Financial Accounting

IFRS 4 – Insurance Contracts, Scope and Applicability

Overview

IFRS 4 is the IASB’s first advice on insurance contract accounting – but not the last. A detailed study of insurance contracts is now being conducted.

The Board developed IFRS 4 in response to an urgent requirement for enhanced disclosures about insurance contracts, as well as certain enhancements to recognition and measurement processes, in time for listed firms throughout Europe and abroad to implement IFRS in 2005.

Scope and Applicability

Except for specific contracts covered by other Standards, IFRS 4 applies to all insurance contracts (including reinsurance contracts) that a company issues and holds. It does not apply to an insurer’s other assets and liabilities, such as financial assets and financial liabilities covered by IFRS 9.

Additionally, it does not handle policyholder accounting.

Definition of insurance contract

An insurance contract is defined as “a contract in which one party (the insurer) assumes significant insurance risk on behalf of another party (the policyholder) in exchange for agreeing to compensate the policyholder in the event of a specified uncertain future event (the insured event) having a negative impact on the policyholder.”

Disclosures

As per the IFRS, disclosure is required in given situations:

The following information assists users in comprehending the amounts in the insurer’s financial statements arising from insurance contracts:

  • accounting policies for insurance contracts and related assets, liabilities, revenue, and expense. insurance contracts’
  • recognised assets, liabilities, income, expenditure, and cash flow
  • Certain extra disclosures are necessary if the insurer is a cedant.
  • information on the assumptions that have the greatest impact on the assessment of assets, liabilities, income, and cost, including, to the extent possible, quantitative disclosure of those assumptions.
  • the ramifications of changing assumptions reconciliations of changes in insurance obligations and reinsurance assets, as well as, if applicable, associated deferred acquisition costs

Information that assists users in determining the type and scope of risks associated with insurance contracts:

  • goals and strategies for risk management insurance contract
  • terms and circumstances that have a major impact on the quantity, timeliness, and uncertainty of the insurer’s future cash flows
  • information regarding insurance risk (both before and after risk mitigation through reinsurance), including data on the following:
    • the sensitivity of insurance risk
    • concentrations of insurance risk
    • actual claims compared to earlier estimates
  • the information about credit risk, liquidity risk, and market risk that IFRS 7 would require if the insurance contracts were covered by the standard
  • information about market risk exposures arising from embedded derivatives in a host insurance contract if the insurer is not required to measure the embedded derivatives at fair value and does not do so.
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