Insurance contracts are contracts where the insurer accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if the insured event adversely affects the policyholder. The risk in the contract must be insurance risk, which is any risk except for financial risk.
IFRS 4 applies to all issuers of insurance contracts whether or not the entity is legally an insurance company. It does not apply to accounting for insurance contracts by policyholders. Accounting for insurance contracts issued by insurance or financial services companies can be complex and differs from country to country.
Existing accounting policies IFRS 4 is an interim standard pending completion of Phase 2 of the IASB’s project on insurance contracts. It allows entities to continue with their existing accounting policies for insurance contracts if those policies meet certain minimum criteria. Accounting policies modelled on IAS 37, ‘Provisions, contingent liabilities and contingent assets’, are appropriate in cases where the insurer is not an insurance company and where there is no specific local GAAP for insurance contracts (or the local GAAP is directed at insurance companies).
Insurers can continue to measure their insurance contracts using local GAAP accounting policies. However, the amount of the insurance liability is subject to a liability adequacy test. This liability adequacy test considers current estimates of all contractual and related cash flows. If the liability adequacy test identifies that that the insurance liability is inadequate, the entire deficiency is recognised in the income statement.
Disclosure Disclosure is particularly important for information relating to insurance contracts, as insurers can continue to use local GAAP accounting policies. IFRS 4 has two main principles for disclosure; insurers should disclose:
- Information that identifies and explains the amounts in its financial statements arising from insurance contracts.
- Information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts.
You may want to read the other chapters as well:
IFRS-1: First Time Adoption of IFRS
IFRS-2: Share-based Payment
IFRS-3: Business Combination
IFRS-4: Insurance Contract
IFRS-5: Disposal of Subsidiaries, Business and Non-current Asset
IFRS-6: Extractive Industries
IFRS-7, IAS 32 & 39: Financial Instruments
IFRS-8: Segment Reporting