the effects of contracts initially recognised in the period.
(b) changes that relate to current service, ie:
(i) the amount of the contractual service margin recognised in profit or loss
to reflect the transfer of services;
(ii) the change in the risk adjustment for non-financial risk that does not
relate to future service or past service; and
(iii) experience adjustments (see paragraphs B96(a), B97(c) and B113(a)).
(c) changes that relate to past service, ie changes in fulfilment cash flows relating
to incurred claims (see paragraphs B97(b) and B113(a)).
105. To complete the reconciliations in paragraphs 100101, an entity shall also disclose
separately each of the following amounts not related to insurance services provided in
the period, if applicable:
(a) cash flows in the period, including:
(i) premiums received for insurance contracts issued (or paid for
reinsurance contracts held);
(ii) insurance acquisition cash flows; and
(iii) incurred claims paid and other insurance service expenses paid for
insurance contracts issued (or recovered under reinsurance contracts
held), excluding insurance acquisition cash flows.
(b) the effect of changes in the risk of non-performance by the issuer of
reinsurance contracts held;
(c) insurance finance income or expenses; and
(d) any additional line items that may be necessary to understand the change in the
net carrying amount of the insurance contracts.
106. For insurance contracts issued other than those to which the premium allocation
approach described in paragraphs 5359 has been applied, an entity shall disclose an
analysis of the insurance revenue recognised in the period comprising:
(a) the amounts relating to the changes in the liability for remaining coverage as
specified in paragraph B124, separately disclosing:
(i) the insurance service expenses incurred during the period as specified in
paragraph B124(a);
(ii) the change in the risk adjustment for non-financial risk, as specified in
paragraph B124(b); and
(iii) the amount of the contractual service margin recognised in profit or loss
because of the transfer of services in the period, as specified in
paragraph B124(c).
(b) the allocation of the portion of the premiums that relate to the recovery of
insurance acquisition cash flows.
107. For insurance contracts other than those to which the premium allocation approach
described in paragraphs 5359 or 6970 has been applied, an entity shall disclose the
effect on the statement of financial position separately for insurance contracts issued
and reinsurance contracts held that are initially recognised in the period, showing their
effect at initial recognition on:
(a) the estimates of the present value of future cash outflows, showing separately
the amount of the insurance acquisition cash flows;
(b) the estimates of the present value of future cash inflows;
(c) the risk adjustment for non-financial risk; and
(d) the contractual service margin.
108. In the disclosures required by paragraph 107, an entity shall separately disclose
amounts resulting from:
(a) contracts acquired from other entities in transfers of insurance contracts or
business combinations; and
(b) groups of contracts that are onerous.
109. For insurance contracts other than those to which the premium allocation approach
described in paragraphs 5359 or 6970 has been applied, an entity shall disclose an
explanation of when it expects to recognise the contractual service margin remaining
at the end of the reporting period in profit or loss, either quantitatively, in appropriate
time bands, or by providing qualitative information. Such information shall be
provided separately for insurance contracts issued and reinsurance contracts held.
Insurance finance income or expenses
110. An entity shall disclose and explain the total amount of insurance finance income or
expenses in the reporting period. In particular, an entity shall explain the relationship
between insurance finance income or expenses and the investment return on its assets,
to enable users of its financial statements to evaluate the sources of finance income or
expenses recognised in profit or loss and other comprehensive income.
111. For contracts with direct participation features, the entity shall describe the
composition of the underlying items and disclose their fair value.
112. For contracts with direct participation features, if an entity chooses not to adjust the
contractual service margin for some changes in the fulfilment cash flows, applying
paragraph B115, it shall disclose the effect of that choice on the adjustment to the
contractual service margin in the current period.
113. For contracts with direct participation features, if an entity changes the basis of
disaggregation of insurance finance income or expenses between profit or loss and
other comprehensive income, applying paragraph B135, it shall disclose, in the period
when the change in approach occurred:
(a) the reason why the entity was required to change the basis of disaggregation;
(b) the amount of any adjustment for each financial statement line item affected;
and
(c) the carrying amount of the group of insurance contracts to which the change
applied at the date of the change.
Transition amounts
114. An entity shall provide disclosures that enable users of financial statements to identify
the effect of groups of insurance contracts measured at the transition date applying the
modified retrospective approach (see paragraphs C6C19) or the fair value approach
(see paragraphs C20C24) on the contractual service margin and insurance revenue in
subsequent periods. Hence an entity shall disclose the reconciliation of the contractual
service margin applying paragraph 101(c), and the amount of insurance revenue
applying paragraph 103(a), separately for:
(a) insurance contracts that existed at the transition date to which the entity has
applied the modified retrospective approach;
(b) insurance contracts that existed at the transition date to which the entity has
applied the fair value approach; and
(c) all other insurance contracts.
115. For all periods in which disclosures are made applying paragraphs 114(a) or 114(b),
to enable users of financial statements to understand the nature and significance of the
methods used and judgements applied in determining the transition amounts, an entity
shall explain how it determined the measurement of insurance contracts at the
transition date.
116. An entity that chooses to disaggregate insurance finance income or expenses between
profit or loss and other comprehensive income applies paragraphs C18(b), C19(b),
C24(b) and C24(c) to determine the cumulative difference between the insurance
finance income or expenses that would have been recognised in profit or loss and the
total insurance finance income or expenses at the transition date for the groups of
insurance contracts to which the disaggregation applies. For all periods in which
amounts determined applying these paragraphs exist, the entity shall disclose a
reconciliation from the opening to the closing balance of the cumulative amounts
included in other comprehensive income for financial assets measured at fair value
through other comprehensive income related to the groups of insurance contracts. The
reconciliation shall include, for example, gains or losses recognised in other
comprehensive income in the period and gains or losses previously recognised in
other comprehensive income in previous periods reclassified in the period to profit or
loss.
Significant judgements in applying Ind AS 117
117. An entity shall disclose the significant judgements and changes in judgements made
in applying Ind AS 117. Specifically, an entity shall disclose the inputs, assumptions
and estimation techniques used, including:
(a) the methods used to measure insurance contracts within the scope of Ind AS
117 and the processes for estimating the inputs to those methods. Unless
impracticable, an entity shall also provide quantitative information about those
inputs.
(b) any changes in the methods and processes for estimating inputs used to
measure contracts, the reason for each change, and the type of contracts
affected.
(c) to the extent not covered in (a), the approach used:
(i) to distinguish changes in estimates of future cash flows arising from the
exercise of discretion from other changes in estimates of future cash
flows for contracts without direct participation features (see paragraph
B98);
(ii) to determine the risk adjustment for non-financial risk, including
whether changes in the risk adjustment for non-financial risk are
disaggregated into an insurance service component and an insurance
finance component or are presented in full in the insurance service
result;
(iii) to determine discount rates; and
(iv) to determine investment components.
118. If, applying paragraph 88(b) or paragraph 89(b), an entity chooses to disaggregate
insurance finance income or expenses into amounts presented in profit or loss and
amounts presented in other comprehensive income, the entity shall disclose an
explanation of the methods used to determine the insurance finance income or
expenses recognised in profit or loss.
119. An entity shall disclose the confidence level used to determine the risk adjustment for
non-financial risk. If the entity uses a technique other than the confidence level
technique for determining the risk adjustment for non-financial risk, it shall disclose
the technique used and the confidence level corresponding to the results of that
technique.
120. An entity shall disclose the yield curve (or range of yield curves) used to discount
cash flows that do not vary based on the returns on underlying items, applying
paragraph 36. When an entity provides this disclosure in aggregate for a number of
groups of insurance contracts, it shall provide such disclosures in the form of
weighted averages, or relatively narrow ranges.
Nature and extent of risks that arise from contracts within the scope
of Ind AS 117
121. An entity shall disclose information that enables users of its financial statements to
evaluate the nature, amount, timing and uncertainty of future cash flows that arise
from contracts within the scope of Ind AS 117. Paragraphs 122132 contain
requirements for disclosures that would normally be necessary to meet this
requirement.
122. These disclosures focus on the insurance and financial risks that arise from insurance
contracts and how they have been managed. Financial risks typically include, but are
not limited to, credit risk, liquidity risk and market risk.
123. If the information disclosed about an entity's exposure to risk at the end of the
reporting period is not representative of its exposure to risk during the period, the
entity shall disclose that fact, the reason why the period-end exposure is not
representative, and further information that is representative of its risk exposure
during the period.
124. For each type of risk arising from contracts within the scope of Ind AS 117, an entity
shall disclose:
(a) the exposures to risks and how they arise;
(b) the entity's objectives, policies and processes for managing the risks and the
methods used to measure the risks; and
(c) any changes in (a) or (b) from the previous period.
125. For each type of risk arising from contracts within the scope of Ind AS 117, an entity
shall disclose:
(a) summary quantitative information about its exposure to that risk at the end of
the reporting period. This disclosure shall be based on the information
provided internally to the entity's key management personnel.
(b) the disclosures required by paragraphs 127132, to the extent not provided
applying (a) of this paragraph.
126. An entity shall disclose information about the effect of the regulatory frameworks in
which it operates; for example, minimum capital requirements or required interest-
rate guarantees. If an entity applies paragraph 20 in determining the groups of
insurance contracts to which it applies the recognition and measurement requirements
of Ind AS 117, it shall disclose that fact.
All types of risk--concentrations of risk
127. An entity shall disclose information about concentrations of risk arising from
contracts within the scope of Ind AS 117, including a description of how the entity
determines the concentrations, and a description of the shared characteristic that
identifies each concentration (for example, the type of insured event, industry,
geographical area, or currency). Concentrations of financial risk might arise, for
example, from interest-rate guarantees that come into effect at the same level for a
large number of contracts. Concentrations of financial risk might also arise from
concentrations of non-financial risk; for example, if an entity provides product
liability protection to pharmaceutical companies and also holds investments in those
companies.
Insurance and market risks--sensitivity analysis
128. An entity shall disclose information about sensitivities to changes in risk exposures
arising from contracts within the scope of Ind AS 117. To comply with this
requirement, an entity shall disclose:
(a) a sensitivity analysis that shows how profit or loss and equity would have been
affected by changes in risk exposures that were reasonably possible at the end
of the reporting period:
(i) for insurance risk--showing the effect for insurance contracts issued,
before and after risk mitigation by reinsurance contracts held; and
(ii) for each type of market risk--in a way that explains the relationship
between the sensitivities to changes in risk exposures arising from
insurance contracts and those arising from financial assets held by the
entity.
(b) the methods and assumptions used in preparing the sensitivity analysis; and
(c) changes from the previous period in the methods and assumptions used in
preparing the sensitivity analysis, and the reasons for such changes.
129. If an entity prepares a sensitivity analysis that shows how amounts different from
those specified in paragraph 128(a) are affected by changes in risk exposures and uses
that sensitivity analysis to manage risks arising from contracts within the scope of Ind
AS 117, it may use that sensitivity analysis in place of the analysis specified in
paragraph 128(a). The entity shall also disclose:
(a) an explanation of the method used in preparing such a sensitivity analysis and
of the main parameters and assumptions underlying the information provided;
and
(b) an explanation of the objective of the method used and of any limitations that
may result in the information provided.
Insurance risk--claims development
130. An entity shall disclose actual claims compared with previous estimates of the
undiscounted amount of the claims (ie claims development). The disclosure about
claims development shall start with the period when the earliest material claim(s)
arose and for which there is still uncertainty about the amount and timing of the
claims payments at the end of the reporting period; but the disclosure is not required
to start more than 10 years before the end of the reporting period. The entity is not
required to disclose information about the development of claims for which
uncertainty about the amount and timing of the claims payments is typically resolved
within one year. An entity shall reconcile the disclosure about claims development
with the aggregate carrying amount of the groups of insurance contracts, which the
entity discloses applying paragraph 100(c).
Credit risk--other information
131. For credit risk that arises from contracts within the scope of Ind AS 117, an entity
shall disclose:
(a) the amount that best represents its maximum exposure to credit risk at the end
of the reporting period, separately for insurance contracts issued and
reinsurance contracts held; and
(b) information about the credit quality of reinsurance contracts held that are
assets.
Liquidity risk--other information
132. For liquidity risk arising from contracts within the scope of Ind AS 117, an entity
shall disclose:
(a) a description of how it manages the liquidity risk.
(b) separate maturity analyses for groups of insurance contracts issued that are
liabilities and groups of reinsurance contracts held that are liabilities that
show, as a minimum, net cash flows of the groups for each of the first five
years after the reporting date and in aggregate beyond the first five years. An
entity is not required to include in these analyses liabilities for remaining
coverage measured applying paragraphs 5559. The analyses may take the
form of:
(i) an analysis, by estimated timing, of the remaining contractual
undiscounted net cash flows; or
(ii) an analysis, by estimated timing, of the estimates of the present value of
the future cash flows.
(c) the amounts that are payable on demand, explaining the relationship between
such amounts and the carrying amount of the related groups of contracts, if not
disclosed applying (b) of this paragraph.
Appendix A
Defined terms
This appendix is an integral part of Ind AS 117, Insurance Contracts.
contractual A component of the carrying amount of the asset or liability for a
service margin group of insurance contracts representing the unearned profit the
entity will recognise as it provides services under the insurance
contracts in the group.
coverage period The period during which the entity provides coverage for insured
events. This period includes the coverage that relates to all premiums
within the boundary of the insurance contract.
experience A difference between:
adjustment (a) for premium receipts (and any related cash flows such as
insurance acquisition cash flows and insurance premium
taxes)--the estimate at the beginning of the period of the amounts
expected in the period and the actual cash flows in the period; or
(b) for insurance service expenses (excluding insurance acquisition
expenses)--the estimate at the beginning of the period of the
amounts expected to be incurred in the period and the actual
amounts incurred in the period.
financial risk The risk of a possible future change in one or more of a specified
interest rate, financial instrument price, commodity price, currency
exchange rate, index of prices or rates, credit rating or credit index or
other variable, provided in the case of a non-financial variable that the
variable is not specific to a party to the contract.
fulfilment cash An explicit, unbiased and probability-weighted estimate(ie expected
flows value) of the present value of the future cash outflows minus the
present value of the future cash inflows that will arise as the entity
fulfils insurance contracts, including a risk adjustment for non-
financial risk
group of A set of insurance contracts resulting from the division of portfolio of
insurance insurance contracts into, at a minimum, contracts written within a
contracts period of no longer than one year and that, at initial recognition:
(a) are onerous, if any;
(b) have no significant possibility of becoming onerous subsequently,
if any; or
(c) do not fall into either (a) or (b), if any.
insurance Cash flows arising from the costs of selling, underwriting and starting a
acquisition cash group of insurance contracts that are directly attributable to the
flows portfolio of insurance contracts to which the group belongs. Such
cash flows include cash flows that are not directly attributable to
individual contracts or groups of insurance contracts within the
portfolio.
insurance A contract under which one party (the issuer) accepts significant
contract insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (the
insured event) adversely affects the policyholder.
insurance An insurance contract for which, at inception:
contract (a) the contractual terms specify that the policyholder participates in
with direct a share of a clearly identified pool of underlying items;
participation (b) the entity expects to pay to the policyholder an amount equal to a
features substantial share of the fair value returns on the underlying
items; and
(c) the entity expects a substantial proportion of any change in the
amounts to be paid to the policyholder to vary with the change
in fair value of the underlying items.
insurance An insurance contract that is not an insurance contract with direct
contract participation features.
without direct
participation
features
insurance risk Risk, other than financial risk, transferred from the holder of a contract
to the issuer.
insured event An uncertain future event covered by an insurance contract that
creates insurance risk.
investment The amounts that an insurance contract requires the entity to repay to
component a policyholder even if an insured event does not occur.
investment A financial instrument that provides a particular investor with the
contract with contractual right to receive, as a supplement to an amount not subject to
discretionary the discretion of the issuer, additional amounts:
participation
features (a) that are expected to be a significant portion of the total
contractual benefits;
(b) the timing or amount of which are contractually at the discretion
of the issuer; and
(c) that are contractually based on:
(i) the returns on a specified pool of contracts or a specified
type of contract;
(ii) realised and/or unrealised investment returns on a specified
pool of assets held by the issuer; or
(iii) the profit or loss of the entity or fund that issues the
contract.
liability for An entity's obligation to investigate and pay valid claims for insured
incurred claims events that have already occurred, including events that have occurred
but for which claims have not been reported, and other incurred
insurance expenses.
liability for An entity's obligation to investigate and pay valid claims under existing
remaining insurance contracts for insured events that have not yet occurred (ie
coverage the obligation that relates to the unexpired portion of the coverage
period).
policyholder A party that has a right to compensation under an insurance contract if
an insured event occurs.
portfolio of Insurance contracts subject to similar risks and managed together.
insurance
contracts
reinsurance An insurance contract issued by one entity (the reinsurer) to
contract compensate another entity for claims arising from one or more
insurance contracts issued by that other entity (underlying contracts).
risk adjustment The compensation an entity requires for bearing the uncertainty about
for non- the amount and timing of the cash flows that arises from non-financial
financial risk risk as the entity fulfils insurance contracts.
underlying Items that determine some of the amounts payable to a policyholder.
items Underlying items can comprise any items; for example, a reference
portfolio of assets, the net assets of the entity, or a specified subset of
the net assets of the entity.
Appendix B
Application guidance
This appendix is an integral part of Ind AS 117 Insurance Contracts.
B1 This appendix provides guidance on the following:
(a) definition of an insurance contract (see paragraphs B2B30);
(b) separation of components from an insurance contract (see paragraphs B31
B35);
(c) measurement (see paragraphs B36B119);
(d) insurance revenue (see paragraphs B120B127);
(e) insurance finance income or expenses (see paragraphs B128B136); and
(f) interim financial statements (see paragraph B137).
Definition of an insurance contract (Appendix A)
B2 This section provides guidance on the definition of an insurance contract as
specified in Appendix A. It addresses the following:
(a) uncertain future event (see paragraphs B3B5);
(b) payments in kind (see paragraph B6);
(c) the distinction between insurance risk and other risks (see paragraphs B7
B16);
(d) significant insurance risk (see paragraphs B17B23);
(e) changes in the level of insurance risk (see paragraphs B24B25); and
(f) examples of insurance contracts (see paragraphs B26B30).
