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TMI BlogInsurance Contracts (Omitted)X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to the customer ( subject to other specified criteria). That approach is also acceptable under this Ind AS, which permits the service provider (i) to continue its existing accounting policies for these contracts unless they involve practices prohibited by paragraph 14 and (ii) to improve its accounting policies if so permitted by paragraphs 22-30." 4. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as,"(h) product warranties. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of this Ind AS. However, product warranties issued directly by a manufacturer, dealer or retailer are outside its scope, because they are within the scope of Ind AS 115 and Ind AS 37." 5. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, "B21 If the contracts described in paragraph B19 do not create financial assets or financial liabilities, Ind AS 115 applies. Under Ind AS 115, revenue is recognised when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer in an amount that reflects the consideration to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f services is recognised by reference to the stage of completion of the transaction if the outcome of the transaction can be estimated reliably.]" 12. Inserted vide F. No. 01/01/2009-CL-V(Part VI) - Dated 28-03-2018, w.e.f. 1st day of April, 2018 13. Substituted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 before it was read as 7[(c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee's residual value guarantee embedded in a finance lease (see Ind AS 17, Leases, Ind AS 115, Revenue from Contracts with Customers and Ind AS 38, Intangible Assets).] 14. Inserted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 15. Substituted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 before it was read as "12[4. Paragraphs 40 to 41F related to effective date have not been included in Ind AS 104 as these are not relevant in Indian context. However, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding financial instruments that contain such features. 3 This Ind AS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see Ind AS 32, Financial Instruments: Presentation, Ind AS 107 and Ind AS 109, Financial Instruments). 4 An entity shall not apply this Ind AS to: 6[(a) product warranties issued directly by a manufacturer, dealer or retailer (see Ind AS 115 , Revenue from Contracts with Customers and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets).] (b) employers' assets and liabilities under employee benefit plans (see Ind AS 19, Employee Benefits, and Ind AS 102, Share-based Payment) and retirement benefit obligations reported by defined benefit retirement plans. 13[(c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, variable lease payments and similar items), as well as a lessee's residual value guarantee embedded in a lease (see Ind AS 116, Leases, Ind AS 115, Revenue from Contracts with Customers, and Ind AS 38, In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t index reaches a specified level). 9 Paragraph 8 applies equally to options to surrender a financial instrument containing a discretionary participation feature. Unbundling of deposit components 10 Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components: (a) unbundling is required if both the following conditions are met: (i) the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component). (ii) the insurer's accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component. (b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations. (c) unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i). 11 The following is an example of a case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss. 16 If an insurer applies a liability adequacy test that meets specified minimum requirements, this Ind AS imposes no further requirements. The minimum requirements are the following: (a) The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees. (b) If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss. 17 If an insurer's accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16, the insurer shall: (a) determine the carrying amount of the relevant insurance liabilities2 less the carrying amount of: (i) any related deferred acquisition costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in Ind AS 8. 23 To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in Ind AS 8, but the change need not achieve full compliance with those criteria. The following specific issues are discussed below: (a) current interest rates (paragraph 24); (b) continuation of existing practices (paragraph 25); (c) prudence (paragraph 26); (d) future investment margins (paragraphs 27-29); and (e) shadow accounting (paragraph 30). Current market interest rates 24 An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities3 to reflect current market interest rates and recognises changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph permits an insurer to change its accounting policies for designated liabilities, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rate and including the result in the measurement of the liability. 28 An insurer may overcome the rebuttable presumption described in paragraph 27 if, and only if, the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins. For example, suppose that an insurer's existing accounting policies for insurance contracts involve excessively prudent assumptions set at inception and a discount rate prescribed by a regulator without direct reference to market conditions, and ignore some embedded options and guarantees. The insurer might make its financial statements more relevant and no less reliable by switching to a comprehensive investor oriented basis of accounting that is widely used and involves: (a) current estimates and assumptions; (b) a reasonable (but not excessively prudent) adjustment to reflect risk and uncertainty; (c) measurements that reflect both the intrinsic value and time value of embedded options and guarantees; and (d) a current market discount rate, even if that discount rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent measurement of this asset shall be consistent with the measurement of the related insurance liability. 32 An insurer acquiring a portfolio of insurance contracts may use the expanded presentation described in paragraph 31. 