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TMI BlogCompanies (Indian Accounting Standards) Third Amendment Rules, 2024.X X X X Extracts X X X X X X X X Extracts X X X X ..... all, as specified in the Schedule to these rules, continue to apply. 3. After the Annexure to the said rules and the entries relating thereto, the following Schedule shall be inserted, namely: - SCHEDULE [See proviso to rule 5] Indian Accounting Standard (Ind AS) 104 Insurance Contracts ( This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles .) Objective 1 The objective of this Indian Accounting Standard (Ind AS) is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this Ind AS as an insurer). In particular, this Ind AS requires: (a) limited improvements to accounting by insurers for insurance contracts. (b) disclosure that identifies and explains the amounts in an insurer s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts. Scope 2 An entity shall apply this Ind AS to: (a) insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce contract is a type of insurance contract. Accordingly, all references in this Ind AS to insurance contracts also apply to reinsurance contracts. Embedded derivatives 7 Ind AS 109 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. Ind AS 109 applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract. 8 As an exception to the requirements in Ind AS 109, an insurer need not separate, and measure at fair value, a policyholder s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirements in Ind AS 109 do apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract. Furthermore, those requirements also app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts that it issues (including related acquisition costs and related intangible assets, such as those described in paragraphs 31 and 32); and (b) reinsurance contracts that it holds. 14 Nevertheless, this Ind AS does not exempt an insurer from some implications of the criteria in paragraphs 10 12 of Ind AS 8. Specifically, an insurer: (a) shall not recognise as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the end of the reporting period (such as catastrophe provisions and equalisation provisions). (b) shall carry out the liability adequacy test described in paragraphs 15 19. (c) shall remove an insurance liability (or a part of an insurance liability) from its balance sheet when, and only when, it is extinguished ie when the obligation specified in the contract is discharged or cancelled or expires. (d) shall not offset: (i) reinsurance assets against the related insurance liabilities; or (ii) income or expense from reinsurance contracts against the expense or income from the related insurance contracts. (e) shall consider whether its reinsurance assets are impaired (see paragraph 20). Liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test is applied at the level of aggregation specified in that test. If its liability adequacy test does not meet those minimum requirements, the comparison described in paragraph 17 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. 19 The amount described in paragraph 17(b) (ie the result of applying Ind AS 37) shall reflect future investment margins (see paragraphs 27 29) if, and only if, the amount described in paragraph 17(a) also reflects those margins. Impairment of reinsurance assets 20 If a cedant s reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognise that impairment loss in profit or loss. A reinsurance asset is impaired if, and only if: (a) there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the contract; and (b) that event has a reliably measurable impact on the amounts that the cedant will receive from the reinsurer. 20A-20Q [Refer Appendix 1] 20R-20S [Refer Appendix 1] Changes in accounting poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables. (c) using non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and related intangible assets, if any) of subsidiaries, except as permitted by paragraph 24. If those accounting policies are not uniform, an insurer may change them if the change does not make the accounting policies more diverse and also satisfies the other requirements in this Ind AS. Prudence 26 An insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures its insurance contracts with sufficient prudence, it shall not introduce additional prudence. Future investment margins 27 An insurer need not change its accounting policies for insurance contracts to eliminate future investment margins. However, there is a rebuttable presumption that an insurer s fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is highly unlikely that an insurer could overcome the rebuttable presumption described in paragraph 27. Shadow accounting 30 In some accounting models, realised gains or losses on an insurer s assets have a direct effect on the measurement of some or all of (a) its insurance liabilities, (b) related deferred acquisition costs and (c) related intangible assets, such as those described in paragraphs 31 and 32. An insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. The related adjustment to the insurance liability (or deferred acquisition costs or intangible assets) shall be recognised in other comprehensive income if, and only if, the unrealised gains or losses are recognised in other comprehensive income. This practice is sometimes described as shadow accounting . Insurance contracts acquired in a business combination or portfolio transfer 31 To comply with Ind AS 103, an insurer shall, at the acquisition date, measure at fair value the insurance liabilities assumed and insurance assets acquired in a business combination. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and in the portion of the discretionary participation feature classified as a liability shall be recognised in profit or loss. If part or all of the discretionary participation feature is classified in equity, a portion of profit or loss may be attributable to that feature (in the same way that a portion may be attributable to non -controlling interests). The issuer shall recognise the portion of profit or loss attributable to any equity component of a discretionary participation feature as an allocation of profit or loss, not as expense or income (see Ind AS 1, Presentation of Financial Statements ). (d) shall, if the contract contains an embedded derivative within the scope of Ind AS 109, apply Ind AS 109 to that embedded derivative. (e) shall, in all respects not described in paragraphs 14 20 and 34(a) (d), continue its existing accounting policies for such contracts, unless it changes those accounting policies in a way that complies with paragraphs 21 30. Discretionary participation features in financial instruments 35 The requirements in paragraph 34 also apply to a financial instrument that contains a discretionary participation feature. In addition: (a) if the issuer cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisation for the period and the amounts remaining unamortised at the beginning and end of the period. (c) the process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts described in (b). When practicable, an insurer shall also give quantified disclosure of those assumptions. (d) the effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements. (e) reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs. Nature and extent of risks arising from insurance contracts 38 An insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts. 39 To comply with paragraph 38, an insurer shall disclose: (a) its objectives, policies and processes for managing risks arising from insurance contracts and the methods used to manage those risks. (b) [Refer Appendix 1] (c) information about insurance risk (both before and after risk mitigation by reinsurance), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensitivity to market conditions, such as an embedded value analysis, it may meet this requirement by disclosing that alternative sensitivity analysis and the disclosures required by paragraph 41 of Ind AS 107. (b) qualitative information about sensitivity, and information about those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurer s future cash flows. 