IFRS 4

IFRS 4

Insurance Contracts
In March 2004 the International Accounting Standards Board (the Board) issued IFRS 4
Insurance Contracts. In August 2005 the Board amended the scope of IFRS 4 to clarify that
most financial guarantee contracts would be accounted for by applying the financial
instruments requirements. In December 2005 the Board issued revised guidance on
implementing IFRS 4.
In September 2016 IFRS 4 was amended by Applying IFRS 9 Financial Instruments with IFRS 4
Insurance Contracts. These amendments address concerns arising from the different
effective dates of IFRS 9 and the forthcoming insurance contracts Standard. Accordingly,
these amendments introduce two optional approaches: a temporary exemption from
applying IFRS 9; and an overlay approach.
Other Standards have made minor consequential amendments to IFRS 4. They include
IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15
Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued
July 2014) and IFRS 16 Leases (issued January 2016).

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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 4
INSURANCE CONTRACTS
OBJECTIVE 1
SCOPE 2
Embedded derivatives 7
Unbundling of deposit components 10
RECOGNITION AND MEASUREMENT 13
Temporary exemption from some other IFRSs 13
Temporary exemption from IFRS 9 20A
Changes in accounting policies 21
Insurance contracts acquired in a business combination or portfolio transfer 31
Discretionary participation features 34
PRESENTATION 35B
The overlay approach 35B
DISCLOSURE 36
Explanation of recognised amounts 36
Nature and extent of risks arising from insurance contracts 38
Disclosures about the temporary exemption from IFRS 9 39B
Disclosures about the overlay approach 39K
EFFECTIVE DATE AND TRANSITION 40
Disclosure 42
Redesignation of financial assets 45
Applying IFRS 4 with IFRS 9 46
APPENDICES
A Defined terms
B Definition of an insurance contract
C Amendments to other IFRSs

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS

EDITION

APPROVAL BY THE BOARD OF IFRS 4 ISSUED IN MARCH 2004

APPROVAL BY THE BOARD OF FINANCIAL GUARANTEE CONTRACTS
(AMENDMENTS TO IAS 39 AND IFRS 4) ISSUED IN AUGUST 2005
APPROVAL BY THE BOARD OF APPLYING IFRS 9 FINANCIAL INSTRUMENTS
WITH IFRS 4 INSURANCE CONTRACTS (AMENDMENTS TO IFRS 4) ISSUED
IN SEPTEMBER 2016
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS

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IMPLEMENTATION GUIDANCE

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International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is set out in

paragraphs 149 and Appendices AC. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the Standard. Definitions of other terms are given in
the Glossary for International Financial Reporting Standards. IFRS 4 should be read in
the context of its objective and the Basis for Conclusions, the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance.

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International Financial Reporting Standard 4

Insurance Contracts

Objective

1 The objective of this IFRS is to specify the financial reporting for insurance
contracts by any entity that issues such contracts (described in this IFRS as an
insurer) until the Board completes the second phase of its project on insurance
contracts. In particular, this IFRS requires:
(a) limited improvements to accounting by insurers for insurance contracts.

(b) disclosure that identifies and explains the amounts in an insurers

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 IFRS to:

(a) insurance contracts (including reinsurance contracts) that it issues and

reinsurance contracts that it holds.

(b) financial instruments that it issues with a discretionary participation feature

(see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires
disclosure about financial instruments, including financial instruments
that contain such features.

3 This IFRS 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 IAS 32 Financial Instruments: Presentation, IFRS 7 and IFRS 9 Financial
Instruments), except:
(a) paragraph 20A permits insurers that meet specified criteria to apply a
temporary exemption from IFRS 9;

(b) paragraph 35B permits insurers to apply the overlay approach to

designated financial assets; and

(c) paragraph 45 permits insurers to reclassify in specified circumstances

some or all of their financial assets so that the assets are measured at fair
value through profit or loss.

4 An entity shall not apply this IFRS to:

(a) product warranties issued directly by a manufacturer, dealer or retailer

(see IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions,
Contingent Liabilities and Contingent Assets).

(b) employers assets and liabilities under employee benefit plans (see IAS 19
Employee Benefits and IFRS 2 Share-based Payment) and retirement benefit
obligations reported by defined benefit retirement plans (see IAS 26
Accounting and Reporting by Retirement Benefit Plans).

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(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 lessees residual value guarantee embedded in a lease (see IFRS 16
Leases, IFRS 15 Revenue from Contracts with Customers and IAS 38 Intangible
Assets).
(d) financial guarantee contracts unless the issuer has previously asserted
explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts, in which case the
issuer may elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to
such financial guarantee contracts. The issuer may make that election
contract by contract, but the election for each contract is irrevocable.

