International financial reporting standards

Fact Sheet

IFRS 4 Insurance contracts

(This fact sheet is based on the standard as at 1 January 2008.)

Important note:
This fact sheet is based on the requirements of the International Financial Reporting Standards (IFRSs). In some
jurisdictions, the IFRSs are adopted in their entirety, in other jurisdictions the individual IFRSs are amended.
In some jurisdictions the requirements of a particular IFRS may not have been adopted. Consequently, users
of the fact sheet in various jurisdictions should ascertain for themselves the relevance of the fact sheet to the
particular jurisdiction. The application date indicated below is identified in the IFRS, as such it may not be
relevant to the application date of any specific jurisdiction.

OBJECTIVE
IFRS 4 Insurance contracts prescribes the financial reporting requirements for issuers of insurance contracts (including reinsurance
contracts), holders of reinsurance contracts, and issuers of financial instruments with discretionary participation features.

PRESCRIBED ACCOUNTING TREATMENT

An insurer is temporarily exempted from applying the criteria in IAS 8 Accounting policies, changes in accounting estimates and errors
when developing accounting policies applicable to insurance contracts it issues and reinsurance contracts it holds. An insurer may
continue to account for fixed-fee service contracts that meet the definition of an insurance contract using their existing accounting
policies so long as the insurer:

• does not recognise as a liability any provisions for possible future claims arising under insurance contracts that are not in
existence at the reporting date

• conducts a liability adequacy test at each reporting date

• removes an insurance liability (or part thereof) from its balance sheet only when the liability is extinguished

• does not offset

–– reinsurance assets against related insurance liabilities
–– income or expense from reinsurance contracts against the expense or income from the related insurance contracts
• considers whether a reinsurance asset is impaired and, if so, reduces the carrying amount of the reinsurance asset accordingly
and recognises an impairment loss in profit or loss

Liability Adequacy Test

At each reporting date, an insurer shall assess whether the carrying amount of an insurance liability needs to be increased by comparing
its carrying amount (less related deferred acquisition costs and related intangible assets) with the current estimates of future cash flows
under the insurance contracts. Any deficiency is recognised in the income statement.

Changes in accounting policies

An insurer may change accounting policies for insurance contracts only if the change adds to the relevance to users for economic
decision-making needs without loss of reliability. Examples of specific issues where accounting policy changes for insurance contracts are
or are not permitted include

• an insurer is permitted but not required to change its policies to remeasure designated insurance liabilities (including deferred
acquisition costs and related intangible assets) to reflect current market interest rates and recognises changes in those liabilities
in profit or loss
IFRS 4 Insurance contracts

• an insurer can continue, but not introduce:

–– measuring liabilities on an undiscounted basis
–– measuring contractual rights to future investment management fees at an amount exceeding their fair value as implied by
a comparison with current fees for similar services charged by other market participants
–– using non-uniform accounting policies for the insurance contracts of subsidiaries, unless
specifically permitted
• accounting policies do not need to be changed to eliminate excessive prudence or to
eliminate future investment margins

• an insurer is permitted to change its policies such that a recognised but unrealised gain or loss on an asset affects the
measurement of some or all of its insurance liabilities, related deferred acquisition costs and related intangible assets in the
same way that a realised gain or loss does

Unbundling of deposit components

If the insurance contract consists of an insurance component and a deposit component, unbundling of the components:

• is required, if the deposit component can be measured separately and the insurer’s accounting policies do not otherwise require
recognition of all obligations and rights arising from the deposit component

• is permitted but not required, if the deposit component can be measured separately and the insurer’s accounting policies
require recognition of all obligations and rights arising from the deposit component

• is prohibited, if the deposit component cannot be measured separately

If unbundled, the insurance component is accounted for under IFRS 4 and the deposit component under IAS 39 Financial instruments:
recognition and measurement.

Discretionary participation features

The issuer of an insurance contract with a discretionary participation feature and a guaranteed element may but need not choose to
recognise the elements separately with the following consequences:

• if not recognised separately, the whole contract is classified as a liability

• if recognised separately:
–– the guaranteed element is classified as a liability
–– the discretionary participation feature can be classified as either a liability or a separate component of equity
• all premiums may be recognised as revenue without separating any portion applying to an equity component

PRESCRIBED DISCLOSURES
An insurer shall disclose information identifying and explaining the amounts in financial statements arising from insurance
contracts including:

• accounting policies for insurance contracts and related assets, liabilities, income and expense

• recognised assets, liabilities, income and expense

• cash flows, if presenting the cash flow statement using the direct method

• specific disclosures for an insurer who is a cedant

• specific disclosures on the process used to determine the assumptions that have the greatest effect on the measurement of the
recognised amounts

• the effect of changes in assumptions used to measure insurance assets and insurance liabilities

• reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs
IFRS 4 Insurance Contracts

Other required disclosures also include information that enables users to evaluate the nature and extent of risks arising from insurance
contracts. The disclosures shall include:

• the objectives, policies and processes for managing risks arising from insurance contracts and the methods used to manage
those risks

• information about insurance risk including sensitivity of risk, concentration of risk and claims development

• information about credit risk, liquidity risk and market risk that IFRS 7 Financial instruments: disclosures would require if the
insurance contracts were within the scope of IFRS 7

• information about exposures to market risk arising from embedded derivatives contained in a host insurance contract if the
embedded derivatives are not measured at fair value

IMPORTANT DEFINITIONS
A cedant is the policyholder under a reinsurance contract.

A discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits:

• that are likely to be a significant portion of the total contractual benefits

• whose amount or timing of the additional benefits is contractually at the issuer’s discretion

• that are contractually based on the performance of a specified pool of contracts or a specified type of contract; realised and/
or unrealised investment returns on a specified pool of the insurer’s assets; or the profit or loss of the company, fund or other
entity that issues the contract

Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity
price, foreign 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.

An insurance contract is a contract under which one party (the insurer) accepts significant 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 risk is risk, other than financial risk, transferred from the holder of a contract to the issuer.

Insured event is an uncertain future event that is covered by an insurance contract and creates insurance risk.

Insurer is the party with an obligation under an insurance contract to compensate a policyholder if an insured event occurs.

A liability adequacy test is an assessment of whether the carrying amount of an insurance liability needs to be increased (or the
carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows.

A policyholder is a party that has a right to compensation under an insurance contract if an insured event occurs.

A reinsurer is the party that has an obligation under a reinsurance contract to compensate a cedant if an insured event occurs.

Reinsurance contract is an insurance contract issued by one insurer (the reinsurer) to compensate another insurer (the cedant) for losses
on one or more contracts issued by the cedant.

To unbundle is to account for the components of a contract as if they were separate contracts.

OTHER MATTERS
1. Scope and Application
IFRS 4 applies to insurance contracts that it issues and reinsurance contracts that it holds, and financial instruments that it issues with a
discretionary participation feature.

IFRS 4 does not apply to the following insurance contracts:

• product warranties issued directly by a manufacturer, dealer or retailer

• employers’ assets and liabilities under employee benefit plans

• retirement benefit obligations reported by defined benefit retirement plans

• contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item, as
well as a lessee’s residual value guarantee embedded in a finance lease

This fact sheet series has been developed by CPA Australia Ltd. For further information visit cpaaustralia.com.au
CPA85428 03/2008
IFRS 4 Insurance Contracts

• financial guarantee contracts unless previously asserted as insurance contracts and has used accounting applicable to
insurance contracts

• contingent consideration payable or receivable in a business combination

• direct insurance contracts that the entity holds

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This fact sheet series has been developed by CPA Australia Ltd. For further information visit cpaaustralia.com.au
CPA85428 03/2008