39B-39M [Refer Appendix 1] Effective date and transition 40 * 41 * 41A * 41B * 41C * 41D * 41E * 41F * 41G As a consequence of issuance of Ind AS 115, Revenue from Contracts with Customers , paragraphs 4(a) and (c), B7(b), B18(h) and B21 are amended. An entity shall apply those amendments when it applies Ind AS 115. 41H Omitted * 41I Ind AS 116 amended paragraph 4. An entity shall apply that amendment when it applies Ind AS 116. 42-51 [Refer Appendix 1] Appendix A Defined terms This appendix is an integral part of the Ind AS. Cedant The 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. dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the holder of a contract to the issuer. insured event An uncertain future event that is covered by an insurance contract and creates insurance risk . insurer The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs. liability adequacy test An assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows. policyholder A party that has a right to compensation under an insurance contract if an insured event occurs. reinsurance assets A cedant s net contractual rights under a reinsurance contract . reinsurance contract An insurance contract issued by one insurer (the reinsurer ) to compensate another insurer (the cedant ) for losses on one or more contracts issued by the cedant. reinsurer The 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 integra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the contract compensates the owner (in kind, rather than cash). Another example is a contract for car breakdown services in which the provider agree s, for a fixed annual fee, to provide roadside assistance or tow the car to a nearby garage. The latter contract could meet the definition of an insurance contract even if the provider does not agree to carry out repairs or replace parts. B7 Applying this Standard to the contracts described in paragraph B6 is likely to be no more burdensome than applying the Ind ASs that would be applicable if such contracts were outside the scope of this Ind AS: (a) There are unlikely to be material liabilities for malfunctions and breakdowns that have already occurred. (b) If Ind AS 115 applied, the service provider would recognise revenue when (or as) it transfers services 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. (c) The service provider cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. Such contracts are insurance contracts, provided the payment that is contingent on the insured event can be significant. For example, a life-contingent annuity linked to a cost-of-living index transfers insurance risk because payment is triggered by an uncertain event the survival of the annuitant. The link to the price index is an embedded derivative, but it also transfers insurance risk. If the resulting transfer of insurance risk is significant, the embedded derivative meets the definition of an insurance contract, in which case it need not be separated and measured at fair value (see paragraph 7 of this Ind AS). B12 The definition of insurance risk refers to risk that the insurer accepts from the policyholder. In other words, insurance risk is a pre-existing risk transferred from the policyholder to the insurer. Thus, a new risk created by the contract is not 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 policyhold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licyholder only if the insurer is an entity separate from the policyholder. In the case of a mutual insurer, the mutual accepts risk from each policyholder and pools that risk. Although policyholders bear that pooled risk collectively in their capacity as owners, the mutual has still accepted the risk that is the essence of an insurance contract. Examples of insurance contracts B18 The following are examples of contracts that are insurance contracts, if the transfer of insurance risk is significant: (a) insurance against theft or damage to property. (b) insurance against product liability, professional liability, civil liability or legal expenses. (c) life insurance and prepaid funeral plans (although death is certain, it is uncertain when death will occur or, for some types of life insurance, whether death will occur within the period covered by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that are specific to a party to the contract. (m) reinsurance contracts. B19 The following are examples of items that are not insurance contracts: (a) investment contracts that have the legal form of an insurance contract but do not expose the insurer to significant insurance risk, for example life insurance contracts in which the insurer bears no significant mortality risk (such contracts are non-insurance financial instruments or service contracts, see paragraphs B20 and B21). (b) contracts that have the legal form of insurance, but pass all significant insurance risk back to the policyholder through non-cancellable and enforceable mechanisms that adjust future payments by the policyholder as a direct result of insured losses, for example some financial reinsurance contracts or some group contracts (such contracts 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g raphs B8 B21 discuss insurance risk. The following paragraphs discuss the assessment of whether insurance risk is significant. B23 Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (ie have no discernible effect on the economics of the transaction). If significant additional benefits would be payable in scenarios that have commercial substance, the condition in the previous sentence may be met even if the insured event is extremely unlikely or even if the expected (ie probability-weighted) present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows. B24 The additional benefits described 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract pays a death benefit exceeding the amount payable on survival, the contract is an insurance contract unless the additional death benefit is insignificant (judged by reference to the contract rather than to an entire book of contracts). As noted in paragraph B24(b), the waiver on death of cancellation or surrender charges is not included in this assessment if this waiver does not compensate the policyholder for a pre-existing risk. Similarly, an annuity contract that pays out regular sums for the rest of a policyholder s life is an insurance contract, unless the aggregate life-contingent payments are insignificant. B27 Paragraph B23 refers to additional benefits. These additional benefits could include a requirement to pay benefits earlier if the insured event occurs earlier and the payment is not adjusted for the time value of money. An example is whole life insurance for a fixed amount (in other words, insurance that provides a 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 polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since all transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards. 3 IFRS 4 contains provisions that address concerns arising from the different effective dates of IFRS 9 and the forthcoming Insurance Contracts Standard, IFRS 17. IFRS 4 provides two optional approaches: a temporary exemption from applying IFRS 9; and an overlay approach. It provides the following two options for entities that issue insurance contracts within the scope of IFRS 4: the option to recognise in other comprehensive income, rather than profit or loss, the volatility that could arise when IFRS 9 is applied before the new insurance contracts Standard is issued; and give companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 until 2023. The above optional temporary exemptions 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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