33 The intangible assets described in paragraphs 31 and 32 are excluded from the scope of Ind AS 38 and Ind AS 36, Impairment of Assets. However, Ind AS 38 and Ind AS 36 apply to customer lists and customer relationships reflecting the expectation of future contracts that are not part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer. Discretionary participation features Discretionary participation features in insurance contracts 34 Some insurance contracts contain a discretionary participation feature as well as a guaranteed element. The issuer of such a contract: (a) may, but need not, recognise the guaranteed element separately from the discretionary participation feature. If the issuer does not recognise them separately, it shall classify the whole contract as a liability. If the issuer classifies them separately, it shall classify the guaranteed ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole contract shall not be less than the amount that would result from applying Ind AS 109 to the guaranteed element. That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 9 exempts that option from measurement at fair value. The issuer need not disclose the amount that would result from applying Ind AS 109 to the guaranteed element, nor need it present that amount separately. Furthermore, the issuer need not determine that amount if the total liability recognised is clearly higher. (c) although these contracts are financial instruments, the issuer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in the carrying amount of the liability. (d) although these contracts are financial instruments, an issuer applying paragraph 20(b) of Ind AS 107 to contracts with a discretionary participation feature shall disclose the total interest expense recognised in profit or loss, but need not calculate such interest expense using the effective interest method. 17[35A [Refer Appendix 1] 35B-35N [Refer Appendix 1]] Disclosure Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year. (d) information about credit risk, liquidity risk and market risk that paragraphs 31-42 of Ind AS 107 would require if the insurance contracts were within the scope of Ind AS 107. However: (i) an insurer need not provide the maturity analysis required by paragraph 39(a) and (b) of Ind AS 107 if it discloses information about the estimated timing of the net cash outflows resulting from recognised insurance liabilities instead. This may take the form of an analysis, by estimated timing, of the amounts recognised in the balance sheet. (ii) if an insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may use that sensitivity analysis to meet the requirement in paragraph 40(a) of Ind AS 107. Such an insurer shall also provide the disclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... policyholder under a reinsurance contract. deposit component A contractual component that is not accounted for as a derivative under Ind AS 109 and would be within the scope of Ind AS 109 if it were a separate instrument. direct insurance contract An insurance contract that is not a reinsurance contract. discretionary participation feature A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: (a) that are likely to be a significant portion of the total contractual benefits; (b) whose amount or timing is contractually at the discretion of the issuer; and (c) that are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profit or loss of the company, fund or other entity that issues the contract. fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113.) financial guarantee contract A contract that requires th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party that has an obligation under a reinsurance contract to compensate a cedant if an insured event occurs. unbundle Account for the components of a contract as if they were separate contracts. Appendix B Definition of an insurance contract This appendix is an integral part of the Ind AS. B1 This appendix gives guidance on the definition of an insurance contract in Appendix A. It addresses the following issues: (a) the term 'uncertain future event' (paragraphs B2-B4); (b) payments in kind (paragraphs B5-B7); (c) insurance risk and other risks (paragraphs B8-B17); (d) examples of insurance contracts (paragraphs B18-B21); (e) significant insurance risk (paragraphs B22-B28); and (f) changes in the level of insurance risk (paragraphs B29 and B30). Uncertain future event B2 Uncertainty (or risk) is the essence of an insurance contract. Accordingly, at least one of the following is uncertain at the inception of an insurance contract: (a) whether an insured event will occur; (b) when it will occur; or (c) how much the insurer will need to pay if it occurs. B3 In some insurance contracts, the insured event is the discovery of a loss during the term of the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is also acceptable under this Ind AS, which permits the service provider (i) to continue its existing accounting policies for these contracts unless they involve practices prohibited by paragraph 14 and (ii) to improve its accounting policies if so permitted by paragraphs 22-30.] (c) The service provider considers whether the cost of meeting its contractual obligation to provide services exceeds the revenue received in advance. To do this, it applies the liability adequacy test described in paragraphs 15-19 of this Ind AS. If this Accounting Standard did not apply to these contracts, the service provider would apply Ind AS 37 to determine whether the contracts are onerous. (d) For these contracts, the disclosure requirements in this Ind AS are unlikely to add significantly to disclosures required by other Ind ASs. Distinction between insurance risk and other risks B8 The definition of an insurance contract refers to insurance risk, which this Ind AS defines as risk, other than financial risk, transferred from the holder of a contract to the issuer. A contract that exposes the issuer to financial risk without significant insurance risk is not an insurance contract. B9 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot insurance risk. B13 The definition of an insurance contract refers to an adverse effect on the policyholder. The definition does not limit the payment by the insurer to an amount equal to the financial impact of the adverse event. For example, the definition does not exclude 'new-for-old' coverage that pays the policyholder sufficient to permit replacement of a damaged old asset by a new asset. Similarly, the definition does not limit payment under a term life insurance contract to the financial loss suffered by the deceased's