Uncertain future event
B3 Uncertainty (or risk) is the essence of an insurance contract. Accordingly, at least
one of the following is uncertain at the inception of an insurance contract:
(a) the probability of an insured event occurring;
(b) when the insured event will occur; or
(c) how much the entity will need to pay if the insured event occurs.
B4 In some insurance contracts, the insured event is the discovery of a loss during the
term of the contract, even if that loss arises from an event that occurred before the
inception of the contract. In other insurance contracts, the insured event is an event
that occurs during the term of the contract, even if the resulting loss is discovered
after the end of the contract term.
B5 Some insurance contracts cover events that have already occurred but the financial
effect of which is still uncertain. An example is an insurance contract that provides
coverage against an adverse development of an event that has already occurred. In
such contracts, the insured event is the determination of the ultimate cost of those
claims.
Payments in kind
B6 Some insurance contracts require or permit payments to be made in kind. In such
cases, the entity provides goods or services to the policyholder to settle the entity's
obligation to compensate the policyholder for insured events. An example is when
the entity replaces a stolen article instead of reimbursing the policyholder for the
amount of its loss. Another example is when an entity uses its own hospitals and
medical staff to provide medical services covered by the insurance contract. Such
contracts are insurance contracts, even though the claims are settled in kind. Fixed-
fee service contracts that meet the conditions specified in paragraph 8 are also
insurance contracts, but applying paragraph 8, an entity may choose to account for
them applying either Ind AS 117 or Ind AS 115 Revenue from Contracts with
Customers.
The distinction between insurance risk and other risks
B7 The definition of an insurance contract requires that one party accepts significant
insurance risk from another party. Ind AS 117 defines insurance risk as `risk, other
than financial risk, transferred from the holder of a contract to the issuer'. A
contract that exposes the issuer to financial risk without significant insurance risk is
not an insurance contract.
B8 The definition of financial risk in Appendix A refers to financial and non-financial
variables. Examples of non-financial variables not specific to a party to the contract
include an index of earthquake losses in a particular region or temperatures in a
particular city. Financial risk excludes risk from non-financial variables that are
specific to a party to the contract, such as the occurrence or non-occurrence of a fire
that damages or destroys an asset of that party. Furthermore, the risk of changes in
the fair value of a non-financial asset is not a financial risk if the fair value reflects
changes in the market prices for such assets (ie a financial variable) and the
condition of a specific non-financial asset held by a party to a contract (ie a non-
financial variable). For example, if a guarantee of the residual value of a specific
car in which the policyholder has an insurable interest exposes the guarantor to the
risk of changes in the car's physical condition, that risk is insurance risk, not
financial risk.
B9 Some contracts expose the issuer to financial risk in addition to significant
insurance risk. For example, many life insurance contracts guarantee a minimum
rate of return to policyholders, creating financial risk, and at the same time promise
death benefits that may significantly exceed the policyholder's account balance,
creating insurance risk in the form of mortality risk. Such contracts are insurance
contracts.
B10 Under some contracts, an insured event triggers the payment of an amount linked to
a price index. Such contracts are insurance contracts, provided that the payment
contingent on the insured event could be significant. For example, a life-contingent
annuity linked to a cost-of-living index transfers insurance risk because the payment
is triggered by an uncertain future event--the survival of the person who receives
the annuity. The link to the price index is a derivative, but it also transfers insurance
risk because the number of payments to which the index applies depends on the
survival of the annuitant. If the resulting transfer of insurance risk is significant, the
derivative meets the definition of an insurance contract, in which case it shall not be
separated from the host contract (see paragraph 11(a)).
B11 Insurance risk is the risk the entity accepts from the policyholder. This means the
entity must accept, from the policyholder, a risk to which the policyholder was
already exposed. Any new risk created by the contract for the entity or the
policyholder is not insurance risk.
B12 The definition of an insurance contract refers to an adverse effect on the
policyholder. This definition does not limit the payment by the entity to an amount
equal to the financial effect of the adverse event. For example, the definition
includes `new for old' coverage that pays the policyholder an amount that permits
the replacement of a used and damaged asset with a new one. Similarly, the
definition does not limit the payment under a life insurance contract to the financial
loss suffered by the deceased's dependants, nor does it exclude contracts that
specify the payment of predetermined amounts to quantify the loss caused by death
or an accident.
B13 Some contracts require a payment if a specified uncertain future event occurs, but
do not require an adverse effect on the policyholder as a precondition for the
payment. This type of contract is not an insurance contract even if the holder uses it
to mitigate an underlying risk exposure. For example, if the holder uses a derivative
to hedge an underlying financial or non-financial variable correlated with the cash
flows from an asset of the entity, the derivative is not an insurance contract because
the payment is not conditional on whether the holder is adversely affected by a
reduction in the cash flows from the asset. The definition of an insurance contract
refers to an uncertain future event for which an adverse effect on the policyholder is
a contractual precondition for payment. A contractual precondition does not require
the entity to investigate whether the event actually caused an adverse effect, but it
does permit the entity to deny the payment if it is not satisfied that the event did
cause an adverse effect.
B14 Lapse or persistency risk (the risk that the policyholder will cancel the contract
earlier or later than the issuer had expected when pricing the contract) is not
insurance risk because the resulting variability in the payment to the policyholder is
not contingent on an uncertain future event that adversely affects the policyholder.
Similarly, expense risk (ie the risk of unexpected increases in the administrative
costs associated with the servicing of a contract, rather than in the costs associated
with insured events) is not insurance risk because an unexpected increase in such
expenses does not adversely affect the policyholder.
B15 Consequently, a contract that exposes the entity to lapse risk, persistency risk or
expense risk is not an insurance contract unless it also exposes the entity to
significant insurance risk. However, if the entity mitigates its risk by using a second
contract to transfer part of the non-insurance risk to another party, the second
contract exposes the other party to insurance risk.
B16 An entity can accept significant insurance risk from the policyholder only if the
entity is separate from the policyholder. In the case of a mutual entity, the mutual
entity accepts risk from each policyholder and pools that risk. Although
policyholders bear that pooled risk collectively because they hold the residual
interest in the entity, the mutual entity is a separate entity that has accepted the risk.
Significant insurance risk
B17 A contract is an insurance contract only if it transfers significant insurance risk.
Paragraphs B7B16 discuss insurance risk. Paragraphs B18B23 discuss the
assessment of whether the insurance risk is significant.
B18 Insurance risk is significant if, and only if, an insured event could cause the issuer
to pay additional amounts that are significant in any single scenario, excluding
scenarios that have no commercial substance (ie no discernible effect on the
economics of the transaction). If an insured event could mean significant additional
amounts would be payable in any scenario that has commercial substance, the
condition in the previous sentence can be met even if the insured event is extremely
unlikely, or even if the expected (ie probability-weighted) present value of the
contingent cash flows is a small proportion of the expected present value of the
remaining cash flows from the insurance contract.
B19 In addition, a contract transfers significant insurance risk only if there is a scenario
that has commercial substance in which the issuer has a possibility of a loss on a
present value basis. However, even if a reinsurance contract does not expose the
issuer to the possibility of a significant loss, that contract is deemed to transfer
significant insurance risk if it transfers to the reinsurer substantially all the
insurance risk relating to the reinsured portions of the underlying insurance
contracts.
B20 The additional amounts described in paragraph B18 are determined on a present-
value basis. If an insurance contract requires payment when an event with uncertain
timing occurs and if the payment is not adjusted for the time value of money, there
may be scenarios in which the present value of the payment increases, even if its
nominal value is fixed. An example is insurance that provides a fixed death benefit
when the policyholder dies, with no expiry date for the cover (often referred to as
whole-life insurance for a fixed amount). It is certain that the policyholder will die,
but the date of death is uncertain. Payments may be made when an individual
policyholder dies earlier than expected. Because those payments are not adjusted
for the time value of money, significant insurance risk could exist even if there is no
overall loss on the portfolio of contracts. Similarly, contractual terms that delay
timely reimbursement to the policyholder can eliminate significant insurance risk.
An entity shall use the discount rates required in paragraph 36 to determine the
present value of the additional amounts.
B21 The additional amounts described in paragraph B18 refer to the present value of
amounts that exceed those that would be payable if no insured event had occurred
(excluding scenarios that lack commercial substance). Those additional amounts
include claims handling and assessment costs, but exclude:
(a) the loss of the ability to charge the policyholder for future service. For
example, in an investment-linked life insurance contract, the death of the
policyholder means that the entity can no longer perform investment
management services and collect a fee for doing so. However, this economic
loss for the entity does not result from insurance risk, just as a mutual fund
manager does not take on insurance risk in relation to the possible death of a
client. Consequently, the potential loss of future investment management
fees is not relevant when assessing how much insurance risk is transferred
by a contract.
(b) a waiver, on death, of charges that would be made on cancellation or
surrender. Because the contract brought those charges into existence, their
waiver does not compensate the policyholder for a pre-existing risk.
Consequently, they are not relevant when assessing how much insurance
risk is transferred by a contract.
(c) a payment conditional on an event that does not cause a significant loss to
the holder of the contract. For example, consider a contract that requires the
issuer to pay CU1 million1 if an asset suffers physical damage that causes an
insignificant economic loss of CU1 to the holder. In this contract, the holder
transfers the insignificant risk of losing CU1 to the issuer. At the same time,
the contract creates a non-insurance risk that the issuer will need to pay
CU999,999 if the specified event occurs. Because there is no scenario in
which an insured event causes a significant loss to the holder of the contract,
the issuer does not accept significant insurance risk from the holder and this
contract is not an insurance contract.
(d) possible reinsurance recoveries. The entity accounts for these separately.
B22 An entity shall assess the significance of insurance risk contract by contract.
Consequently, the insurance risk can be significant even if there is minimal
probability of significant losses for a portfolio or group of contracts.
B23 It follows from paragraphs B18B22 that, if a contract pays a death benefit that
exceeds the amount payable on survival, the contract is an insurance contract unless
the additional death benefit is not significant (judged by reference to the contract
itself rather than to an entire portfolio of contracts). As noted in paragraph B21(b),
1
CU denotes currency unit.
the waiver on death of cancellation or surrender charges is not included in this
assessment if that waiver does not compensate the policyholder for a pre-existing
risk. Similarly, an annuity contract that pays out regular sums for the rest of a
policyholder's life is an insurance contract, unless the aggregate life-contingent
payments are insignificant.
Changes in the level of insurance risk
B24 For some contracts, the transfer of insurance risk to the issuer occurs after a period
of time. For example, consider a contract that provides a specified investment return
and includes an option for the policyholder to use the proceeds of the investment on
maturity to buy a life-contingent annuity at the same rates the entity charges other
new annuitants at the time the policyholder exercises that option. Such a contract
transfers insurance risk to the issuer only after the option is exercised, because the
entity remains free to price the annuity on a basis that reflects the insurance risk that
will be transferred to the entity at that time. Consequently, the cash flows that
would occur on the exercise of the option fall outside the boundary of the contract,
and before exercise there are no insurance cash flows within the boundary of the
contract. However, if the contract specifies the annuity rates (or a basis other than
market rates for setting the annuity rates), the contract transfers insurance risk to the
issuer because the issuer is exposed to the risk that the annuity rates will be
unfavourable to the issuer when the policyholder exercises the option. In that case,
the cash flows that would occur when the option is exercised are within the
boundary of the contract.
B25 A contract that meets the definition of an insurance contract remains an insurance
contract until all rights and obligations are extinguished (ie discharged, cancelled or
expired), unless the contract is derecognised applying paragraphs 7477, because of
a contract modification.
Examples of insurance contracts
B26 The following are examples of contracts that are insurance contracts if the transfer
of insurance risk is significant:
(a) insurance against theft or damage.
(b) insurance against product liability, professional liability, civil liability or legal
expenses.
(c) life insurance and prepaid funeral plans (although death is certain, it is
uncertain when death will occur or, for some types of life insurance, whether
death will occur within the period covered by the insurance).
(d) life-contingent annuities and pensions, ie contracts that provide compensation
for the uncertain future event--the survival of the annuitant or pensioner--to
provide the annuitant or pensioner with a level of income that would
otherwise be adversely affected by his or her survival. (Employers' liabilities
that arise from employee benefit plans and retirement benefit obligations
reported by defined benefit retirement plans are outside the scope of Ind AS
117, applying paragraph 7(b)).
(e) insurance against disability and medical costs.
(f) surety bonds, fidelity bonds, performance bonds and bid bonds, ie contracts
that compensate the holder if another party fails to perform a contractual
obligation; for example, an obligation to construct a building.
(g) product warranties. Product warranties issued by another party for goods sold
by a manufacturer, dealer or retailer are within the scope of Ind AS 117.
However, product warranties issued directly by a manufacturer, dealer or
retailer are outside the scope of Ind AS 117 applying paragraph 7(a), and are
instead within the scope of Ind AS 115 or Ind AS 37 Provisions, Contingent
Liabilities and Contingent Assets.
(h) title insurance (insurance against the discovery of defects in the title to land or
buildings that were not apparent when the insurance contract was issued). In
this case, the insured event is the discovery of a defect in the title, not the
defect itself.
(i) travel insurance (compensation in cash or in kind to policyholders for losses
suffered in advance of, or during, travel).
(j) catastrophe bonds that provide for reduced payments of principal, interest or
both, if a specified event adversely affects the issuer of the bond (unless the
specified event does not create significant insurance risk; for example, if the
event is a change in an interest rate or a foreign exchange rate).
(k) insurance swaps and other contracts that require a payment depending on
changes in climatic, geological or other physical variables that are specific to
a party to the contract.
B27 The following are examples of items that are not insurance contracts:
(a) investment contracts that have the legal form of an insurance contract but do
not transfer significant insurance risk to the issuer. For example, life insurance
contracts in which the entity bears no significant mortality or morbidity risk
are not insurance contracts; such contracts are financial instruments or service
contracts--see paragraph B28. Investment contracts with discretionary
participation features do not meet the definition of an insurance contract;
however, they are within the scope of Ind AS 117 provided they are issued by
an entity that also issues insurance contracts, applying paragraph 3(c).
(b) contracts that have the legal form of insurance, but return all significant
insurance risk to the policyholder through non-cancellable and enforceable
mechanisms that adjust future payments by the policyholder to the issuer as a
direct result of insured losses. For example, some financial reinsurance
contracts or some group contracts return all significant insurance risk to the
policyholders; such contracts are normally financial instruments or service
contracts (see paragraph B28).
(c) self-insurance (ie retaining a risk that could have been covered by insurance).
In such situations, there is no insurance contract because there is no agreement
with another party. Thus, if an entity issues an insurance contract to its parent,
subsidiary or fellow subsidiary, there is no insurance contract in the
consolidated financial statements because there is no contract with another
party. However, for the individual or separate financial statements of the
issuer or holder, there is an insurance contract.
(d) contracts (such as gambling contracts) that require a payment if a specified
uncertain future event occurs, but do not require, as a contractual precondition
for payment, the event to adversely affect the policyholder. However, this
does not exclude from the definition of an insurance contract contracts that
specify a predetermined payout to quantify the loss caused by a specified
event such as a death or an accident (see paragraph B12).
(e) derivatives that expose a party to financial risk but not insurance risk, because
the derivatives require that party to make (or give them the right to receive)
payment solely based on the changes in one or more of a specified interest
rate, a financial instrument price, a commodity price, a foreign exchange rate,
an index of prices or rates, a credit rating or a credit index or any other
variable, provided that, in the case of a non-financial variable, the variable is
not specific to a party to the contract.
(f) credit-related guarantees that require payments even if the holder has not
incurred a loss on the failure of the debtor to make payments when due; such
contracts are accounted for applying Ind AS 109 Financial Instruments (see
paragraph B29).
(g) contracts that require a payment that depends on a climatic, geological or any
other physical variable not specific to a party to the contract (commonly
described as weather derivatives).
(h) contracts that provide for reduced payments of principal, interest or both, that
depend on a climatic, geological or any other physical variable, the effect of
which is not specific to a party to the contract (commonly referred to as
catastrophe bonds).
B28 An entity shall apply other applicable Standards, such as Ind AS 109 and Ind AS
115, to the contracts described in paragraph B27.
B29 The credit-related guarantees and credit insurance contracts discussed in paragraph
B27(f) can have various legal forms, such as that of a guarantee, some types of
letters of credit, a credit default contract or an insurance contract. Those contracts
are insurance contracts if they require the issuer to make specified payments to
reimburse the holder for a loss that the holder incurs because a specified debtor fails
to make payment when due to the policyholder applying the original or modified
terms of a debt instrument. However, such insurance contracts are excluded from
the scope of Ind AS 117 unless the issuer has previously asserted explicitly that it
regards the contracts as insurance contracts and has used accounting applicable to
insurance contracts (see paragraph 7(e)).
B30 Credit-related guarantees and credit insurance contracts that require payment, even
if the policyholder has not incurred a loss on the failure of the debtor to make
payments when due, are outside the scope of Ind AS 117 because they do not
transfer significant insurance risk. Such contracts include those that require
payment:
(a) regardless of whether the counterparty holds the underlying debt instrument;
or
(b) on a change in the credit rating or the credit index, rather than on the failure
of a specified debtor to make payments when due.
Separating components from an insurance contract (paragraphs
1013)
Investment components (paragraph 11(b))
B31 Paragraph 11(b) requires an entity to separate a distinct investment component from
the host insurance contract. An investment component is distinct if, and only if,
both the following conditions are met:
(a) the investment component and the insurance component are not highly
interrelated.
(b) a contract with equivalent terms is sold, or could be sold, separately in the
same market or the same jurisdiction, either by entities that issue insurance
contracts or by other parties. The entity shall take into account all
information reasonably available in making this determination. The entity is
not required to undertake an exhaustive search to identify whether an
investment component is sold separately.
