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IFRS 4 Insurance Contracts

IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds.

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IFRS 4 applies to virtually all insurance and reinsurance contracts that an entity issues and to reinsurance contracts that it holds. An insurance contract is a contract under which the insurer accepts significant risk from the policyholder by agreeing to compensate them if a specified uncertain future event adversely affects the policyholder.

IFRS 4

IFRS 4 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005. IFRS 4 will be replaced by IFRS 17 as of 1 Janaury 2021.
The IFRS:

  • Prohibits provisions for possible claims under contracts not in existence at the reporting date
  • Requires a test for the adequacy of recognised insurance liabilities
  • Requires an impairment test for reinsurance assets
  • Requires an insurer to keep insurance liabilities in its statement of financial position (balance sheet) until they are discharged, cancelled or expire
  • Prohibits the offsetting of insurance liabilities against related reinsurance assets. The IFRS also prohibits the introduction of the following practices although allows their continued use where used previously:
    • Measuring insurance liabilities on an undiscounted basis
    • Measuring contractual rights to future investment management fees at an amount that exceeds their fair value
    • Using non-uniform accounting policies for the insurance liabilities of subsidiaries
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Insurance contracts

IFRS 4 is the first guidance from the IASB on accounting for insurance contracts – but not the last. A comprehensive project on insurance contracts is under way. The Board issued IFRS 4 because it saw an urgent need for improved disclosures for insurance contracts, and some improvements to recognition and measurement practices, in time for the adoption of IFRS by listed companies throughout Europe and elsewhere in 2005.
Scope

IFRS 4 applies to virtually all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. [IFRS 4.2] It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement. [IFRS 4.3] Furthermore, it does not address accounting by policyholders. [IFRS 4.4(f)]

In 2005, the IASB amended the scope of IAS 39 to include financial guarantee contracts issued. However, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either IAS 39 or IFRS 4 to such financial guarantee contracts. [IFRS 4.4(d)]

Definition of insurance contract

An insurance contract is a "contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder." [IFRS 4.Appendix A]
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