IFRS 4: INSURANCE CONTRACTS

OVERVIEW


IFRS 4 applies to all insurance and reinsurance contracts. An insurance contract is a contract in which one party (Insurer) assures another party (policyholder) to indemnify the policyholder in case of future loss, covered under the insurance policy. This standard provides some exemption in the case of other standards and also an exemption in the case of IAS 8 –Accounting Policies, Changes in Accounting Estimates, and Errors.

Key Takeaway Points


=> IFRS 4 applies to all insurance and reinsurance contracts. An insurance contract is a contract in which one party (Insurer) assures another party (policyholder) to indemnify the policyholder in case of future loss.


=> IFRS 4 applies to all the insurance and reinsurance contracts that an entity issue or hold for the future coverage of any mishap and loss. However, this standard does not apply to those assets and liabilities that are specifically covered under other standards.


=> IFRS 4 specifies that insurer shall adopt the policy for the measurement and recognition of the insurance contracts as per IAS 8 –Accounting Policies, Changes in Accounting Estimates and Errors if no standard applies specifically to an item of insurance.


=> The reinsurance assets shall not be offset against the insurance liability. Similarly, the income and expenses from the reinsurance contracts shall not be offset against the income and expenses of the insurance contracts.


SCOPE


As discussed in the overview section, IFRS 4 applies to all the insurance and reinsurance contracts that an entity issue or hold for the future coverage of any mishap and loss. However, this standard does not apply to those assets and liabilities that are specifically covered under other standards.


RECOGNITION AND MEASUREMENT


=> IFRS 4 specifies that insurer shall adopt the policy for the measurement and recognition of the insurance contracts as per IAS 8 –Accounting Policies, Changes in Accounting Estimates and Errors if no standard applies specifically to an item of insurance.


=> An insurer shall not recognize any liability as to the provision against future losses and such losses are not exist at the end of the reporting period. An example of such future losses could be future losses due to flood and equalization provision.


=> An insurer shall carry out the liability adequacy test at the end of each reporting period. The liability adequacy test is a test that is performed at the end of the reporting period to compare the carrying amount of the insurance liability with the current estimates of the future cash under the insurance contracts to assess that whether the insurance liability is sufficient to cover the expected loss. Any deficiency is recognized in the statement of profit or loss.


=> The insurance liability shall be removed from the statement of financial position only when the insurer compensates the policyholder in full for the loss or the contract of insurance become to an end or expires.


=> The reinsurance assets shall not be offset against the insurance liability. Similarly, the income and expenses from the reinsurance contracts shall not be offset against the income and expenses of the insurance contracts.


=> An entity shall carry out the impairment test on the insurance contracts at the end of the reporting period and such impairment shall be dealt with as per IAS 36.


CHANGE IN ACCOUNTING POLICY


An insurer may change its accounting policy only when the change in the policy makes the financial statements more reliable and credible to the users of the financial statements so that they can make the best economic decisions based on such financial statements.


DISCLOSURES


IFRS 4 requires the following disclosures regarding the insurance contracts:


=> The accounting policy is adopted for insurance contracts, insurance assets, and liabilities.

=> The details of income and expenses, liabilities, and liabilities arising from the insurance contracts.

=> The assumptions used in the measurement and recognition of insurance contracts.

=> The effect of the changes in the assumptions used in the insurance contracts If any.

=> The recognition of changes in insurance liabilities and re-insurance contracts.

=>Risk management policies and objectives.