IFRS 4: Insurance Contracts

OBJECTIVE
 
The objective of this IFRS is to deal with the financial reporting for insurance contracts by an entity that issues insurance contracts. 
 
An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (i.e. the policyholder) by agreeing to compensate the policyholder if a specific uncertain future event (the insured event) adversely affects the policyholder.
 
IFRS 4 applies to all insurance contracts that an entity issues and to reinsurance contracts that it holds, except for certain contracts that are dealt with in other IFRS’s such as IAS 39 Financial Instruments: Recognition and measurement.
 
In addition, the IFRS:
 
  • prohibits provisions for potential claims under contracts that do not exist at the end of the reporting period;
  • requires a test for the adequacy of recognised insurance liabilities and requires an impairment test to be carried out for reinsurance assets; and
  • requires an insurer to keep insurance liabilities in its statement of financial position (balance sheet) until such time that they are discharged, cancelled or expire. It also requires an entity to present insurance liabilities without offsetting them against related reinsurance assets.
An entity that has to report using IFRS 4 can change its accounting policies for insurance contracts but only, if as a result, the financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. The IFRS also stipulates that an insurer cannot:
 
  • measure insurance liabilities on an undiscounted basis;
  • measure contractual rights to future investment management fees at an amount that exceeds their fair value by comparison with current fees charged by other market participants for similar services; and
  • use non-uniform accounting policies for the insurance liabilities of subsidiaries.
About the author:

Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates www.lwaltd.com. Read all of Collings's analyses of the International Financial Reporting Standards.

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