dependants, nor does it preclude the payment of predetermined amounts to quantify the loss caused by death or an accident. B14 Some contracts require a payment if a specified uncertain event occurs, but do not require an adverse effect on the policyholder as a precondition for payment. Such a contract is not an insurance contract even if the holder uses the contract to mitigate an underlying risk exposure. For example, if the holder uses a derivative to hedge an underlying non-financial variable that is correlated with cash flows from an asset of the entity, the derivative is not an insurance contract because payment is not conditional on whether the hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the insurance). (d) life-contingent annuities and pensions (ie contracts that provide compensation for the uncertain future event-the survival of the annuitant or pensioner-to assist the annuitant or pensioner in maintaining a given standard of living, which would otherwise be adversely affected by his or her survival). (e) disability and medical cover. (f) surety bonds, fidelity bonds, performance bonds and bid bonds (ie contracts that provide compensation if another party fails to perform a contractual obligation, for example an obligation to construct a building). (g) credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. These contracts could have various legal forms, such as that of a guarantee, some types of letter of credit, a credit derivative default contract or an insurance contract. However, although these contracts meet the definition of an insurance contract, they also meet the definition of a financial guarantee contract in Ind AS 109 and are within the scope of Ind AS 107 and Ind AS 109, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are normally non-insurance financial instruments or service contracts, see paragraphs B20 and B21). (c) self-insurance, in other words retaining a risk that could have been covered by insurance (there is no insurance contract because there is no agreement with another party). (d) contracts (such as gambling contracts) that require a payment if a specified uncertain future event occurs, but do not require, as a contractual precondition for payment, that the event adversely affects the policyholder. However, this does not preclude the specification of a predetermined payout to quantify the loss caused by a specified event such as death or an accident (see also paragraph B13). (e) derivatives that expose one party to financial risk but not insurance risk, because they require that party to make payment based solely on changes in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (see Ind AS 109). (f) a credit-related guarantee (or letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed in paragraph B23 refer to amounts that exceed those that would be payable if no insured event occurred (excluding scenarios that lack commercial substance). Those additional amounts include claims handling and claims assessment costs, but exclude: (a) the loss of the ability to charge the policyholder for future services. For example, in an investment-linked life insurance contract, the death of the policyholder means that the insurer can no longer perform investment management services and collect a fee for doing so. However, this economic loss for the insurer does not reflect insurance risk, just as a mutual fund manager does not take on insurance risk in relation to the possible death of the client. Therefore, the potential loss of future investment management fees is not relevant in assessing how much insurance risk is transferred by a contract. (b) waiver on death of charges that would be made on cancellation or surrender. Because the contract brought those charges into existence, the waiver of these charges does not compensate the policyholder for a pre-existing risk. Hence, they are not relevant in assessing how much insurance risk is transferred by a contract. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed death benefit whenever the policyholder dies, with no expiry date for the cover). It is certain that the policyholder will die, but the date of death is uncertain. The insurer will suffer a loss on those individual contracts for which policyholders die early, even if there is no overall loss on the whole book of contracts. B28 If an insurance contract is unbundled into a deposit component and an insurance component, the significance of insurance risk transfer is assessed by reference to the insurance component. The significance of insurance risk transferred by an embedded derivative is assessed by reference to the embedded derivative. Changes in the level of insurance risk B29 Some contracts do not transfer any insurance risk to the issuer at inception, although they do transfer insurance risk at a later time. For example, consider a contract that provides a specified investment return and includes an option for the policyholder to use the proceeds of the investment on maturity to buy a life-contingent annuity at the current annuity rates charged by the insurer to other new annuitants when the policyholder exercises the option. The contract transfers no insurance risk to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emptions have not been provided under Ind AS 104. In the context of optional temporary exemptions from applying IFRS 9, paragraphs 3 and 5 have been amended and paragraphs 20A-20Q, 35A-35N, 39B-39M, 46-49 have been added in IFRS 4. Since temporary optional exemptions have not been provided under Ind AS 104, these paragraphs have not been included in Ind AS 104. However, paragraph numbers have been retained in Ind AS 104 to maintain consistency with IFRS 4. Amendments to Interest Rate Benchmark Reform-Phase 2 added paragraphs 20R-20S in IFRS 4 which prescribes that an insurer applying the temporary exemption from IFRS 9 shall read certain paragraph references of IAS 39 in place of paragraph references of IFRS 9. Since temporary optional exemptions have not been provided under Ind AS 104, these paragraphs have not been included in Ind AS 104. However, paragraph numbers have been retained in Ind AS 104 to maintain consistency with IFRS 4.] 21[4] Paragraph 39(b) has been deleted in IFRS 4 by IASB. However, paragraph number has been retained in Ind AS 104 to maintain consistency with IFRS 4. 15[23[5. Paragraphs 40-41F, and 41H, and 42-51 related to effective date and transition have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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