B32 An investment component and an insurance component are highly interrelated if,
and only if:
(a) the entity is unable to measure one component without considering the
other. Thus, if the value of one component varies according to the value of
the other, an entity shall apply Ind AS 117 to account for the combined
investment and insurance component; or
(b) the policyholder is unable to benefit from one component unless the other is
also present. Thus, if the lapse or maturity of one component in a contract
causes the lapse or maturity of the other, the entity shall apply Ind AS 117 to
account for the combined investment component and insurance component.
Promises to transfer distinct goods or non-insurance services
(paragraph 12)
B33 Paragraph 12 requires an entity to separate from an insurance contract a promise to
transfer distinct goods or non-insurance services to a policyholder. For the purpose
of separation, an entity shall not consider activities that an entity must undertake to
fulfil a contract unless the entity transfers a good or service to the policyholder as
those activities occur. For example, an entity may need to perform various
administrative tasks to set up a contract. The performance of those tasks does not
transfer a service to the policyholder as the tasks are performed.
B34 A good or non-insurance service promised to a policyholder is distinct if the
policyholder can benefit from the good or service either on its own or together with
other resources readily available to the policyholder. Readily available resources are
goods or services that are sold separately (by the entity or by another entity), or
resources that the policyholder has already got (from the entity or from other
transactions or events).
B35 A good or non-insurance service that is promised to the policyholder is not distinct
if:
(a) the cash flows and risks associated with the good or service are highly
interrelated with the cash flows and risks associated with the insurance
components in the contract; and
(b) the entity provides a significant service in integrating the good or non-
insurance service with the insurance components.
Measurement (paragraphs 2971)
Estimates of future cash flows (paragraphs 3335)
B36 This section addresses:
(a) unbiased use of all reasonable and supportable information available without
undue cost or effort (see paragraphs B37B41);
(b) market variables and non-market variables (see paragraphs B42B53);
(c) using current estimates (see paragraphs B54B60); and
(d) cash flows within the contract boundary (see paragraphs B61B71).
Unbiased use of all reasonable and supportable information available without
undue cost or effort (paragraph 33(a))
B37 The objective of estimating future cash flows is to determine the expected value, or
probability-weighted mean, of the full range of possible outcomes, considering all
reasonable and supportable information available at the reporting date without
undue cost or effort. Reasonable and supportable information available at the
reporting date without undue cost or effort includes information about past events
and current conditions, and forecasts of future conditions (see paragraph B41).
Information available from an entity's own information systems is considered to be
available without undue cost or effort.
B38 The starting point for an estimate of the cash flows is a range of scenarios that
reflects the full range of possible outcomes. Each scenario specifies the amount and
timing of the cash flows for a particular outcome, and the estimated probability of
that outcome. The cash flows from each scenario are discounted and weighted by
the estimated probability of that outcome to derive an expected present value.
Consequently, the objective is not to develop a most likely outcome, or a more-
likely-than-not outcome, for future cash flows.
B39 When considering the full range of possible outcomes, the objective is to
incorporate all reasonable and supportable information available without undue cost
or effort in an unbiased way, rather than to identify every possible scenario. In
practice, developing explicit scenarios is unnecessary if the resulting estimate is
consistent with the measurement objective of considering all reasonable and
supportable information available without undue cost or effort when determining
the mean. For example, if an entity estimates that the probability distribution of
outcomes is broadly consistent with a probability distribution that can be described
completely with a small number of parameters, it will be sufficient to estimate the
smaller number of parameters. Similarly, in some cases, relatively simple modelling
may give an answer within an acceptable range of precision, without the need for
many detailed simulations. However, in some cases, the cash flows may be driven
by complex underlying factors and may respond in a non-linear fashion to changes
in economic conditions. This may happen if, for example, the cash flows reflect a
series of interrelated options that are implicit or explicit. In such cases, more
sophisticated stochastic modelling is likely to be necessary to satisfy the
measurement objective.
B40 The scenarios developed shall include unbiased estimates of the probability of
catastrophic losses under existing contracts. Those scenarios exclude possible
claims under possible future contracts.
B41 An entity shall estimate the probabilities and amounts of future payments under
existing contracts on the basis of information obtained including:
(a) information about claims already reported by policyholders.
(b) other information about the known or estimated characteristics of the
insurance contracts.
(c) historical data about the entity's own experience, supplemented when
necessary with historical data from other sources. Historical data is adjusted to
reflect current conditions, for example, if:
(i) the characteristics of the insured population differ (or will differ, for
example, because of adverse selection) from those of the population that
has been used as a basis for the historical data;
(ii) there are indications that historical trends will not continue, that new
trends will emerge or that economic, demographic and other changes
may affect the cash flows that arise from the existing insurance
contracts; or
(iii) there have been changes in items such as underwriting procedures and
claims management procedures that may affect the relevance of
historical data to the insurance contracts.
(d) current price information, if available, for reinsurance contracts and other
financial instruments (if any) covering similar risks, such as catastrophe bonds
and weather derivatives, and recent market prices for transfers of insurance
contracts. This information shall be adjusted to reflect the differences between
the cash flows that arise from those reinsurance contracts or other financial
instruments, and the cash flows that would arise as the entity fulfils the
underlying contracts with the policyholder.
Market variables and non-market variables
B42 Ind AS 117 identifies two types of variables:
(a) market variables--variables that can be observed in, or derived directly from,
markets (for example, prices of publicly traded securities and interest rates);
and
(b) non-market variables--all other variables (for example, the frequency and
severity of insurance claims and mortality).
B43 Market variables will generally give rise to financial risk (for example, observable
interest rates) and non-market variables will generally give rise to non-financial risk
(for example, mortality rates). However, this will not always be the case. For
example, there may be assumptions that relate to financial risks for which variables
cannot be observed in, or derived directly from, markets (for example, interest rates
that cannot be observed in, or derived directly from, markets).
Market variables (paragraph 33(b))
B44 Estimates of market variables shall be consistent with observable market prices at
the measurement date. An entity shall maximise the use of observable inputs and
shall not substitute its own estimates for observable market data except as described
in paragraph 79 of Ind AS 113 Fair Value Measurement. Consistent with Ind AS
113, if variables need to be derived (for example, because no observable market
variables exist) they shall be as consistent as possible with observable market
variables.
B45 Market prices blend a range of views about possible future outcomes and also
reflect the risk preferences of market participants. Consequently, they are not a
single-point forecast of the future outcome. If the actual outcome differs from the
previous market price, this does not mean that the market price was `wrong'.
B46 An important application of market variables is the notion of a replicating asset or a
replicating portfolio of assets. A replicating asset is one whose cash flows exactly
match, in all scenarios, the contractual cash flows of a group of insurance contracts
in amount, timing and uncertainty. In some cases, a replicating asset may exist for
some of the cash flows that arise from a group of insurance contracts. The fair value
of that asset reflects both the expected present value of the cash flows from the asset
and the risk associated with those cash flows. If a replicating portfolio of assets
exists for some of the cash flows that arise from a group of insurance contracts, the
entity can use the fair value of those assets to measure the relevant fulfilment cash
flows instead of explicitly estimating the cash flows and discount rate.
B47 Ind AS 117 does not require an entity to use a replicating portfolio technique.
However, if a replicating asset or portfolio does exist for some of the cash flows
that arise from insurance contracts and an entity chooses to use a different
technique, the entity shall satisfy itself that a replicating portfolio technique would
be unlikely to lead to a materially different measurement of those cash flows.
B48 Techniques other than a replicating portfolio technique, such as stochastic
modelling techniques, may be more robust or easier to implement if there are
significant interdependencies between cash flows that vary based on returns on
assets and other cash flows. Judgement is required to determine the technique that
best meets the objective of consistency with observable market variables in specific
circumstances. In particular, the technique used must result in the measurement of
any options and guarantees included in the insurance contracts being consistent with
observable market prices (if any) for such options and guarantees.
Non-market variables
B49 Estimates of non-market variables shall reflect all reasonable and supportable
evidence available without undue cost or effort, both external and internal.
B50 Non-market external data (for example, national mortality statistics) may have more
or less relevance than internal data (for example, internally developed mortality
statistics), depending on the circumstances. For example, an entity that issues life
insurance contracts shall not rely solely on national mortality statistics, but shall
consider all other reasonable and supportable internal and external sources of
information available without undue cost or effort when developing unbiased
estimates of probabilities for mortality scenarios for its insurance contracts. In
developing those probabilities, an entity shall give more weight to the more
persuasive information. For example:
(a) internal mortality statistics may be more persuasive than national mortality
data if national data is derived from a large population that is not
representative of the insured population. This might be because, for
example, the demographic characteristics of the insured population could
significantly differ from those of the national population, meaning that an
entity would need to place more weight on the internal data and less weight
on the national statistics.
(b) conversely, if the internal statistics are derived from a small population with
characteristics that are believed to be close to those of the national
population, and the national statistics are current, an entity shall place more
weight on the national statistics.
B51 Estimated probabilities for non-market variables shall not contradict observable
market variables. For example, estimated probabilities for future inflation rate
scenarios shall be as consistent as possible with probabilities implied by market
interest rates.
B52 In some cases, an entity may conclude that market variables vary independently of
non-market variables. If so, the entity shall consider scenarios that reflect the range
of outcomes for the non-market variables, with each scenario using the same
observed value of the market variable.
B53 In other cases, market variables and non-market variables may be correlated. For
example, there may be evidence that lapse rates (a non-market variable) are
correlated with interest rates (a market variable). Similarly, there may be evidence
that claim levels for house or car insurance are correlated with economic cycles and
therefore with interest rates and expense amounts. The entity shall ensure that the
probabilities for the scenarios and the risk adjustments for the non-financial risk
that relates to the market variables are consistent with the observed market prices
that depend on those market variables.
Using current estimates (paragraph 33(c))
B54 In estimating each cash flow scenario and its probability, an entity shall use all
reasonable and supportable information available without undue cost or effort. An
entity shall review the estimates that it made at the end of the previous reporting
period and update them. In doing so, an entity shall consider whether:
(a) the updated estimates faithfully represent the conditions at the end of the
reporting period.
(b) the changes in estimates faithfully represent the changes in conditions
during the period. For example, suppose that estimates were at one end of a
reasonable range at the beginning of the period. If the conditions have not
changed, shifting the estimates to the other end of the range at the end of the
period would not faithfully represent what has happened during the period.
If an entity's most recent estimates are different from its previous estimates,
but conditions have not changed, it shall assess whether the new
probabilities assigned to each scenario are justified. In updating its estimates
of those probabilities, the entity shall consider both the evidence that
supported its previous estimates and all newly available evidence, giving
more weight to the more persuasive evidence.
B55 The probability assigned to each scenario shall reflect the conditions at the end of
the reporting period. Consequently, applying Ind AS 10 Events after the Reporting
Period, an event occurring after the end of the reporting period that resolves an
uncertainty that existed at the end of the reporting period does not provide evidence
of the conditions that existed at that date. For example, there may be a 20 per cent
probability at the end of the reporting period that a major storm will strike during
the remaining six months of an insurance contract. After the end of the reporting
period but before the financial statements are authorised for issue, a major storm
strikes. The fulfilment cash flows under that contract shall not reflect the storm that,
with hindsight, is known to have occurred. Instead, the cash flows included in the
measurement include the 20 per cent probability apparent at the end of the reporting
period (with disclosure applying Ind AS 10 that a non-adjusting event occurred
after the end of the reporting period).
B56 Current estimates of expected cash flows are not necessarily identical to the most
recent actual experience. For example, suppose that mortality experience in the
reporting period was 20 per cent worse than the previous mortality experience and
previous expectations of mortality experience. Several factors could have caused
the sudden change in experience, including:
(a) lasting changes in mortality;
(b) changes in the characteristics of the insured population (for example,
changes in underwriting or distribution, or selective lapses by policyholders
in unusually good health);
(c) random fluctuations; or
(d) identifiable non-recurring causes.
B57 An entity shall investigate the reasons for the change in experience and develop
new estimates of cash flows and probabilities in the light of the most recent
experience, the earlier experience and other information. The result for the example
in paragraph B56 would typically be that the expected present value of death
benefits changes, but not by as much as 20 per cent. In the example in paragraph
B56, if mortality rates continue to be significantly higher than the previous
estimates for reasons that are expected to continue, the estimated probability
assigned to the high-mortality scenarios will increase.
B58 Estimates of non-market variables shall include information about the current level
of insured events and information about trends. For example, mortality rates have
consistently declined over long periods in many countries. The determination of the
fulfilment cash flows reflects the probabilities that would be assigned to each
possible trend scenario, taking account of all reasonable and supportable
information available without undue cost or effort.
B59 Similarly, if cash flows allocated to a group of insurance contracts are sensitive to
inflation, the determination of the fulfilment cash flows shall reflect current
estimates of possible future inflation rates. Because inflation rates are likely to be
correlated with interest rates, the measurement of fulfilment cash flows shall reflect
the probabilities for each inflation scenario in a way that is consistent with the
probabilities implied by the market interest rates used in estimating the discount
rate (see paragraph B51).
B60 When estimating the cash flows, an entity shall take into account current
expectations of future events that might affect those cash flows. The entity shall
develop cash flow scenarios that reflect those future events, as well as unbiased
estimates of the probability of each scenario. However, an entity shall not take into
account current expectations of future changes in legislation that would change or
discharge the present obligation or create new obligations under the existing
insurance contract until the change in legislation is substantively enacted.
Cash flows within the contract boundary (paragraph 34)
B61 Estimates of cash flows in a scenario shall include all cash flows within the
boundary of an existing contract and no other cash flows. An entity shall apply
paragraph 2 in determining the boundary of an existing contract.
B62 Many insurance contracts have features that enable policyholders to take actions
that change the amount, timing, nature or uncertainty of the amounts they will
receive. Such features include renewal options, surrender options, conversion
options and options to stop paying premiums while still receiving benefits under the
contracts. The measurement of a group of insurance contracts shall reflect, on an
expected value basis, the entity's current estimates of how the policyholders in the
group will exercise the options available, and the risk adjustment for non-financial
risk shall reflect the entity's current estimates of how the actual behaviour of the
policyholders may differ from the expected behaviour. This requirement to
determine the expected value applies regardless of the number of contracts in a
group; for example it applies even if the group comprises a single contract. Thus,
the measurement of a group of insurance contracts shall not assume a 100 per cent
probability that policyholders will:
(a) surrender their contracts, if there is some probability that some of the
policyholders will not; or
(b) continue their contracts, if there is some probability that some of the
policyholders will not.
B63 When an issuer of an insurance contract is required by the contract to renew or
otherwise continue the contract, it shall apply paragraph 34 to assess whether
premiums and related cash flows that arise from the renewed contract are within the
boundary of the original contract.
B64 Paragraph 34 refers to an entity's practical ability to set a price at a future date (a
renewal date) that fully reflects the risks in the contract from that date. An entity
has that practical ability in the absence of constraints that prevent the entity from
setting the same price it would for a new contract with the same characteristics as
the existing contract issued on that date, or if it can amend the benefits to be
consistent with the price it will charge. Similarly, an entity has that practical ability
to set a price when it can reprice an existing contract so that the price reflects
overall changes in the risks in a portfolio of insurance contracts, even if the price set
for each individual policyholder does not reflect the change in risk for that specific
policyholder. When assessing whether the entity has the practical ability to set a
price that fully reflects the risks in the contract or portfolio, it shall consider all the
risks that it would consider when underwriting equivalent contracts on the renewal
date for the remaining coverage. In determining the estimates of future cash flows
at the end of a reporting period, an entity shall reassess the boundary of an
insurance contract to include the effect of changes in circumstances on the entity's
substantive rights and obligations.
B65 Cash flows within the boundary of an insurance contract are those that relate
directly to the fulfilment of the contract, including cash flows for which the entity
has discretion over the amount or timing. The cash flows within the boundary
include:
(a) premiums (including premium adjustments and instalment premiums) from
a policyholder and any additional cash flows that result from those
premiums.
(b) payments to (or on behalf of) a policyholder, including claims that have
already been reported but have not yet been paid (ie reported claims),
incurred claims for events that have occurred but for which claims have not
been reported and all future claims for which the entity has a substantive
obligation (see paragraph 34).
(c) payments to (or on behalf of) a policyholder that vary depending on returns
on underlying items.
(d) payments to (or on behalf of) a policyholder resulting from derivatives, for
example, options and guarantees embedded in the contract, to the extent that
those options and guarantees are not separated from the insurance contract
(see paragraph 11(a)).
(e) an allocation of insurance acquisition cash flows attributable to the portfolio
to which the contract belongs.
(f) claim handling costs (ie the costs the entity will incur in investigating,
processing and resolving claims under existing insurance contracts,
including legal and loss-adjusters' fees and internal costs of investigating
claims and processing claim payments).
(g) costs the entity will incur in providing contractual benefits paid in kind.
(h) policy administration and maintenance costs, such as costs of premium
billing and handling policy changes (for example, conversions and
reinstatements). Such costs also include recurring commissions that are
expected to be paid to intermediaries if a particular policyholder continues
to pay the premiums within the boundary of the insurance contract.
(i) transaction-based taxes (such as premium taxes, value added taxes and
goods and services taxes) and levies (such as fire service levies and
guarantee fund assessments) that arise directly from existing insurance
contracts, or that can be attributed to them on a reasonable and consistent
basis.
(j) payments by the insurer in a fiduciary capacity to meet tax obligations
incurred by the policyholder, and related receipts.
(k) potential cash inflows from recoveries (such as salvage and subrogation) on
future claims covered by existing insurance contracts and, to the extent that
they do not qualify for recognition as separate assets, potential cash inflows
from recoveries on past claims.
(l) an allocation of fixed and variable overheads (such as the costs of
accounting, human resources, information technology and support, building
depreciation, rent, and maintenance and utilities) directly attributable to
fulfilling insurance contracts. Such overheads are allocated to groups of
contracts using methods that are systematic and rational, and are
consistently applied to all costs that have similar characteristics.
(m) any other costs specifically chargeable to the policyholder under the terms
of the contract.
