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INSURANCE CONTRACTS (IFRS 4)
1. BACKGROUND AND INTRODUCTION
1.1
IFRS 4 is the first Standard from the International Accounting Standards S oard (lAS S) on in–
surance contracts. The extent of guidance in IFRS 4 is quite modest in comparison with the more
comprehensive ove rhaul of insurance accounting that is envisaged by the lASS in the future . IFRS
4 was introduced in time for insurance companies to comply with the adop tion of International
Financial Repon ing Standards (lFRS) in Europe and elsewhere in 2005 . The Standard is des igned
to make limited improvements to accounting practices and to provide users with an insight into the
key areas that relate to accounting for insura nce contracts.
1.2 All entities that issue policies that meet the definition of an insurance contract in IFRS 4
have to apply the Standa rd. Add itionally, the Standard applies to financia l instruments with so–
called discretionary participation features. The Standard does not apply to other assets and
liabilities of the insurance companies , such as financial asse ts and financial liabilities, which fall
within the scope of lAS 39. Similarly, it does not address the acco unting required by policyholders.
Additionally, IFRS 4 sets out new disclosure requirement s for contracts that qualify as insurance,
including details about futur e cash flows.
2. DEFINITION OF KEY TERM (in accordance with IFRS 4)
Insurance contract. A contract under which one party (the insurer) accepts significant insur–
ance risk from another
party
(the policyholder) by agreei ng to compensate the policyholder if a
specified uncertain future event (the insured event) adve rsely affects the policyholder.
2.1 IFRS 4 covers most motor, travel, life, and property insurance contracts as well as mos t
reins urance contracts. However, some policies that transfer no significa nt insurance risk, such as
savings and pension plans, are covered by lAS 39 and acco unted for as financial instrum ents
irrespective of their legal form.
2.2 lAS 39 also applies to those contrac ts that principally transfer financial risk, such as credit
derivatives and some financial reinsurance contracts. IFRS 4 does not apply to: product warranties,
which are cove red by lAS
18
and lAS 37; emp loyers' assets and liabilities under employee benefits
plans, which are covered by lAS
19
and IFRS 2; and contingent cons ideration payable or receiv–
able in a business combination, which is covered by IFRS 3,
Business Combinations.
2.3 Financial guarantee contracts are outside the scope of IFRS 4 unless the issuer elects to app ly
IFRS 4 to such contracts. An issuer may make such an electio n only if it has previo usly asse rted
explicitly that it regards such contracts as insurance contracts and has used acco unting applicable to
insurance contracts.
3. FIRST PHASE
3.1 Insurance contracts continue to be covered by existing acco unting practices during thi s first
phase of the development of a comprehensive set of standards on insurance . The IFRS actually
exempts an insurer temporarily from some requirements of other Standards, includin g the requ ire–
ment to consider the lASS ' s
Framewo rk
in determining accounting policies .
3.2 IFRS 4 makes limited improvements to accounting policies for insurance contracts in order to
bring them more into line with IFRS. The Standard
(a) Prohibits provisions for possible claims under contracts that are not in existence at the bal–
ance sheet date. Th is includes catastrop he provisions and equalizat ion provisions.