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Wiley IFRS: Practical Implementation Guide and Workbook
(b) Sets out a minimum liabilit y adequacy test that requires insurers to compare their recog–
nized insurance liabilit ies against estimates of future cash flows. Additionally, there is a
requirement to carry out an impairment test for reinsurance assets.
3.3 There is a requirement for an insurer to keep insurance liabilities in its balance sheet until
they are discharged. The IFRS also prohibit s offsetting insurance liabilities against related reinsur–
ance assets.
4. CHANGES IN ACCOUNTING POLICIES
4.1 Insurers are permitted to modify their existing accounting policies for insurance contracts as
long as any changes meet the lASH ' s criteria for improvin g the relevance of their financi al
statements without making them less reliable. An insurer cannot introduce any of these practices,
although it can continue using accounting policies that involve any of them:
• Measuring insurance liabilities on a nondiscounted basis
• Measuring contractual rights to future investment management fees at an amount that ex–
ceeds their fair value
• Using nonuniform account ing policies for the insurance liabilit ies of a subsidiary
4.2 Insurers can use current market interest rates to value liabiliti es, thus bringing them more into
line with movements in associa ted assets that are interest-sensitive. This measure does not need to
be applied consistently across all insurance liabilities. However, insurers will need to designate the
liabilit ies that will be measured using market rates.
4.3 An insurer does not need to change its accounting policies on insurance contracts in order to
eliminate excessive prudence. However, an insurer that already measures its insurance contracts
with sufficient prudence should not introduce additional prudence.
4.4 An insurer need not change its accounting policies for insurance contracts to eliminate future
investment margins. However, entities cannot change to an accounting policy that adjusts their
liabilities to reflect future investment margins unless, for example, this is part of a wider switch to a
comprehensive investor-based accounting system.
4.5 The lASH would require proof that this switch improves the relevance and reliability of the
financial statements to such an extent that it outweighs the disadvantage caused by the inclusion of
future investment margins.
5. CONCESSIONS IN IFRS 4
5.1 There is a concession to insurers regarding the accounting on a business combination. Insur–
ers can recognize an intangible asset that is the difference between the fair value and book value of
the insurance liabilities taken on board. Such an asset is excluded from the scope of lAS 36,
Im–
pairment ofAssets.
and lAS 38,
Intangibl e Assets.
5.2 Entities can continue to value insurance and investment contracts that have discretionary par–
ticipation in profit feature s using their existing accounting policies. Any fixed guaranteed amount
should be regarded as the minimum liability with the rest of the contract classified as an additional
liability or included in equity, or evenly split between equity and liabilities. If the contract is not
split in this way, the issuer of the contract should classify the whole contract as a liability. These
requirements also apply to any financial instruments that contain a discretionary participati on
future.
6. ACCOUNTING UNDER IFRS 4
6.1 Certain derivative features in a contract, such as an index-linked option, may need to be sepa–
rated at fair value. lAS 39 applies to derivatives that are embedded in an insurance contract unless
the embedded derivative is itself an insurance contract. An insurer need not account for an embed–
ded deri vative separately at fair value if the embedded derivative meets the definition of an insur–
ance contract.
6.2 IFRS 4 requires an insurer to account separately for the deposit components of some insur–
ance contracts in order to avoid the omission of assets and liabilities from the balance sheet. An
insurance contract can contain both deposit and insurance components.