B66 The following cash flows shall not be included when estimating the cash flows that
will arise as the entity fulfils an existing insurance contract:
(a) investment returns. Investments are recognised, measured and presented
separately.
(b) cash flows (payments or receipts) that arise under reinsurance contracts
held. Reinsurance contracts held are recognised, measured and presented
separately.
(c) cash flows that may arise from future insurance contracts, ie cash flows
outside the boundary of existing contracts (see paragraphs 3435).
(d) cash flows relating to costs that cannot be directly attributed to the portfolio
of insurance contracts that contain the contract, such as some product
development and training costs. Such costs are recognised in profit or loss
when incurred.
(e) cash flows that arise from abnormal amounts of wasted labour or other
resources that are used to fulfil the contract. Such costs are recognised in
profit or loss when incurred.
(f) income tax payments and receipts the insurer does not pay or receive in a
fiduciary capacity. Such payments and receipts are recognised, measured
and presented separately applying Ind AS 12 Income Taxes.
(g) cash flows between different components of the reporting entity, such as
policyholder funds and shareholder funds, if those cash flows do not change
the amount that will be paid to the policyholders.
(h) cash flows arising from components separated from the insurance contract
and accounted for using other applicable Standards (see paragraphs 1013).
Contracts with cash flows that affect or are affected by cash flows to policyholders
of other contracts
B67 Some insurance contracts affect the cash flows to policyholders of other contracts
by requiring:
(a) the policyholder to share with policyholders of other contracts the returns on
the same specified pool of underlying items; and
(b) either:
(i) the policyholder to bear a reduction in their share of the returns on
the underlying items because of payments to policyholders of other
contracts that share in that pool, including payments arising under
guarantees made to policyholders of those other contracts; or
(ii) policyholders of other contracts to bear a reduction in their share of
returns on the underlying items because of payments to the
policyholder, including payments arising from guarantees made to
the policyholder.
B68 Sometimes, such contracts will affect the cash flows to policyholders of contracts in
other groups. The fulfilment cash flows of each group reflect the extent to which the
contracts in the group cause the entity to be affected by expected cash flows,
whether to policyholders in that group or to policyholders in another group. Hence
the fulfilment cash flows for a group:
(a) include payments arising from the terms of existing contracts to
policyholders of contracts in other groups, regardless of whether those
payments are expected to be made to current or future policyholders; and
(b) exclude payments to policyholders in the group that, applying (a), have been
included in the fulfilment cash flows of another group.
B69 For example, to the extent that payments to policyholders in one group are reduced
from a share in the returns on underlying items of CU350 to CU250 because of
payments of a guaranteed amount to policyholders in another group, the fulfilment
cash flows of the first group would include the payments of CU100 (ie would be
CU350) and the fulfilment cash flows of the second group would exclude CU100 of
the guaranteed amount.
B70 Different practical approaches can be used to determine the fulfilment cash flows of
groups of contracts that affect or are affected by cash flows to policyholders of
contracts in other groups. In some cases, an entity might be able to identify the
change in the underlying items and resulting change in the cash flows only at a
higher level of aggregation than the groups. In such cases, the entity shall allocate
the effect of the change in the underlying items to each group on a systematic and
rational basis.
B71 After all the coverage has been provided to the contracts in a group, the fulfilment
cash flows may still include payments expected to be made to current policyholders
in other groups or future policyholders. An entity is not required to continue to
allocate such fulfilment cash flows to specific groups but can instead recognise and
measure a liability for such fulfilment cash flows arising from all groups.
Discount rates (paragraph 36)
B72 An entity shall use the following discount rates in applying Ind AS 117:
(a) to measure the fulfilment cash flows--current discount rates applying
paragraph 36;
(b) to determine the interest to accrete on the contractual service margin
applying paragraph 44(b) for insurance contracts without direct participation
features--discount rates determined at the date of initial recognition of a
group of contracts, applying paragraph 36 to nominal cash flows that do not
vary based on the returns on any underlying items;
(c) to measure the changes to the contractual service margin applying paragraph
B96(a)B96(c) for insurance contracts without direct participation
features--discount rates applying paragraph 36 determined on initial
recognition;
(d) for groups of contracts applying the premium allocation approach that have
a significant financing component, to adjust the carrying amount of the
liability for remaining coverage applying paragraph 56--discount rates
applying paragraph 36 determined on initial recognition;
(e) if an entity chooses to disaggregate insurance finance income or expenses
between profit or loss and other comprehensive income (see paragraph 88),
to determine the amount of the insurance finance income or expenses
included in profit or loss:
(i) for groups of insurance contracts for which changes in assumptions
that relate to financial risk do not have a substantial effect on the
amounts paid to policyholders, applying paragraph B131--discount
rates determined at the date of initial recognition of a group of
contracts, applying paragraph 36 to nominal cash flows that do not
vary based on the returns on any underlying items;
(ii) for groups of insurance contracts for which changes in assumptions
that relate to financial risk have a substantial effect on the amounts
paid to policyholders, applying paragraph B132(a)(i)--discount rates
that allocate the remaining revised expected finance income or
expenses over the remaining duration of the group of contracts at a
constant rate; and
(iii) for groups of contracts applying the premium allocation approach
applying paragraphs 59(b) and B133--discount rates determined at
the date of the incurred claim, applying paragraph 36 to nominal
cash flows that do not vary based on the returns on any underlying
items.
B73 To determine the discount rates at the date of initial recognition of a group of
contracts described in paragraphs B72(b)B72(e), an entity may use weighted-
average discount rates over the period that contracts in the group are issued, which
applying paragraph 22 cannot exceed one year.
B74 Estimates of discount rates shall be consistent with other estimates used to measure
insurance contracts to avoid double counting or omissions; for example:
(a) cash flows that do not vary based on the returns on any underlying items
shall be discounted at rates that do not reflect any such variability;
(b) cash flows that vary based on the returns on any financial underlying items
shall be:
(i) discounted using rates that reflect that variability; or
(ii) adjusted for the effect of that variability and discounted at a rate that
reflects the adjustment made.
(c) nominal cash flows (ie those that include the effect of inflation) shall be
discounted at rates that include the effect of inflation; and
(d) real cash flows (ie those that exclude the effect of inflation) shall be
discounted at rates that exclude the effect of inflation.
B75 Paragraph B74(b) requires cash flows that vary based on the returns on underlying
items to be discounted using rates that reflect that variability, or to be adjusted for
the effect of that variability and discounted at a rate that reflects the adjustment
made. The variability is a relevant factor regardless of whether it arises because of
contractual terms or because the entity exercises discretion, and regardless of
whether the entity holds the underlying items.
B76 Cash flows that vary with returns on underlying items with variable returns, but that
are subject to a guarantee of a minimum return, do not vary solely based on the
returns on the underlying items, even when the guaranteed amount is lower than the
expected return on the underlying items. Hence, an entity shall adjust the rate that
reflects the variability of the returns on the underlying items for the effect of the
guarantee, even when the guaranteed amount is lower than the expected return on
the underlying items.
B77 Ind AS 117 does not require an entity to divide estimated cash flows into those that
vary based on the returns on underlying items and those that do not. If an entity
does not divide the estimated cash flows in this way, the entity shall apply discount
rates appropriate for the estimated cash flows as a whole; for example, using
stochastic modelling techniques or risk-neutral measurement techniques.
B78 Discount rates shall include only relevant factors, ie factors that arise from the time
value of money, the characteristics of the cash flows and the liquidity characteristics
of the insurance contracts. Such discount rates may not be directly observable in the
market. Hence, when observable market rates for an instrument with the same
characteristics are not available, or observable market rates for similar instruments
are available but do not separately identify the factors that distinguish the
instrument from the insurance contracts, an entity shall estimate the appropriate
rates. Ind AS 117 does not require a particular estimation technique for determining
discount rates. In applying an estimation technique, an entity shall:
(a) maximise the use of observable inputs (see paragraph B44) and reflect all
reasonable and supportable information on non-market variables available
without undue cost or effort, both external and internal (see paragraph B49).
In particular, the discount rates used shall not contradict any available and
relevant market data, and any non-market variables used shall not contradict
observable market variables.
(b) reflect current market conditions from the perspective of a market
participant.
(c) exercise judgement to assess the degree of similarity between the features of
the insurance contracts being measured and the features of the instrument
for which observable market prices are available and adjust those prices to
reflect the differences between them.
B79 For cash flows of insurance contracts that do not vary based on the returns on
underlying items, the discount rate reflects the yield curve in the appropriate
currency for instruments that expose the holder to no or negligible credit risk,
adjusted to reflect the liquidity characteristics of the group of insurance contracts.
That adjustment shall reflect the difference between the liquidity characteristics of
the group of insurance contracts and the liquidity characteristics of the assets used
to determine the yield curve. Yield curves reflect assets traded in active markets
that the holder can typically sell readily at any time without incurring significant
costs. In contrast, under some insurance contracts the entity cannot be forced to
make payments earlier than the occurrence of insured events, or dates specified in
the contracts.
B80 Hence, for cash flows of insurance contracts that do not vary based on the returns
on underlying items, an entity may determine discount rates by adjusting a liquid
risk-free yield curve to reflect the differences between the liquidity characteristics
of the financial instruments that underlie the rates observed in the market and the
liquidity characteristics of the insurance contracts (a bottom-up approach).
B81 Alternatively, an entity may determine the appropriate discount rates for insurance
contracts based on a yield curve that reflects the current market rates of return
implicit in a fair value measurement of a reference portfolio of assets (a top-down
approach). An entity shall adjust that yield curve to eliminate any factors that are
not relevant to the insurance contracts, but is not required to adjust the yield curve
for differences in liquidity characteristics of the insurance contracts and the
reference portfolio.
B82 In estimating the yield curve described in paragraph B81:
(a) if there are observable market prices in active markets for assets in the
reference portfolio, an entity shall use those prices (consistent with
paragraph 69 of Ind AS 113).
(b) if a market is not active, an entity shall adjust observable market prices for
similar assets to make them comparable to market prices for the assets being
measured (consistent with paragraph 83 of Ind AS 113).
(c) if there is no market for assets in the reference portfolio, an entity shall
apply an estimation technique. For such assets (consistent with paragraph 89
of Ind AS 113) an entity shall:
(i) develop unobservable inputs using the best information available in
the circumstances. Such inputs might include the entity's own data
and, in the context of Ind AS 117, the entity might place more
weight on long-term estimates than on short-term fluctuations; and
(ii) adjust those data to reflect all information about market participant
assumptions that is reasonably available.
B83 In adjusting the yield curve, an entity shall adjust market rates observed in recent
transactions in instruments with similar characteristics for movements in market
factors since the transaction date, and shall adjust observed market rates to reflect
the degree of dissimilarity between the instrument being measured and the
instrument for which transaction prices are observable. For cash flows of insurance
contracts that do not vary based on the returns on the assets in the reference
portfolio, such adjustments include:
(a) adjusting for differences between the amount, timing and uncertainty of the
cash flows of the assets in the portfolio and the amount, timing and
uncertainty of the cash flows of the insurance contracts; and
(b) excluding market risk premiums for credit risk, which are relevant only to
the assets included in the reference portfolio.
B84 In principle, for cash flows of insurance contracts that do not vary based on the
returns of the assets in the reference portfolio, there should be a single illiquid risk-
free yield curve that eliminates all uncertainty about the amount and timing of cash
flows. However, in practice the top-down approach and the bottom-up approach
may result in different yield curves, even in the same currency. This is because of
the inherent limitations in estimating the adjustments made under each approach,
and the possible lack of an adjustment for different liquidity characteristics in the
top-down approach. An entity is not required to reconcile the discount rate
determined under its chosen approach with the discount rate that would have been
determined under the other approach.
B85 Ind AS 117 does not specify restrictions on the reference portfolio of assets used in
applying paragraph B81. However, fewer adjustments would be required to
eliminate factors that are not relevant to the insurance contracts when the reference
portfolio of assets has similar characteristics. For example, if the cash flows from
the insurance contracts do not vary based on the returns on underlying items, fewer
adjustments would be required if an entity used debt instruments as a starting point
rather than equity instruments. For debt instruments, the objective would be to
eliminate from the total bond yield the effect of credit risk and other factors that are
not relevant to the insurance contracts. One way to estimate the effect of credit risk
is to use the market price of a credit derivative as a reference point.
Risk adjustment for non-financial risk (paragraph 37)
B86 The risk adjustment for non-financial risk relates to risk arising from insurance
contracts other than financial risk. Financial risk is included in the estimates of the
future cash flows or the discount rate used to adjust the cash flows. The risks
covered by the risk adjustment for non-financial risk are insurance risk and other
non-financial risks such as lapse risk and expense risk (see paragraph B14).
B87 The risk adjustment for non-financial risk for insurance contracts measures the
compensation that the entity would require to make the entity indifferent between:
(a) fulfilling a liability that has a range of possible outcomes arising from non-
financial risk; and
(b) fulfilling a liability that will generate fixed cash flows with the same
expected present value as the insurance contracts.
For example, the risk adjustment for non-financial risk would measure the
compensation the entity would require to make it indifferent between fulfilling a
liability that--because of non-financial risk--has a 50 per cent probability of being
CU90 and a 50 per cent probability of being CU110, and fulfilling a liability that is
fixed at CU100. As a result, the risk adjustment for non-financial risk conveys
information to users of financial statements about the amount charged by the entity
for the uncertainty arising from non-financial risk about the amount and timing of
cash flows.
B88 Because the risk adjustment for non-financial risk reflects the compensation the
entity would require for bearing the non-financial risk arising from the uncertain
amount and timing of the cash flows, the risk adjustment for non-financial risk also
reflects:
(a) the degree of diversification benefit the entity includes when determining
the compensation it requires for bearing that risk; and
(b) both favourable and unfavourable outcomes, in a way that reflects the
entity's degree of risk aversion.
B89 The purpose of the risk adjustment for non-financial risk is to measure the effect of
uncertainty in the cash flows that arise from insurance contracts, other than
uncertainty arising from financial risk. Consequently, the risk adjustment for non-
financial risk shall reflect all non-financial risks associated with the insurance
contracts. It shall not reflect the risks that do not arise from the insurance contracts,
such as general operational risk.
B90 The risk adjustment for non-financial risk shall be included in the measurement in
an explicit way. The risk adjustment for non-financial risk is conceptually separate
from the estimates of future cash flows and the discount rates that adjust those cash
flows. The entity shall not double-count the risk adjustment for non-financial risk
by, for example, also including the risk adjustment for non-financial risk implicitly
when determining the estimates of future cash flows or the discount rates. The
discount rates that are disclosed to comply with paragraph 120 shall not include any
implicit adjustments for non-financial risk.
B91 Ind AS 117 does not specify the estimation technique(s) used to determine the risk
adjustment for non-financial risk. However, to reflect the compensation the entity
would require for bearing the non-financial risk, the risk adjustment for non-
financial risk shall have the following characteristics:
(a) risks with low frequency and high severity will result in higher risk
adjustments for non-financial risk than risks with high frequency and low
severity;
(b) for similar risks, contracts with a longer duration will result in higher risk
adjustments for non-financial risk than contracts with a shorter duration;
(c) risks with a wider probability distribution will result in higher risk
adjustments for non-financial risk than risks with a narrower distribution;
(d) the less that is known about the current estimate and its trend, the higher will
be the risk adjustment for non-financial risk; and
(e) to the extent that emerging experience reduces uncertainty about the amount
and timing of cash flows, risk adjustments for non-financial risk will
decrease and vice versa.
B92 An entity shall apply judgement when determining an appropriate estimation
technique for the risk adjustment for non-financial risk. When applying that
judgement, an entity shall also consider whether the technique provides concise and
informative disclosure so that users of financial statements can benchmark the
entity's performance against the performance of other entities. Paragraph 119
requires an entity that uses a technique other than the confidence level technique for
determining the risk adjustment for non-financial risk to disclose the technique used
and the confidence level corresponding to the results of that technique.
Initial recognition of transfers of insurance contracts and business
combinations (paragraph 39)
B93 When an entity acquires insurance contracts issued or reinsurance contracts held in
a transfer of insurance contracts that do not form a business or in a business
combination, the entity shall apply paragraphs 1424 to identify the groups of
contracts acquired, as if it had entered into the contracts on the date of the
transaction.
B94 An entity shall use the consideration received or paid for the contracts as a proxy
for the premiums received. The consideration received or paid for the contracts
excludes the consideration received or paid for any other assets and liabilities
acquired in the same transaction. In a business combination, the consideration
received or paid is the fair value of the contracts at that date. In determining that fair
value, an entity shall not apply paragraph 47 of ind AS 113 (relating to demand
features).
B95 Unless the premium allocation approach for the liability for remaining coverage in
paragraphs 5559 applies, on initial recognition the contractual service margin is
calculated applying paragraph 38 for acquired insurance contracts issued and
paragraph 65 for acquired reinsurance contracts held using the consideration
received or paid for the contracts as a proxy for the premiums received or paid at
the date of initial recognition. If acquired insurance contracts issued are onerous,
applying paragraph 47, the entity shall recognise the excess of the fulfilment cash
flows over the consideration paid or received as part of goodwill or gain on a
bargain purchase for contracts acquired in a business combination or as a loss in
profit or loss for contracts acquired in a transfer. The entity shall establish a loss
component of the liability for remaining coverage for that excess, and apply
paragraphs 4952 to allocate subsequent changes in fulfilment cash flows to that
loss component.
Changes in the carrying amount of the contractual service margin
for insurance contracts without direct participation features
(paragraph 44)
B96 For insurance contracts without direct participation features, paragraph 44(c)
requires an adjustment to the contractual service margin of a group of insurance
contracts for changes in fulfilment cash flows that relate to future service. These
changes comprise:
(a) experience adjustments arising from premiums received in the period that
relate to future service, and related cash flows such as insurance acquisition
cash flows and premium-based taxes, measured at the discount rates
specified in paragraph B72(c);
(b) changes in estimates of the present value of the future cash flows in the
liability for remaining coverage, except those described in paragraph
B97(a), measured at the discount rates specified in paragraph B72(c);
(c) differences between any investment component expected to become payable
in the period and the actual investment component that becomes payable in
the period, measured at the discount rates specified in paragraph B72(c); and
(d) changes in the risk adjustment for non-financial risk that relate to future
service.
B97 An entity shall not adjust the contractual service margin for a group of insurance
contracts without direct participation features for the following changes in
fulfilment cash flows because they do not relate to future service:
(a) the effect of the time value of money and changes in the time value of
money and the effect of financial risk and changes in financial risk (being
the effect, if any, on estimated future cash flows and the effect of a change
in discount rate);
(b) changes in estimates of fulfilment cash flows in the liability for incurred
claims; and
(c) experience adjustments, except those described in paragraph B96(a).
B98 The terms of some insurance contracts without direct participation features give
an entity discretion over the cash flows to be paid to policyholders. A change in
the discretionary cash flows is regarded as relating to future service, and
accordingly adjusts the contractual service margin. To determine how to identify
a change in discretionary cash flows, an entity shall specify at inception of the
contract the basis on which it expects to determine its commitment under the
contract; for example, based on a fixed interest rate, or on returns that vary based
on specified asset returns.
B99 An entity shall use that specification to distinguish between the effect of changes
in assumptions that relate to financial risk on that commitment (which do not
adjust the contractual service margin) and the effect of discretionary changes to
that commitment (which adjust the contractual service margin).
B100 If an entity cannot specify at inception of the contract what it regards as its
commitment under the contract and what it regards as discretionary, it shall
regard its commitment to be the return implicit in the estimate of the fulfilment
cash flows at inception of the contract, updated to reflect current assumptions that
relate to financial risk.
Changes in the carrying amount of the contractual service margin
for insurance contracts with direct participation features
(paragraph 45)
B101 Insurance contracts with direct participation features are insurance contracts that
are substantially investment-related service contracts under which an entity
promises an investment return based on underlying items. Hence, they are defined
as insurance contracts for which:
(a) the contractual terms specify that the policyholder participates in a share
of a clearly identified pool of underlying items (see paragraphs B105
B106);
(b) the entity expects to pay to the policyholder an amount equal to a
substantial share of the fair value returns on the underlying items (see
paragraph B107); and
(c) the entity expects a substantial proportion of any change in the amounts to
be paid to the policyholder to vary with the change in fair value of the
underlying items (see paragraph B107).
B102 An entity shall assess whether the conditions in paragraph B101 are met using its
expectations at inception of the contract and shall not reassess the conditions
afterwards, unless the contract is modified, applying paragraph 72.
B103 To the extent that insurance contracts in a group affect the cash flows to
policyholders of contracts in other groups (see paragraphs B67B71), an entity
shall assess whether the conditions in paragraph B101 are met by considering the
cash flows that the entity expects to pay the policyholders determined applying
paragraphs B68B70.
B104 The conditions in paragraph B101 ensure that insurance contracts with direct
participation features are contracts under which the entity's obligation to the
policyholder is the net of:
(a) the obligation to pay the policyholder an amount equal to the fair value of
the underlying items; and
(b) a variable fee (see paragraphs B110B118) that the entity will deduct
from (a) in exchange for the future service provided by the insurance
contract, comprising:
(i) the entity's share of the fair value of the underlying items; less
(ii) fulfilment cash flows that do not vary based on the returns on
underlying items.
B105 A share referred to in paragraph B101(a) does not preclude the existence of the
entity's discretion to vary the amounts paid to the policyholder. However, the link
to the underlying items must be enforceable (see paragraph 2).
B106 The pool of underlying items referred to in paragraph B101(a) can comprise any
items, for example a reference portfolio of assets, the net assets of the entity, or a
specified subset of the net assets of the entity, as long as they are clearly
identified by the contract. An entity need not hold the identified pool of
underlying items. However, a clearly identified pool of underlying items does not
exist when:
(a) an entity can change the underlying items that determine the amount of
the entity's obligation with retrospective effect; or
(b) there are no underlying items identified, even if the policyholder could be
provided with a return that generally reflects the entity's overall
performance and expectations, or the performance and expectations of a
subset of assets the entity holds. An example of such a return is a crediting
rate or dividend payment set at the end of the period to which it relates. In
this case, the obligation to the policyholder reflects the crediting rate or
dividend amounts the entity has set, and does not reflect identified
underlying items.
B107 Paragraph B101(b) requires that the entity expects a substantial share of the fair
value returns on the underlying items will be paid to the policyholder and
paragraph B101(c) requires that the entity expects a substantial proportion of any
change in the amounts to be paid to the policyholder to vary with the change in
fair value of the underlying items. An entity shall:
(a) interpret the term `substantial' in both paragraphs in the context of the
objective of insurance contracts with direct participation features being
contracts under which the entity provides investment-related services and
is compensated for the services by a fee that is determined by reference to
the underlying items; and
(b) assess the variability in the amounts in paragraphs B101(b) and B101(c):
(i) over the duration of the group of insurance contracts; and
(ii) on a present value probability-weighted average basis, not a best or
worst outcome basis (see paragraphs B37B38).
B108 For example, if the entity expects to pay a substantial share of the fair value
returns on underlying items, subject to a guarantee of a minimum return, there
will be scenarios in which:
(a) the cash flows that the entity expects to pay to the policyholder vary with
the changes in the fair value of the underlying items because the
guaranteed return and other cash flows that do not vary based on the
returns on underlying items do not exceed the fair value return on the
underlying items; and
(b) the cash flows that the entity expects to pay to the policyholder do not
vary with the changes in the fair value of the underlying items because the
guaranteed return and other cash flows that do not vary based on the
returns on underlying items exceed the fair value return on the underlying
items.
The entity's assessment of the variability in paragraph B101(c) for this example
will reflect a present value probability-weighted average of all these scenarios.
B109 Reinsurance contracts issued and reinsurance contracts held cannot be insurance
contracts with direct participation features for the purposes of Ind AS 117.
B110 For insurance contracts with direct participation features, the contractual service
margin is adjusted to reflect the variable nature of the fee. Hence, changes in the
amounts set out in paragraph B104 are treated as set out in paragraphs B111
B114.
B111 Changes in the obligation to pay the policyholder an amount equal to the fair
value of the underlying items (paragraph B104(a)) do not relate to future service
and do not adjust the contractual service margin.
B112 Changes in the entity's share of the fair value of the underlying items (paragraph
B104(b)(i)) relate to future service and adjust the contractual service margin,
applying paragraph 45(b).
B113 Changes in the fulfilment cash flows that do not vary based on the returns on
underlying items (paragraph B104(b)(ii)) comprise:
(a) changes in estimates of the fulfilment cash flows other than those
specified in (b). An entity shall apply paragraphs B96B97, consistent
with insurance contracts without direct participation features, to determine
to what extent they relate to future service and, applying paragraph 45(c),
adjust the contractual service margin. All the adjustments are measured
using current discount rates.
(b) the change in the effect of the time value of money and financial
risks not arising from the underlying items; for example, the effect of
financial guarantees. These relate to future service and, applying
paragraph 45(c), adjust the contractual service margin, except to the extent
that paragraph B115 applies.
B114 An entity is not required to identify the adjustments to the contractual service
margin required by paragraphs B112 and B113 separately. Instead, a combined
amount may be determined for some or all of the adjustments.
Risk mitigation
B115 To the extent that an entity meets the conditions in paragraph B116, it may
choose not to recognise a change in the contractual service margin to reflect some
or all of the changes in the effect of financial risk on the entity's share of the
underlying items (see paragraph B112) or the fulfilment cash flows set out in
paragraph B113(b).
B116 To apply paragraph B115, an entity must have a previously documented risk-
management objective and strategy for using derivatives to mitigate financial risk
arising from the insurance contracts and, in applying that objective and strategy:
(a) the entity uses a derivative to mitigate the financial risk arising from the
insurance contracts.
(b) an economic offset exists between the insurance contracts and the
derivative, ie the values of the insurance contracts and the derivative
generally move in opposite directions because they respond in a similar
way to the changes in the risk being mitigated. An entity shall not
consider accounting measurement differences in assessing the economic
offset.
(c) credit risk does not dominate the economic offset.
B117 The entity shall determine the fulfilment cash flows in a group to which paragraph
B115 applies in a consistent manner in each reporting period.
B118 If any of the conditions in paragraph B116 ceases to be met, an entity shall:
(a) cease to apply paragraph B115 from that date; and
(b) not make any adjustment for changes previously recognised in profit or loss.
Recognition of the contractual service margin in profit or loss
B119 An amount of the contractual service margin for a group of insurance contracts is
recognised in profit or loss in each period to reflect the services provided under the
group of insurance contracts in that period (see paragraphs 44(e), 45(e) and 66(e)).
The amount is determined by:
(a) identifying the coverage units in the group. The number of coverage units in
a group is the quantity of coverage provided by the contracts in the group,
determined by considering for each contract the quantity of the benefits
provided under a contract and its expected coverage duration.
(b) allocating the contractual service margin at the end of the period (before
recognising any amounts in profit or loss to reflect the services provided in
the period) equally to each coverage unit provided in the current period and
expected to be provided in the future.
(c) recognising in profit or loss the amount allocated to coverage units provided
in the period.
Insurance revenue (paragraphs 83 and 85)
B120 The total insurance revenue for a group of insurance contracts is the consideration
for the contracts, ie the amount of premiums paid to the entity:
(a) adjusted for a financing effect; and
(b) excluding any investment components.
B121 Paragraph 83 requires the amount of insurance revenue recognised in a period to
depict the transfer of promised services at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those services. The total
consideration for a group of contracts covers the following amounts:
(a) amounts related to the provision of services, comprising:
(i) insurance service expenses, excluding any amounts allocated to the
loss component of the liability for remaining coverage;
(ii) the risk adjustment for non-financial risk, excluding any amounts
allocated to the loss component of the liability for remaining coverage;
and
(iii) the contractual service margin.
(b) amounts related to insurance acquisition cash flows.
B122 Insurance revenue for a period relating to the amounts described in paragraph
B121(a) is determined as set out in paragraphs B123B124. Insurance revenue for a
period relating to the amounts described in paragraph B121(b) is determined as set
out in paragraph B125.
B123 Applying Ind AS 115, when an entity provides services, it derecognises the
performance obligation for those services and recognises revenue. Consistently,
applying Ind AS 117, when an entity provides services in a period, it reduces the
liability for remaining coverage for the services provided and recognises insurance
revenue. The reduction in the liability for remaining coverage that gives rise to
insurance revenue excludes changes in the liability that do not relate to services
expected to be covered by the consideration received by the entity. Those changes
are:
(a) changes that do not relate to services provided in the period, for example:
(i) changes resulting from cash inflows from premiums received;
(ii) changes that relate to investment components in the period;
(iii) changes that relate to transaction-based taxes collected on behalf of
third parties (such as premium taxes, value added taxes and goods
and services taxes) (see paragraph B65(i));
(iv) insurance finance income or expenses;
(v) insurance acquisition cash flows (see paragraph B125); and
(vi) derecognition of liabilities transferred to a third party.
(b) changes that relate to services, but for which the entity does not expect
consideration, ie increases and decreases in the loss component of the
liability for remaining coverage (see paragraphs 4752).
B124 Consequently, insurance revenue for the period can also be analysed as the total of
the changes in the liability for remaining coverage in the period that relates to
services for which the entity expects to receive consideration. Those changes are:
(a) insurance service expenses incurred in the period (measured at the amounts
expected at the beginning of the period), excluding:
(i) amounts allocated to the loss component of the liability for
remaining coverage applying paragraph 51(a);
(ii) repayments of investment components;
(iii) amounts that relate to transaction-based taxes collected on behalf of
third parties (such as premium taxes, value added taxes and goods
and services taxes) (see paragraph B65(i)); and
(iv) insurance acquisition expenses (see paragraph B125).
(b) the change in the risk adjustment for non-financial risk, excluding:
(i) changes included in insurance finance income or expenses applying
paragraph 87;
(ii) changes that adjust the contractual service margin because they
relate to future service applying paragraphs 44(c) and 45(c); and
(iii) amounts allocated to the loss component of the liability for
remaining coverage applying paragraph 51(b).
(c) the amount of the contractual service margin recognised in profit or loss in
the period, applying paragraphs 44(e) and 45(e).
B125 An entity shall determine insurance revenue related to insurance acquisition cash
flows by allocating the portion of the premiums that relate to recovering those cash
flows to each reporting period in a systematic way on the basis of the passage of
time. An entity shall recognise the same amount as insurance service expenses.
B126 When an entity applies the premium allocation approach in paragraphs 5558,
insurance revenue for the period is the amount of expected premium receipts
(excluding any investment component and adjusted to reflect the time value of
money and the effect of financial risk, if applicable, applying paragraph 56)
allocated to the period. The entity shall allocate the expected premium receipts to
each period of coverage:
(a) on the basis of the passage of time; but
(b) if the expected pattern of release of risk during the coverage period differs
significantly from the passage of time, then on the basis of the expected
timing of incurred insurance service expenses.
B127 An entity shall change the basis of allocation between paragraphs B126(a) and
B126(b) as necessary if facts and circumstances change.
Insurance finance income or expenses (paragraphs 8792)
B128 Paragraph 87 requires an entity to include in insurance finance income or expenses
the effect of changes in assumptions that relate to financial risk. For the purposes of
Ind AS 117:
(a) assumptions about inflation based on an index of prices or rates or on prices
of assets with inflation-linked returns are assumptions that relate to financial
risk; and
(b) assumptions about inflation based on an entity's expectation of specific
price changes are not assumptions that relate to financial risk.
B129 Paragraphs 8889 require an entity to make an accounting policy choice as to
whether to disaggregate insurance finance income or expenses for the period
between profit or loss and other comprehensive income. An entity shall apply its
choice of accounting policy to portfolios of insurance contracts. In assessing the
appropriate accounting policy for a portfolio of insurance contracts, applying
paragraph 13 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates
and Errors, the entity shall consider for each portfolio the assets that the entity
holds and how it accounts for those assets.
B130 If paragraph 88(b) applies, an entity shall include in profit or loss an amount
determined by a systematic allocation of the expected total finance income or
expenses over the duration of the group of insurance contracts. In this context, a
systematic allocation is an allocation of the total expected finance income or
expenses of a group of insurance contracts over the duration of the group that:
(a) is based on characteristics of the contracts, without reference to factors that
do not affect the cash flows expected to arise under the contracts. For
example, the allocation of the finance income or expenses shall not be based
on expected recognised returns on assets if those expected recognised
returns do not affect the cash flows of the contracts in the group.
(b) results in the amounts recognised in other comprehensive income over the
duration of the group of contracts totalling zero. The cumulative amount
recognised in other comprehensive income at any date is the difference
between the carrying amount of the group of contracts and the amount that
the group would be measured at when applying the systematic allocation.
B131 For groups of insurance contracts for which changes in assumptions that relate to
financial risk do not have a substantial effect on the amounts paid to the
policyholder, the systematic allocation is determined using the discount rates
specified in paragraph B72(e)(i).
B132 For groups of insurance contracts for which changes in assumptions that relate to
financial risk have a substantial effect on the amounts paid to the policyholders:
(a) a systematic allocation for the finance income or expenses arising from the
estimates of future cash flows can be determined in one of the following
ways:
(i) using a rate that allocates the remaining revised expected finance
income or expenses over the remaining duration of the group of
contracts at a constant rate; or
(ii) for contracts that use a crediting rate to determine amounts due to the
policyholders--using an allocation that is based on the amounts
credited in the period and expected to be credited in future periods.
(b) a systematic allocation for the finance income or expenses arising from the
risk adjustment for non-financial risk, if separately disaggregated from other
changes in the risk adjustment for non-financial risk applying paragraph 81,
is determined using an allocation consistent with that used for the allocation
for the finance income or expenses arising from the future cash flows.
(c) a systematic allocation for the finance income or expenses arising from the
contractual service margin is determined:
(i) for insurance contracts that do not have direct participation features,
using the discount rates specified in paragraph B72(b); and
(ii) for insurance contracts with direct participation features, using an
allocation consistent with that used for the allocation for the finance
income or expenses arising from the future cash flows.
B133 In applying the premium allocation approach to insurance contracts described in
paragraphs 5359, an entity may be required, or may choose, to discount the
liability for incurred claims. In such cases, it may choose to disaggregate the
insurance finance income or expenses applying paragraph 88(b). If the entity makes
this choice, it shall determine the insurance finance income or expenses in profit or
loss using the discount rate specified in paragraph B72(e)(iii).
B134 Paragraph 89 applies if an entity, either by choice or because it is required to, holds
the underlying items for insurance contracts with direct participation features. If an
entity chooses to disaggregate insurance finance income or expenses applying
paragraph 89(b), it shall include in profit or loss expenses or income that exactly
match the income or expenses included in profit or loss for the underlying items,
resulting in the net of the two separately presented items being nil.
B135 An entity may qualify for the accounting policy choice in paragraph 89 in some
periods but not in others because of a change in whether it holds the underlying
items. If such a change occurs, the accounting policy choice available to the entity
changes from that set out in paragraph 88 to that set out in paragraph 89, or vice
versa. Hence, an entity might change its accounting policy between that set out in
paragraph 88(b) and that set out in paragraph 89(b). In making such a change an
entity shall:
(a) include the accumulated amount previously included in other
comprehensive income by the date of the change as a reclassification
adjustment in profit or loss in the period of change and in future periods, as
follows:
(i) if the entity had previously applied paragraph 88(b)--the entity shall
include in profit or loss the accumulated amount included in other
comprehensive income before the change as if the entity were
continuing the approach in paragraph 88(b) based on the
assumptions that applied immediately before the change; and
(ii) if the entity had previously applied paragraph 89(b)--the entity shall
include in profit or loss the accumulated amount included in other
comprehensive income before the change as if the entity were
continuing the approach in paragraph 89(b) based on the
assumptions that applied immediately before the change.
(b) not restate prior period comparative information.
B136 When applying paragraph B135(a), an entity shall not recalculate the accumulated
amount previously included in other comprehensive income as if the new
disaggregation had always applied; and the assumptions used for the reclassification
in future periods shall not be updated after the date of the change.
Interim financial statements
B137 Notwithstanding the requirement in Ind AS 34 Interim Financial Reporting that the
frequency of an entity's reporting shall not affect the measurement of its annual
results, an entity shall not change the treatment of accounting estimates made in
previous interim financial statements when applying Ind AS 117 in subsequent
interim financial statements or in the annual reporting period.
Appendix C
Effective date and transition
This appendix is an integral part of Ind AS 117, Insurance Contracts.
Effective date
C1 An entity shall apply Ind AS 117 for annual reporting periods beginning on or after 1
April 2020. If an entity applies Ind AS 117 earlier, it shall disclose that fact. Early
application is permitted. However, an Insurance Company is permitted to apply Ind
AS 117 early only for consolidation purposes by its parent.
C2 For the purposes of the transition requirements in paragraphs C1 and C3C33:
(a) the date of initial application is the beginning of the annual reporting period in
which an entity first applies Ind AS 117; and
(b) the transition date is the beginning of the annual reporting period immediately
preceding the date of initial application.
Transition
C3 An entity shall apply Ind AS 117 retrospectively unless impracticable, except that:
(a) an entity is not required to present the quantitative information required by
paragraph 28(f) of Ind AS 8 Accounting Policies, Changes in Accounting
Estimates and Errors; and
(b) an entity shall not apply the option in paragraph B115 for periods before the
date of initial application of Ind AS 117.
C4 To apply Ind AS 117 retrospectively, an entity shall at the transition date:
(a) identify, recognise and measure each group of insurance contracts as if Ind AS
117 had always applied;
(b) derecognise any existing balances that would not exist had Ind AS 117 always
applied; and
(c) recognise any resulting net difference in equity.
C5 If, and only if, it is impracticable for an entity to apply paragraph C3 for a group of
insurance contracts, an entity shall apply the following approaches instead of applying
paragraph C4(a):
(a) the modified retrospective approach in paragraphs C6C19, subject to
paragraph C6(a); or
(b) the fair value approach in paragraphs C20C24.
Modified retrospective approach
C6 The objective of the modified retrospective approach is to achieve the closest
outcome to retrospective application possible using reasonable and supportable
information available without undue cost or effort. Accordingly, in applying this
approach, an entity shall:
(a) use reasonable and supportable information. If the entity cannot obtain
reasonable and supportable information necessary to apply the modified
retrospective approach, it shall apply the fair value approach.
(b) maximise the use of information that would have been used to apply a fully
retrospective approach, but need only use information available without undue
cost or effort
C7 Paragraphs C9C19 set out permitted modifications to retrospective application in the
following areas:
(a) assessments of insurance contracts or groups of insurance contracts that would
have been made at the date of inception or initial recognition;
(b) amounts related to the contractual service margin or loss component for
insurance contracts without direct participation features;
(c) amounts related to the contractual service margin or loss component for
insurance contracts with direct participation features; and
(d) insurance finance income or expenses.
C8 To achieve the objective of the modified retrospective approach, an entity is permitted
to use each modification in paragraphs C9C19 only to the extent that an entity does
not have reasonable and supportable information to apply a retrospective approach.
Assessments at inception or initial recognition
C9 To the extent permitted by paragraph C8, an entity shall determine the following
matters using information available at the transition date:
(a) how to identify groups of insurance contracts, applying paragraphs 1424;
(b) whether an insurance contract meets the definition of an insurance contract
with direct participation features, applying paragraphs B101B109; and
(c) how to identify discretionary cash flows for insurance contracts without direct
participation features, applying paragraphs B98B100.
C10 To the extent permitted by paragraph C8, an entity shall not apply paragraph 22 to
divide groups into those that do not include contracts issued more than one year apart.
Determining the contractual service margin or loss component for groups of
insurance contracts without direct participation features
C11 To the extent permitted by paragraph C8, for contracts without direct participation
features, an entity shall determine the contractual service margin or loss component of
the liability for remaining coverage (see paragraphs 4952) at the transition date by
applying paragraphs C12C16.
C12 To the extent permitted by paragraph C8, an entity shall estimate the future cash flows
at the date of initial recognition of a group of insurance contracts as the amount of the
future cash flows at the transition date (or earlier date, if the future cash flows at that
earlier date can be determined retrospectively, applying paragraph C4(a)), adjusted by
the cash flows that are known to have occurred between the date of initial recognition
of a group of insurance contracts and the transition date (or earlier date). The cash
flows that are known to have occurred include cash flows resulting from contracts that
ceased to exist before the transition date.
C13 To the extent permitted by paragraph C8, an entity shall determine the discount rates
that applied at the date of initial recognition of a group of insurance contracts (or
subsequently):
(a) using an observable yield curve that, for at least three years immediately
before the transition date, approximates the yield curve estimated applying
paragraphs 36 and B72B85, if such an observable yield curve exists.
(b) if the observable yield curve in paragraph (a) does not exist, estimate the
discount rates that applied at the date of initial recognition (or subsequently)
by determining an average spread between an observable yield curve and the
yield curve estimated applying paragraphs 36 and B72B85, and applying that
spread to that observable yield curve. That spread shall be an average over at
least three years immediately before the transition date.
C14 To the extent permitted by paragraph C8, an entity shall determine the risk adjustment
for non-financial risk at the date of initial recognition of a group of insurance
contracts (or subsequently) by adjusting the risk adjustment for non-financial risk at
the transition date by the expected release of risk before the transition date. The
expected release of risk shall be determined by reference to the release of risk for
similar insurance contracts that the entity issues at the transition date.
C15 If applying paragraphs C12C14 results in a contractual service margin at the date of
initial recognition, to determine the contractual service margin at the date of transition
an entity shall:
(a) if the entity applies C13 to estimate the discount rates that apply on initial
recognition, use those rates to accrete interest on the contractual service
margin; and
(b) to the extent permitted by paragraph C8, determine the amount of the
contractual service margin recognised in profit or loss because of the transfer
of services before the transition date, by comparing the remaining coverage
units at that date with the coverage units provided under the group of contracts
before the transition date (see paragraph B119).
C16 If applying paragraphs C12C14 results in a loss component of the liability for
remaining coverage at the date of initial recognition, an entity shall determine any
amounts allocated to the loss component before the transition date applying
paragraphs C12C14 and using a systematic basis of allocation.
Determining the contractual service margin or loss component for groups of
insurance contracts with direct participation features
C17 To the extent permitted by paragraph C8, for contracts with direct participation
features an entity shall determine the contractual service margin or loss component of
the liability for remaining coverage at the transition date as:
(a) the total fair value of the underlying items at that date; minus
(b) the fulfilment cash flows at that date; plus or minus
(c) an adjustment for:
(i) amounts charged by the entity to the policyholders (including amounts
deducted from the underlying items) before that date.
(ii) amounts paid before that date that would not have varied based on the
underlying items.
(iii) the change in the risk adjustment for non-financial risk caused by the
release from risk before that date. The entity shall estimate this amount
by reference to the release of risk for similar insurance contracts that
the entity issues at the transition date.
(d) if (a)(c) result in a contractual service margin--minus the amount of the
contractual service margin that relates to services provided before that date.
The total of (a)(c) is a proxy for the total contractual service margin for all
services to be provided under the group of contracts, ie before any amounts
that would have been recognised in profit or loss for services provided. The
entity shall estimate the amounts that would have been recognised in profit or
loss for services provided by comparing the remaining coverage units at the
transition date with the coverage units provided under the group of contracts
before the transition date; or
(e) if (a)(c) result in a loss component--adjust the loss component to nil and
increase the liability for remaining coverage excluding the loss component by
the same amount.
Insurance finance income or expenses
C18 For groups of insurance contracts that, applying paragraph C10, include contracts
issued more than one year apart:
(a) an entity is permitted to determine the discount rates at the date of initial
recognition of a group specified in paragraphs B72(b)B72(e)(ii) and the
discount rates at the date of the incurred claim specified in paragraph
B72(e)(iii) at the transition date instead of at the date of initial recognition or
incurred claim.
(b) if an entity chooses to disaggregate insurance finance income or expenses
between amounts included in profit or loss and amounts included in other
comprehensive income applying paragraphs 88(b) or 89(b), the entity needs to
determine the cumulative amount of insurance finance income or expenses
recognised in other comprehensive income at the transition date to apply
paragraph 91(a) in future periods. The entity is permitted to determine that
cumulative difference either by applying paragraph C19(b) or:
(i) as nil, unless (ii) applies; and
(ii) for insurance contracts with direct participation features to which
paragraph B134 applies, as equal to the cumulative amount recognised
in other comprehensive income on the underlying items.
C19 For groups of insurance contracts that do not include contracts issued more than one
year apart:
(a) if an entity applies paragraph C13 to estimate the discount rates that applied at
initial recognition (or subsequently), it shall also determine the discount rates
specified in paragraphs B72(b)B72(e) applying paragraph C13; and
(b) if an entity chooses to disaggregate insurance finance income or expenses
between amounts included in profit or loss and amounts included in other
comprehensive income, applying paragraphs 88(b) or 89(b), the entity needs
to determine the cumulative amount of insurance finance income or expenses
recognised in other comprehensive income at the transition date to apply
paragraph 91(a) in future periods. The entity shall determine that cumulative
difference:
(i) for insurance contracts for which an entity will apply the methods of
systematic allocation set out in paragraph B131--if the entity applies
paragraph C13 to estimate the discount rates at initial recognition--
using the discount rates that applied at the date of initial recognition,
also applying paragraph C13;
(ii) for insurance contracts for which an entity will apply the methods of
systematic allocation set out in paragraph B132--on the basis that the
assumptions that relate to financial risk that applied at the date of
initial recognition are those that apply on the transition date, ie as nil;
(iii) for insurance contracts for which an entity will apply the methods of
systematic allocation set out in paragraph B133--if the entity applies
paragraph C13 to estimate the discount rates at initial recognition (or
subsequently)--using the discount rates that applied at the date of the
incurred claim, also applying paragraph C13; and
(iv) for insurance contracts with direct participation features to which
paragraph B134 applies--as equal to the cumulative amount
recognised in other comprehensive income on the underlying items.
Fair value approach
C20 To apply the fair value approach, an entity shall determine the contractual service
margin or loss component of the liability for remaining coverage at the transition date
as the difference between the fair value of a group of insurance contracts at that date
and the fulfilment cash flows measured at that date. In determining that fair value, an
entity shall not apply paragraph 47 of Ind AS 113 Fair Value Measurement (relating
to demand features).
C21 In applying the fair value approach, an entity may apply paragraph C22 to determine:
(a) how to identify groups of insurance contracts, applying paragraphs 1424;
(b) whether an insurance contract meets the definition of an insurance contract
with direct participation features, applying paragraphs B101B109; and
(c) how to identify discretionary cash flows for insurance contracts without direct
participation features, applying paragraphs B98B100.
C22 An entity may choose to determine the matters in paragraph C21 using:
(a) reasonable and supportable information for what the entity would have
determined given the terms of the contract and the market conditions at the
date of inception or initial recognition, as appropriate; or
(b) reasonable and supportable information available at the transition date.
C23 In applying the fair value approach, an entity is not required to apply paragraph 22,
and may include in a group contracts issued more than one year apart. An entity shall
only divide groups into those including only contracts issued within a year (or less) if
it has reasonable and supportable information to make the division. Whether or not an
entity applies paragraph 22, it is permitted to determine the discount rates at the date
of initial recognition of a group specified in paragraphs B72(b)B72(e)(ii) and the
discount rates at the date of the incurred claim specified in paragraph B72(e)(iii) at
the transition date instead of at the date of initial recognition or incurred claim.
C24 In applying the fair value approach, if an entity chooses to disaggregate insurance
finance income or expenses between profit or loss and other comprehensive income,
it is permitted to determine the cumulative amount of insurance finance income or
expenses recognised in other comprehensive income at the transition date:
(a) retrospectively--but only if it has reasonable and supportable
information to do so; or
(b) as nil--unless (c) applies; and
(c) for insurance contracts with direct participation features to which paragraph
B134 applies--as equal to the cumulative amount recognised in other
comprehensive income from the underlying items.
Comparative information
C25 Notwithstanding the reference to the annual reporting period immediately preceding
the date of initial application in paragraph C2(b), an entity may also present adjusted
comparative information applying Ind AS 117 for any earlier periods presented, but is
not required to do so. If an entity does present adjusted comparative information for
any earlier periods, the reference to `the beginning of the annual reporting period
immediately preceding the date of initial application' in paragraph C2(b) shall be read
as `the beginning of the earliest adjusted comparative period presented'.
C26 An entity is not required to provide the disclosures specified in paragraphs 93132 for
any period presented before the beginning of the annual reporting period immediately
preceding the date of initial application.
C27 If an entity presents unadjusted comparative information and disclosures for any
earlier periods, it shall clearly identify the information that has not been adjusted,
disclose that it has been prepared on a different basis, and explain that basis.
C28 An entity need not disclose previously unpublished information about claims
development that occurred earlier than five years before the end of the annual
reporting period in which it first applies Ind AS 117. However, if an entity does not
disclose that information, it shall disclose that fact.
Redesignation of financial assets
C29 At the date of initial application of Ind AS 117, an entity that had applied Ind AS 109
to annual reporting periods before the initial application of Ind AS 117:
(a) may reassess whether an eligible financial asset meets the condition in
paragraph 4.1.2(a) or paragraph 4.1.2A(a) of Ind AS 109. A financial asset is
eligible only if the financial asset is not held in respect of an activity that is
unconnected with contracts within the scope of Ind AS 117. Examples of
financial assets that would not be eligible for reassessment are financial assets
held in respect of banking activities or financial assets held in funds relating to
investment contracts that are outside the scope of Ind AS 117.
(b) shall revoke its previous designation of a financial asset as measured at fair
value through profit or loss if the condition in paragraph 4.1.5 of Ind AS 109
is no longer met because of the application of Ind AS 117.
(c) may designate a financial asset as measured at fair value through profit or loss
if the condition in paragraph 4.1.5 of Ind AS 109 is met.
(d) may designate an investment in an equity instrument as at fair value through
other comprehensive income applying paragraph 5.7.5 of Ind AS 109.
(e) may revoke its previous designation of an investment in an equity instrument
as at fair value through other comprehensive income applying paragraph 5.7.5
of Ind AS 109.
C30 An entity shall apply paragraph C29 on the basis of the facts and circumstances that
exist at the date of initial application of Ind AS 117. An entity shall apply those
designations and classifications retrospectively. In doing so, the entity shall apply the
relevant transition requirements in Ind AS 1091. The date of initial application for that
purpose shall be deemed to be the date of initial application of Ind AS 117.
C31 An entity that applies paragraph C29 is not required to restate prior periods to reflect
such changes in designations or classifications. The entity may restate prior periods
only if it is possible without the use of hindsight. If an entity restates prior periods,
the restated financial statements must reflect all the requirements of Ind AS 109 for
those affected financial assets. If an entity does not restate prior periods, the entity
shall recognise, in the opening retained earnings (or other component of equity, as
appropriate) at the date of initial application, any difference between:
(a) the previous carrying amount of those financial assets; and
(b) the carrying amount of those financial assets at the date of initial
application.
C32 When an entity applies paragraph C29, it shall disclose in that annual reporting period
for those financial assets by class:
(a) if paragraph C29(a) applies--its basis for determining eligible financial
assets;
(b) if any of paragraphs C29(a)C29(e) apply:
(i) the measurement category and carrying amount of the affected financial
assets determined immediately before the date of initial application of
Ind AS 117; and
(ii) the new measurement category and carrying amount of the affected
financial assets determined after applying paragraph C29.
(c) if paragraph C29(b) applies--the carrying amount of financial assets in the
statement of financial position that were previously designated as measured at
fair value through profit or loss applying paragraph 4.1.5 of Ind AS 109 that
are no longer so designated.
C33 When an entity applies paragraph C29, the entity shall disclose in that annual
reporting period qualitative information that would enable users of financial
statements to understand:
(a) how it applied paragraph C29 to financial assets the classification of which
has changed on initially applying Ind AS 117;
1
Relevant Transitional Provisions of IFRS 9, Financial Instruments, are being incorporated in Ind AS 109
along with amendments to Ind AS 109 corresponding to amendments to IFRS 9, Prepayment Features with
Negative Compensation.
(b) the reasons for any designation or de-designation of financial assets as
measured at fair value through profit or loss applying paragraph 4.1.5 of Ind
AS 109; and
(c) why the entity came to any different conclusions in the new assessment
applying paragraphs 4.1.2(a) or 4.1.2A(a) of Ind AS 109.
Withdrawal of other Indian Accounting Standards
C34 Ind AS 117 supersedes Ind AS 104 Insurance Contracts.
Appendix D
Amendments to other Indian Accounting Standards
This appendix sets out the amendments to other Standards that are a consequence of the
issuing Ind AS 117 Insurance Contracts. An entity shall apply these amendments when it
applies Ind AS 117.
Ind AS 101 First-time Adoption of Indian Accounting Standards
Paragraph 39AE is added.
Effective date
...
39AD [Refer Appendix 1]
39AE Ind AS 117, Insurance Contracts, amended paragraphs B1 and D1, deleted the
heading before paragraph D4 and paragraph D4, and after paragraph B12 added a
heading and paragraph B13. An entity shall apply those amendments when it applies
Ind AS 117.
In Appendix B, paragraph B1 is amended. After paragraph B12, a heading and paragraph
B13 are added. New text is underlined and deleted text is struck through.
Appendix B
Exceptions to the retrospective application of other Ind ASs
...
B1 An entity shall apply the following exceptions:
(a) ...
(f) embedded derivatives (paragraph B9); and
(g) government loans (paragraphs B10B12).: and
(h) insurance contracts (paragraph B13).
...
1
Insurance contracts
B13 An entity shall apply the transition provisions in paragraphs C1C24 and C28 in
Appendix C of Ind AS 117 to contracts within the scope of Ind AS 117. The
references in those paragraphs in Ind AS 117 to the transition date shall be read as the
date of transition to Ind ASs.
In Appendix D, paragraph D1 is amended and paragraph D4 and its related heading are
deleted. New text is underlined and deleted text is struck through.
Appendix D
Exemptions from other Ind AS
...
D1 An entity may elect to use one or more of the following exemptions:
(a) ...
(b) [Refer Appendix 1]insurance contracts (paragraph D4);
(c) ...
Insurance contracts
D4 An entity shall apply Ind AS 104 Insurance Contracts for annual periods beginning on
or after date of transition to Ind ASs. Earlier application is encouraged. If an entity
applies this Ind AS 104 for an earlier period, it shall disclose that fact.
In applying paragraph 39(c)(iii), of Ind AS 104 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 Ind AS 104. Furthermore, if it is
impracticable, when an entity first applies Ind AS 104, to prepare information about
claims development that occurred before the beginning of the earliest period for
which an entity presents full comparative information that complies with this Ind AS,
the entity shall disclose that fact.
When an insurer changes its accounting policies for insurance liabilities, it is
permitted, but not required, to reclassify some or all of its financial assets as `at fair
value through profit or loss'. This reclassification is permitted if an insurer changes
accounting policies when it first applies Ind AS 104 and if it makes a subsequent
policy change permitted by paragraph 22. The reclassification is a change in
accounting policy and Ind AS 8 applies.
2
Appendix 1
...
12. Following paragraph numbers appear as `deleted' in IFRS 1. In order to maintain
consistency with paragraph numbers of IFRS 1, the paragraph numbers are retained in
Ind AS 101:
(i) ...
(ii) Paragraph D1(b)
(ii)(iii) Paragraph D1(e)
(iv) Paragraph D1(o)
(iii)(v) Paragraph D4
(iv)(vi) Paragraph D10-11
(v)(vii) Paragraph D 24
(vi)(viii) Paragraph D 31
...
15. Paragraphs 34-39W and paragraphs 39Y-39AA and 39AD have not been included in
Ind AS 101 as these paragraphs relate to effective date. However, in order to maintain
consistency with paragraph numbers of IFRS 1, these paragraph numbers are retained
in Ind AS 101.
Ind AS 103, Business Combinations
Paragraphs 17, 20, 21 and 35 are amended. New text is underlined and deleted text is struck
through. After paragraph 31, a heading and paragraph 31A are added.
Paragraph 64N is added.
Classifying or designating identifiable assets acquired and liabilities assumed in a
business combination
...
17 This Ind AS provides an two exceptions to the principle in paragraph 15:
(a) classification of a lease contract as either an operating lease or a finance lease in
accordance with Ind AS 17, Leases; and
(b) [Refer Appendix 1]classification of a contract as an insurance contract in
accordance with Ind AS 104, Insurance Contracts.
The acquirer shall classify those contracts on the basis of the contractual terms and
other factors at the inception of the contract (or, if the terms of the contract have been
modified in a manner that would change its classification, at the date of that
modification, which might be the acquisition date).
...
3
Measurement principle
...
20 Paragraphs 2431A31 specify the types of identifiable assets and liabilities that
include items for which this Ind AS provides limited exceptions to the measurement
principle.
21 This Ind AS provides limited exceptions to its recognition and measurement
principles. Paragraphs 2231A31 specify both the particular items for which
exceptions are provided and the nature of those exceptions. The acquirer shall account
for those items by applying the requirements in paragraphs 2231A31, which will
result in some items being:
...
Insurance contracts
31A The acquirer shall measure a group of contracts within the scope of Ind AS 117
Insurance Contracts acquired in a business combination as a liability or asset in
accordance with paragraphs 39 and B93B95 of Ind AS 117, at the acquisition date.
...
Bargain purchases
...
35 A bargain purchase might happen, for example, in a business combination that is a
forced sale in which the seller is acting under compulsion. However, the recognition
or measurement exceptions for particular items discussed in paragraphs 2231A31
may also result in recognising a gain (or change the amount of a recognised gain) on a
bargain purchase.
...
Effective date
...
64N Ind AS 117 amended paragraphs 17, 20, 21, 35 and B63, and after paragraph 31
added a heading and paragraph 31A. An entity shall apply those amendments when it
applies Ind AS 117.
In Appendix B, paragraph B63 is amended. New text is underlined and deleted text is struck
through.
Other Ind ASs that provide guidance on subsequent measurement and accounting
(application of paragraph 54)
4
B63 Examples of other Ind ASs that provide guidance on subsequently measuring and
accounting for assets acquired and liabilities assumed or incurred in a business
combination include:
(a) ...
(b) [Refer Appendix 1] Ind AS 104, Insurance Contracts, provides guidance on the
subsequent accounting for an insurance contract acquired in a business combination.
(c) ...
Appendix 1
...
6. The following paragraph numbers appear as `Deleted' in IFRS 3. In order to maintain
consistency with paragraph numbers of IFRS 3, the paragraph numbers are retained in
Ind AS 103:
(i) Paragraph 17(b)
(ii)(i) Paragraph B28- B30
(iii)(ii) Paragraph B32(a)
(iv) Paragraph B63(b)
Ind AS 103, Business Combinations (as amended by proposed Ind AS 116)
Paragraphs 17, 20, 21 and 35 are amended. New text is underlined and deleted text is struck
through. After paragraph 31, a heading and paragraph 31A are added. Paragraph 64N is
added.
Classifying or designating identifiable assets acquired and liabilities assumed in a
business combination
...
17 This Ind AS provides two exceptions to the principle in paragraph 15:
(a) classification of a lease contract in which acquiree is the lessor as either an
operating lease or a finance lease in accordance with Ind AS 116, Leases.; and
(b) [Refer Appendix 1]classification of a contract as an insurance contract in
accordance with Ind AS 104, Insurance Contracts.
The acquirer shall classify those contracts on the basis of the contractual terms and
other factors at the inception of the contract (or, if the terms of the contract have been
modified in a manner that would change its classification, at the date of that
modification, which might be the acquisition date).
5
...
Measurement principle
...
20 Paragraphs 2431A31 specify the types of identifiable assets and liabilities that
include items for which this Ind AS provides limited exceptions to the measurement
principle.
Exceptions to the recognition or measurement principles
21 This Ind AS provides limited exceptions to its recognition and measurement
principles. Paragraphs 2231A31 specify both the particular items for which
exceptions are provided and the nature of those exceptions. The acquirer shall account
for those items by applying the requirements in paragraphs 2231A31, which will
result in some items being:
...
Insurance contracts
31A The acquirer shall measure a group of contracts within the scope of Ind AS 117,
Insurance Contracts, acquired in a business combination as a liability or asset in
accordance with paragraphs 39 and B93B95 of Ind AS 117, at the acquisition date.
...
Bargain purchases
...
35 A bargain purchase might happen, for example, in a business combination that is a
forced sale in which the seller is acting under compulsion. However, the recognition
or measurement exceptions for particular items discussed in paragraphs 22-31A31
may also result in recognising a gain (or change the amount of a recognised gain) on a
bargain purchase.
...
Effective date
...
64N Ind AS 117 amended paragraphs 17, 20, 21, 35 and B63, and after paragraph 31
added a heading and paragraph 31A. An entity shall apply those amendments when it
applies Ind AS 117.
In Appendix B, paragraph B63 is amended. New text is underlined and deleted text is struck
through.
6
Other Ind ASs that provide guidance on subsequent measurement and accounting
(application of paragraph 54)
B63 Examples of other Ind ASs that provide guidance on subsequently measuring and
accounting for assets acquired and liabilities assumed or incurred in a business
combination include:
(d) ...
(e) [Refer Appendix 1]Ind AS 104, Insurance Contracts, provides guidance on the
subsequent accounting for an insurance contract acquired in a business
combination.
(f) ...
Appendix 1
...
6. The following paragraph numbers appear as `Deleted' in IFRS 3. In order to maintain
consistency with paragraph numbers of IFRS 3, the paragraph numbers are retained in
Ind AS 103:
(i) Paragraph 17(b)
(i)(ii) Paragraph B28- B30
(iii)(ii) Paragraph B32(a)
(iv) Paragraph B63(b)
Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations
Paragraph 5 is amended. New text is underlined and deleted text is struck through. Paragraph
44M is added.
Scope
...
5 The measurement provisions of this Ind AS do not apply to the following assets,
which are covered by the Ind ASs listed, either as individual assets or as part of a
disposal group:
(a) ...
(f) [Refer Appendix 1]contractual rights under insurance contracts as defined in Ind
AS 104, Insurance Contracts.
7
...
Transitional provisions
43 [Refer Appendix 1].
Effective date
44-44L [Refer Appendix 1]
44M Ind AS 117 amended paragraph 5. An entity shall apply that amendment when it
applies Ind AS 117
Appendix 1
1 Paragraph 43 related to transitional provision given in IFRS 5 has not been included
in Ind AS 105 The transitional provisions given in IFRS 5 have not been given in Ind
AS 105, since all transitional provisions related to Ind ASs, wherever considered
appropriate have been included in Ind AS 101, First-time Adoption of Indian
Accounting Standards, corresponding to IFRS 1, First-time Adoption of International
Financial Reporting Standards.
...
6. Paragraphs 44-44L have not been included in Ind AS 105 as these paragraphs relate to
effective date. However, in order to maintain consistency with paragraph numbers of
IFRS 5, these paragraph numbers are retained in Ind AS 105.
7 The following paragraph number appear as `Deleted' in IFRS 5. In order to maintain
consistency with paragraph numbers of IFRS 5, the paragraph numbers are retained in
Ind AS 103:
(a) Paragraph 5(f)
Ind AS 107, Financial Instruments: Disclosures
Paragraphs 3, 8 and 29 are amended. Paragraph 30 is deleted. New text is underlined and
deleted text is struck through. Paragraph 44DD is added.
Scope
3 This Ind AS shall be applied by all entities to all types of financial instruments, except:
(a) ...
(d) insurance contracts as defined in Ind AS 104, within the scope of Ind AS 117,
Insurance Contracts. However, this Ind AS applies to:
8
(i) derivatives that are embedded in insurance contracts within the scope of
Ind AS 117, if Ind AS 109 requires the entity to account for them
separately:. and
(ii) investment component that are separated from contracts within the scope
of Ind AS 117, if Ind AS 117 requires such separation.
Moreover, an issuer shall apply this Ind AS to financial guarantee
contracts if the issuer applies Ind AS 109 in recognising and measuring the
contracts, but shall apply Ind AS 117104 if the issuer elects, in accordance
with paragraph 7(e) of Ind AS 1174(d) of Ind AS 104, to apply Ind AS
117104 in recognising and measuring them.
(e) ...
Categories of financial assets and financial liabilities
8 The carrying amounts of each of the following categories, as specified in Ind AS 109,
shall be disclosed either in the balance sheet or in the notes:
(a) financial assets measured at fair value through profit or loss, showing separately
(i) those designated as such upon initial recognition or subsequently in accordance
with paragraph 6.7.1 of Ind AS 109; (ii) those measured as such in accordance
with the election in paragraph 3.3.5 of Ind AS 109; (iii) those measured as such in
accordance with the election in paragraph 33A of Ind AS 32 and (ivi) those
mandatorily measured at fair value through profit or loss in accordance with Ind
AS 109.
(b) ...
Fair value
...
29 Disclosures of fair value are not required:
(a) ...;
(c) [Refer Appendix 1]for a contract containing a discretionary participation feature
(as described in Ind AS 104) if the fair value of that feature cannot be measured
reliably.
30 [Refer Appendix 1]In the case described in paragraph 29(c), an entity shall disclose
information to help users of the financial statements make their own judgements about
the extent of possible differences between the carrying amount of those contracts and
their fair value, including:
(a) the fact that fair value information has not been disclosed for these instruments
because their fair value cannot be measured reliably;
9
(b) a description of the financial instruments, their carrying amount, and an
explanation of why fair value cannot be measured reliably;
(c) information about the market for the instruments;
(d) information about whether and how the entity intends to dispose of the financial
instruments; and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised, that fact, their carrying amount at the time of
derecognition, and the amount of gain or loss recognised.
...
Effective Date and transition
...
44DD Ind AS 117 amended paragraphs 3, 8 and 29 and deleted paragraph 30. An entity shall
apply those amendments when it applies Ind AS 117.
Appendix 1
4 The following paragraph numbers appear as `Deleted' in IFRS 7. In order to m aintain
consistency with paragraph numbers of Ind 107, the paragraph numbers are retained in
Ind AS 107:
(i) ...
(xi) paragraph 29(b) & (c)
(xii) paragraph 30
(xii)(xii) paragraph 36 (c)-(d)
(xiviii) paragraph 37
(xiv) paragraph B4 of Appendix B
(xvi) paragraph B5 (b), (d), (f) & (g)
(xviii) paragraphs B12-B16 of Appendix B
Ind AS 107, Financial Instruments: Disclosures (as amended by proposed
Ind AS 116)
Paragraphs 3, 8 and 29 are amended. Paragraph 30 is deleted. New text is underlined and
deleted text is struck through. Paragraph 44DD is added.
Scope
3 This Ind AS shall be applied by all entities to all types of financial instruments, except:
(a) ...
(d) insurance contracts as defined in Ind AS 104, within the scope of Ind AS 117,
Insurance Contracts. However, this Ind AS applies to:
(i) derivatives that are embedded in insurance contracts within the scope of Ind
AS 117, if Ind AS 109 requires the entity to account for them separately; and
10
(ii) investment component that are separated from contracts within the scope of
Ind AS 117, if Ind AS 117 requires such separation.
Moreover, an issuer shall apply this Ind AS to financial guarantee contracts if the
issuer applies Ind AS 109 in recognising and measuring the contracts, but shall
apply Ind AS 117104 if the issuer elects, in accordance with paragraph 7(e) of Ind
AS 117,4(d) of Ind AS 104, to apply Ind AS 117104 in recognising and measuring
them
(e) ...
Categories of financial assets and financial liabilities
8 The carrying amounts of each of the following categories, as specified in Ind AS 109,
shall be disclosed either in the balance sheet or in the notes:
(a) financial assets measured at fair value through profit or loss, showing separately
(i) those designated as such upon initial recognition or subsequently in accordance
with paragraph 6.7.1 of Ind AS 109; (ii) those measured as such in accordance
with the election in paragraph 3.3.5 of Ind AS 109; (iii) those measured as such in
accordance with the election in paragraph 33A of Ind AS 32 and (ivii) those
mandatorily measured at fair value through profit or loss in accordance with Ind
AS 109.
(b)-(d) ...
Fair value
...
29 Disclosures of fair value are not required:
(a) when the carrying amount is a reasonable approximation of fair value, for
example, for financial instruments such as short-term trade receivables and
payables; or
(b) [Refer Appendix 1]
(c) [Refer Appendix 1]for a contract containing a discretionary participation feature
(as described in Ind AS 104) if the fair value of that feature cannot be measured
reliably.
(d) for lease liabilities
30 [Refer Appendix 1]In the case described in paragraph 29(c), an entity shall disclose
information to help users of the financial statements make their own judgements about
the extent of possible differences between the carrying amount of those contracts and
their fair value, including:
11
(a) the fact that fair value information has not been disclosed for these instruments
because their fair value cannot be measured reliably;
(b) a description of the financial instruments, their carrying amount, and an
explanation of why fair value cannot be measured reliably;
(c) information about the market for the instruments;
(d) information about whether and how the entity intends to dispose of the financial
instruments; and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised, that fact, their carrying amount at the time of
derecognition, and the amount of gain or loss recognised.
...
Effective Date and transition
...
44DD Ind AS 117 amended paragraphs 3, 8 and 29 and deleted paragraph 30. An entity shall
apply those amendments when it applies Ind AS 117.
Appendix 1
4 The following paragraph numbers appear as `Deleted' in IFRS 7. In order to maintain
consistency with paragraph numbers of Ind 107, the paragraph numbers are retained in
Ind AS 107:
(i) ...
(xi) paragraph 29(b) & (c)
(xii) paragraph 30
(xii)(xii) paragraph 36 (c)-(d)
(xiviii) paragraph 37
(xiv) paragraph B4 of Appendix B
(xvi) paragraph B5 (b), (d), (f) & (g)
(xviii) paragraphs B12-B16 of Appendix B
Ind AS 109, Financial Instruments
Paragraph 2.1 is amended. New text is underlined and deleted text is struck through.
Paragraphs 3.3.5 and 7.1.6 are added.
Chapter 2 Scope
2.1 This Standard shall be applied by all entities to all types of financial instruments
except:
(a) ...
(e) rights and obligations arising under (i) an insurance a contract as defined
inwithin the scope of Ind AS 117,104 Insurance Contracts, other than an
12
issuer's rights and obligations arising under an insurance contract that meets
the definition of a financial guarantee contract, or (ii) a contract that is within
the scope of Ind AS104 because it contains a discretionary participation
feature. However, this Standard applies to (i) a derivative that is embedded in
a contract within the scope of Ind AS 117104 if the derivative is not itself a
contract within the scope of Ind AS 117104; and (ii) an investment component
that is separated from a contract within the scope of Ind AS 117, if Ind AS 117
rquires such separation. Moreover, if an issuer of financial guarantee contracts
has previously asserted explicitly that it regards such contracts as insurance
contracts and has used accounting that is applicable to insurance contracts, the
issuer may elect to apply either this Standard or Ind AS 117104 to such
financial guarantee contracts (see paragraphs B2.5B2.6). The issuer may
make that election contract by contract, but the election for each contract is
irrevocable.
...
3.3 Derecognition of financial liabilities
...
3.3.5 Some entities operate, either internally or externally, an investment fund that provides
investors with benefits determined by units in the fund and recognise financial
liabilities for the amounts to be paid to those investors. Similarly, some entities issue
groups of insurance contracts with direct participation features and those entities hold
the underlying items. Some such funds or underlying items include the entity's
financial liability (for example, a corporate bond issued). Despite the other
requirements in this Standard for the derecognition of financial liabilities, an entity
may elect not to derecognise its financial liability that is included in such a fund or is
an underlying item when, and only when, the entity repurchases its financial liability
for such purposes. Instead, the entity may elect to continue to account for that
instrument as a financial liability and to account for the repurchased instrument as if
the instrument were a financial asset, and measure it at fair value through profit or
loss in accordance with this Standard. That election is irrevocable and made on an
instrument-by-instrument basis. For the purposes of this election, insurance contracts
include investment contracts with discretionary participation features. (See Ind AS
117 for terms used in this paragraph that are defined in that Standard.)
...
7.1 Effective date
...
7.1.6 Ind AS 117 amended paragraphs 2.1, B2.1, B2.4, B2.5 and B4.1.30, and added
paragraph 3.3.5. An entity shall apply those amendments when it applies Ind AS 117.
In Appendix B, paragraphs B2.1, B2.4, B2.5 and B4.1.30 are amended. New text is
underlined and deleted text is struck through.
Scope (Chapter 2)
13
B2.1 Some contracts require a payment based on climatic, geological or other physical
variables. (Those based on climatic variables are sometimes referred to as `weather
derivatives'.) If those contracts are not within the scope of Ind AS 117104 Insurance
Contracts, they are within the scope of this Standard.
...
B2.4 This Standard applies to the financial assets and financial liabilities of insurers, other
than rights and obligations that paragraph 2.1(e) excludes because they arise under
contracts within the scope of Ind AS 117104.
B2.5 Financial guarantee contracts may have various legal forms, such as a guarantee,
some types of letter of credit, a credit default contract or an insurance contract. Their
accounting treatment does not depend on their legal form. The following are examples
of the appropriate treatment (see paragraph 2.1(e)):
(a) Although a financial guarantee contract meets the definition of an insurance
contract in Ind AS 117104 (see paragraph 7(e) of Ind AS 117) if the risk
transferred is significant, the issuer applies this Standard. Nevertheless, if the
issuer has previously asserted explicitly that it regards such contracts as
insurance contracts and has used accounting that is applicable to insurance
contracts, the issuer may elect to apply either this Standard or Ind AS 117104 to
such financial guarantee contracts. ...
(b) Some credit-related guarantees do not, as a precondition for payment, require
that the holder is exposed to, and has incurred a loss on, the failure of the debtor
to make payments on the guaranteed asset when due. An example of such a
guarantee is one that requires payments in response to changes in a specified
credit rating or credit index. Such guarantees are not financial guarantee
contracts as defined in this Standard, and are not insurance contracts as defined
in Ind AS 117104. Such guarantees are derivatives and the issuer applies this
Standard to them.
(c) ...
Designation eliminates or significantly reduces an accounting mismatch
...
B4.1.30 The following examples show when this condition could be met. In all cases, an
entity may use this condition to designate financial assets or financial liabilities as at
fair value through profit or loss only if it meets the principle in paragraph 4.1.5 or
4.2.2(a):
(a) an entity has liabilities under insurance contracts within the scope of Ind AS
117 (the whose measurement of which incorporates current information (as
permitted by paragraph 24 of Ind AS104) and financial assets that it considers
to be related and that would otherwise be measured at either fair value through
other comprehensive income or amortised cost.
14
(b) ....
Ind AS 115, Revenue from Contracts with Customers
Paragraph 5 is amended. New text is underlined and deleted text is struck through.
Scope
1 An entity shall apply this Standard to all contracts with customers, except the
following:
(a) ...
(b) insurance contracts within the scope of Ind AS 117104, Insurance Contracts;.
However, an entity may choose to apply this Standard to insurance contracts
that have as their primary purpose the provision of services for a fixed fee in
accordance with paragraph 8 of Ind AS 117.
(c) ...
In Appendix C, paragraph C1C is added.
Effective date
...
C1C Ind AS 117 amended paragraph 5. An entity shall apply that amendment when it
applies Ind AS 117.
Ind AS 1, Presentation of Financial Statements
Paragraphs 7, 54 and 82 are amended. New text is underlined and deleted text is struck
through. Paragraph 139R is added.
Definitions
7 ...
Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required or
permitted by other Ind ASs.
The components of other comprehensive income include:
(a) ...
(h) .;
(i) insurance finance income and expenses from contracts issued within the scope
of Ind AS 117, Insurance Contracts, excluded from profit or loss when total
insurance finance income or expenses is disaggregated to include in profit or
15
loss an amount determined by a systematic allocation applying paragraph
88(b) of Ind AS 117, or by an amount that eliminates accounting mismatcehs
with the finance income or expenses arising on the underlying items, applying
paragraph 89(b) of Ind AS 117; and
(j) finance income and expenses reinsurance contracts held excluded from profit
or loss when total reinsurance finance or expenses is disaggregated to include
in profit or loss an amount determined by a systematic allocation applying
paragraph 88(b) of Ind AS 117.
...
Information to be presented in the statement of financial position
54 The balance sheet shall include line items that present the following amounts:
(a) ...
(e) ...
(da) groups of contracts within the scope of Ind AS 117 that are assets,
disaggregated as required by paragraph 78 of Ind AS 117;
(e) ...
(ma) groups of contracts within the scope of Ind AS 117 that are liabilities,
disaggregated as required by paragraph 78 of Ind AS 117;
(n) ...
Information to be presented in the profit or loss section or the statement of profit
or loss
82 In addition to items required by other Ind ASs, the profit or loss section of the
statement of profit and loss shall include line items that present the following amounts
for the period:
(a) revenue, presenting separately;
(i) interest revenue calculated using the effective interest method; and
(ii) insurance revenue (see Ind AS 117);
(aa) ...
(ab) insurance service expenses from contracts issued within the scope of Ind
AS 117 (see Ind AS 117);
(ac) income or expenses from reinsurance contracts held (see Ind AS 117);
(b) ...
16
(bb) insurance finance income or expenses from contracts issued within the
scope of Ind AS 117 (see Ind AS 117);
(bc) finance income or expenses from reinsurance contracts held (see Ind AS
117);
(c) ...
Transition and effective date
...
139R Ind AS 117 amended paragraphs 7, 54 and 82. An entity shall apply those
amendments when it applies Ind AS 117.
Ind AS 7, Statement of Cash Flows
Paragraph 14 is amended. New text is underlined and deleted text is struck through.
Paragraph 61 is added
Operating activities
...
14 Cash flows from operating activities are primarily derived from the principal revenue
producing activities of the entity. Therefore, they generally result from the
transactions and other events that enter into the determination of profit or loss.
Examples of cash flows from operating activities are:
(a) ...
(e) [Refer Appendix 1]cash receipts and cash payments of an insurance entity for
premiums and claims, annuities and other policy benefits;
(f) ...
Effective date
...
61 Ind AS 117, Insurance Contracts, amended paragraph 14. An entity shall apply that
amendment when it applies Ind AS 117.
Appendix 1
...
17
5. The following paragraph numbers appear as `Deleted' in IAS 7. In order to maintain
consistency with paragraph numbers of IAS 7, the paragraph numbers are retained in Ind AS
7:
(i) paragraph 14(e)
(i)(ii) paragraph 29
(iii) paragraph 30
(ivii) paragraph 50(b)
Ind AS 16 Property, Plant and Equipment
Paragraphs 29A, 29B and 81M are added.
Measurement after recognition
...
29A Some entities operate, either internally or externally, an investment fund that provides
investors with benefits determined by units in the fund. Similarly, some entities issue
groups of insurance contracts with direct participation features and hold the
underlying items. Some such funds or underlying items include owner-occupied
property. The entity applies Ind AS 16 to owner-occupied properties that are included
in such a fund or are underlying items.
29B [Refer Appendix 1]
...
Effective date
...
81M Ind AS 117 added paragraphs 29A and 29B. An entity shall apply those amendments
when it applies Ind AS 117.
Appendix 1
...
5 Paragraphs 5 and 29A of Ind AS 16 has been modified, since Ind AS 40, Investment
Property, prohibits the use of fair value model. Consequently, paragraph 29B is
deleted. However, in order to maintain consistency with paragraph numbers of IAS
16, these paragraph numbers are retained in Ind AS 16
Ind AS 17, Leases
Appendix B
18
Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
Paragraph 7 is amended. New text is underlined and deleted text is struck through.
Accounting Principles
...
7 Other obligations of an arrangement, including any guarantees provided and obligations
incurred upon early termination, shall be accounted for under Ind AS 37, Provisions,
Contingent Liabilities and Contingent Assets, Ind AS 104, Insurance Contracts, or Ind AS
109, Financial Instruments, or Ind AS 117, Insurance Contracts, depending on the terms.
Effective date
Ind AS 117 amended paragraph 7. An entity shall apply that amendment when it applies Ind
AS17.
Ind AS 19 Employee Benefits
The footnote to paragraph 8 is amended. New text is underlined and deleted text is struck
through. Paragraph 178 is added.
A qualifying insurance policy is not necessarily an insurance contract, as defined in Ind AS 117Ind 104,
Insurance Contracts.
...
Transition and effective date
172-177 [Refer Appendix 1]
178 Ind AS 117 amended the footnote to paragraph 8. An entity shall apply that
amendment when it applies Ind AS 117.
Ind AS 28, Investments in Associates and Joint Ventures
Paragraph 18 is amended. New text is underlined and deleted text is struck through.
Paragraph 45F is added.
Exemptions from applying the equity method
...
18 When an investment in an associate or a joint venture is held by, or is held indirectly
through, an entity that is a venture capital organisation, or a mutual fund, unit trust
and similar entities including investment-linked insurance funds, the entity may elect
to measure investments in those associates and joint ventures at fair value through
19
profit or loss in accordance with Ind AS 109. An example of an investment-linked
insurance fund is a fund held by an entity as the underlying items for a group of
insurance contracts with direct participation features. For the purposes of this election,
insurance contracts include investment contracts with discretionary participation
features. (See Ind AS 117, Insurance Contracts, for terms used in this paragraph that
are defined in that Standard.)
...
Effective date and transition
...
45F Ind AS 117 amended paragraph 18. An entity shall apply that amendment when it
applies Ind AS 117.
Ind AS 28, Investments in Associates and Joint Ventures (as amended by
proposed Annual Improvements to Ind AS - Amendments in Ind AS 112
and 28)
Paragraph 18 is amended. New text is underlined and deleted text is struck through.
Paragraph 45F is added.
Exemptions from applying the equity method
...
18 When an investment in an associate or a joint venture is held by, or is held indirectly
through, an entity that is a venture capital organisation, or a mutual fund, unit trust and
similar entities including investment-linked insurance funds, the entity may elect to
measure that investment at fair value through profit or loss in accordance with Ind AS
109. An example of an investment-linked insurance fund is a fund held by an entity as
the underlying items for a group of insurance contracts with direct participation
features. For the purposes of this election, insurance contracts include investment
contracts with discretionary participation features. An entity shall make this election
separately for each associate or joint venture, at initial recognition of the associate or
joint venture. (See Ind AS 117, Insurance Contracts, for terms used in this paragraph
that are defined in that Standard.)
...
Effective date and transition
...
45F Ind AS 117 amended paragraph 18. An entity shall apply that amendment when it
applies Ind AS 117.
20
Ind AS 32, Financial Instruments: Presentation
Paragraph 4 is amended. New text is underlined and deleted text is struck through.
Paragraphs 33A and 97T are added.
Scope
4 This Standard shall be applied by all entities to all types of financial instruments
except:
(a) ...
(d) insurance contracts as defined in within the scope of Ind AS 117104,
Insurance Contracts. However, this Standard applies to
(i) derivatives that are embedded in insurance contracts within the scope of
Ind AS 117 if Ind AS 109 requires the entity to account for them
separately.
(ii) investment components that are separated from contracts within the
scope of Ind AS 117, if Ind AS 117 requires such separation.
Moreover, an issuer shall apply this Standard to financial guarantee
contracts if the issuer applies Ind AS 109 in recognising and measuring the
contracts, but shall apply Ind AS 104 117 if the issuer elects, in accordance
with paragraph 47(e)4(d) of Ind AS 117104, to apply Ind AS 117104 in
recognising and measuring them.
(e) [Refer Appendix 1]financial instruments that are within the scope of Ind AS
104 because they contain a discretionary participation feature. The issuer of
these instruments is exempt from applying to these features paragraphs 15
32 and AG25AG35 of this Standard regarding the distinction between
financial liabilities and equity instruments. However, these instruments are
subject to all other requirements of this Standard. Furthermore, this
Standard applies to derivatives that are embedded in these instruments (see
Ind AS 109).
(f) ...
Treasury shares (see also paragraph AG36)
33 ...
33A Some entities operate, either internally or externally, an investment fund that provides
investors with benefits determined by units in the fund and recognise financial
liabilities for the amounts to be paid to those investors. Similarly, some entities issue
groups of insurance contracts with direct participation features and those entities hold
the underlying items. Some such funds or underlying items include the entity's
treasury shares. Despite paragraph 33, an entity may elect not to deduct from equity a
21
treasury share that is included in such a fund or is an underlying item when, and only
when, an entity reacquires its own equity instrument for such purposes. Instead, the
entity may elect to continue to account for that treasury share as equity and to account
for the reacquired instrument as if the instrument were a financial asset and measure it
at fair value through profit or loss in accordance with Ind AS 109. That election is
irrevocable and made on an instrument-by-instrument basis. For the purposes of this
election, insurance contracts include investment contracts with discretionary
participation features. (See Ind AS 117 for terms used in this paragraph that are
defined in that Standard.)
...
Effective date and transition
...
97T Ind AS 117 amended paragraphs 4 and AG8, and added paragraph 33A. An entity
shall apply those amendments when it applies Ind AS 117.
In the Application Guidance, paragraph AG8 is amended. New text is underlined and deleted
text is struck through.
Financial assets and financial liabilities
...
AG8 The ability to exercise a contractual right or the requirement to satisfy a contractual
obligation may be absolute, or it may be contingent on the occurrence of a future
event. For example, a financial guarantee is a contractual right of the lender to receive
cash from the guarantor, and a corresponding contractual obligation of the guarantor
to pay the lender, if the borrower defaults. The contractual right and obligation exist
because of a past transaction or event (assumption of the guarantee), even though the
lender's ability to exercise its right and the requirement for the guarant or to perform
under its obligation are both contingent on a future act of default by the borrower. A
contingent right and obligation meet the definition of a financial asset and a financial
liability, even though such assets and liabilities are not always recognised in the
financial statements. Some of these contingent rights and obligations may be
insurance contracts within the scope of Ind AS 117104.
Appendix 1
...
5. The following paragraph numbers appear as `Deleted' in IAS 32. In order to maintain
consistency with paragraph numbers of IAS 32, the paragraph numbers are retained in Ind AS
32:
(i) paragraph 1
(ii) paragraph 4(c) & (e)
22
Ind AS 36, Impairment of Assets
Paragraph 2 is amended. New text is underlined and deleted text is struck through.
Paragraph 140N is added.
Scope
2 This Standard shall be applied in accounting for the impairment of all assets,
other than:
(a) ...
(h) deferred acquisition costs, and intangible assets, arising from an insurer's
contractual rights under insurance contracts within the scope of Ind AS
117104, Insurance Contracts, that are assets; and
(i) ...
Transition provisions and effective date
...
140M [Refer Appendix 1]
140N Ind AS 117 amended paragraph 2. An entity shall apply that amendment when it
applies Ind AS 117.
Appendix 1
...
8. Paragraphs 138-140K and 140M related to effective date have not been included in Ind
AS 36 as these are not relevant in Indian context. However, in order to maintain
consistency with paragraph numbers of IAS 36, these paragraph numbers are retained in
Ind AS 36.
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets
Paragraph 5 is amended. New text is underlined and deleted text is struck through.
Paragraph 103 is added.
Scope
...
5 When another Standard deals with a specific type of provision, contingent liability or
contingent asset, an entity applies that Standard instead of this Standard. For example,
some types of provisions are addressed in Standards on:
23
(a) ...
(e) insurance contracts and other contracts within the scope of (see Ind AS
117104, Insurance Contracts). However, this Standard applies to provisions,
contingent liabilities and contingent assets of an insurer, other than those
arising from its contractual obligations and rights under insurance contracts
within the scope of Ind AS 104; and
(f) ...
Effective date
...
103 Ind AS 117 amended paragraph 5. An entity shall apply that amendment when it
applies Ind AS 117.
Ind AS 38, Intangible Assets
Paragraph 3 is amended. New text is underlined and deleted text is struck through.
Paragraph 130M is added.
Scope
...
3 If another Standard prescribes the accounting for a specific type of intangible asset, an
entity applies that Standard instead of this Standard. For example, this Standard does
not apply to:
(a) ...
(g) deferred acquisition costs, and intangible assets, arising from an insurer's
contractual rights under insurance contracts within the scope of Ind AS
117104, Insurance Contracts. Ind AS 104 sets out specific disclosure
requirements for those deferred acquisition costs but not for those intangible
assets. Therefore, the disclosure requirements in this Standard apply to those
intangible assets.
(h) ...
Transitional provisions and effective date
...
130M Ind AS 117 amended paragraph 3. An entity shall apply that amendment when it
applies Ind AS 117.
24
Appendix 1
Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this
Appendix is only to bring out the major differences, if any, between Indian Accounting
Standard (Ind AS) 117 and the corresponding International Financial Reporting Standard
(IFRS) 17, Insurance Contracts, issued by the International Accounting Standards Board.
Comparison with IFRS 17, Insurance Contracts
1. IFRS 17, Insurance Contracts, is applicable globally with effect from 1st January 2021.
However, in India, it has been decided to implement Ind AS with effect from 1st April
2020. In case of insurance companies, early application of the said standard will be
permitted for consolidation purposes only.
2. Paragraph 7(b) of IFRS 17 mentions that this standard shall not be applicable to
retirement benefit obligations reported by defined benefit retirement plans and reference
to IAS 26, Accounting and Reporting by Retirement Benefit Plans, has been made.
Though this scope exclusion is retained but reference to IAS 26 has been omitted in Ind
AS 117 considering Ind AS corresponding to IAS 26 has not been notified in India.
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