(e) contingent consideration payable or receivable in a business

combination (see IFRS 3 Business Combinations).
(f) direct insurance contracts that the entity holds (ie direct insurance contracts
in which the entity is the policyholder). However, a cedant shall apply this
IFRS to reinsurance contracts that it holds.

5 For ease of reference, this IFRS describes any entity that issues an insurance
contract as an insurer, whether or not the issuer is regarded as an insurer for
legal or supervisory purposes. All references in paragraphs 3(a)3(b), 20A20Q,
35B35N, 39B39M and 4649 to an insurer shall be read as also referring to an
issuer of a financial instrument that contains a discretionary participation
feature.

6 A reinsurance contract is a type of insurance contract. Accordingly, all

references in this IFRS to insurance contracts also apply to reinsurance
contracts.

Embedded derivatives
7 IFRS 9 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. IFRS 9 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 IFRS 9, an insurer need not separate, and

measure at fair value, a policyholders 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 IFRS 9 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 apply if the
holders ability to exercise a put option or cash surrender option is triggered by
a change in such a variable (for example, a put option that can be exercised if a
stock market index reaches a specified level).

9 Paragraph 8 applies equally to options to surrender a financial instrument

containing a discretionary participation feature.

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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 insurers 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 when an insurers accounting policies do

not require it to recognise all obligations arising from a deposit component. A
cedant receives compensation for losses from a reinsurer, but the contract obliges
the cedant to repay the compensation in future years. That obligation arises
from a deposit component. If the cedants accounting policies would otherwise
permit it to recognise the compensation as income without recognising the
resulting obligation, unbundling is required.

12 To unbundle a contract, an insurer shall:

(a) apply this IFRS to the insurance component.

(b) apply IFRS 9 to the deposit component.

Recognition and measurement

Temporary exemption from some other IFRSs

13 Paragraphs 1012 of IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors specify criteria for an entity to use in developing an accounting policy if
no IFRS applies specifically to an item. However, this IFRS exempts an insurer
from applying those criteria to its accounting policies for:

(a) insurance contracts 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 IFRS does not exempt an insurer from some implications of
the criteria in paragraphs 1012 of IAS 8. Specifically, an insurer:

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(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 1519.
(c) shall remove an insurance liability (or a part of an insurance liability)
from its statement of financial position when, and only when, it is
extinguishedie 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 adequacy test

15 An insurer shall assess at the end of each reporting period whether its
recognised insurance liabilities are adequate, 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 IFRS 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 insurers 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 liabilities1 less
the carrying amount of:
(i) any related deferred acquisition costs; and

1 The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition
costs and related intangible assets) for which the insurers accounting policies do not require a
liability adequacy test that meets the minimum requirements of paragraph 16.

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(ii) any related intangible assets, such as those acquired in a business

combination or portfolio transfer (see paragraphs 31 and 32).
However, related reinsurance assets are not considered because
an insurer accounts for them separately (see paragraph 20).
(b) determine whether the amount described in (a) is less than the carrying
amount that would be required if the relevant insurance liabilities were
within the scope of IAS 37. If it is less, the insurer shall recognise the
entire difference in profit or loss and decrease the carrying amount of
the related deferred acquisition costs or related intangible assets or
increase the carrying amount of the relevant insurance liabilities.

18 If an insurers liability adequacy test meets the minimum requirements of

paragraph 16, the 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 IAS 37) shall
reflect future investment margins (see paragraphs 2729) if, and only if, the
amount described in paragraph 17(a) also reflects those margins.

Impairment of reinsurance assets

20 If a cedants 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.

Temporary exemption from IFRS 9

20A IFRS 9 addresses the accounting for financial instruments and is effective
for annual periods beginning on or after 1 January 2018. However, for an
insurer that meets the criteria in paragraph 20B, this IFRS provides a
temporary exemption that permits, but does not require, the insurer to
apply IAS 39 Financial Instruments: Recognition and Measurement rather
than IFRS 9 for annual periods beginning before 1 January 2021. An
insurer that applies the temporary exemption from IFRS 9 shall:
(a) use the requirements in IFRS 9 that are necessary to provide the
disclosures required in paragraphs 39B39J of this IFRS; and

(b) apply all other applicable IFRSs to its financial instruments, except
as described in paragraphs 20A20Q, 39B39J and 4647 of this
IFRS.

20B An insurer may apply the temporary exemption from IFRS 9 if, and only
if:

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(a) it has not previously applied any version of IFRS 92, other than only
the requirements for the presentation of gains and losses on
financial liabilities designated as at fair value through profit or
loss in paragraphs 5.7.1(c), 5.7.75.7.9, 7.2.14 and B5.7.5B5.7.20 of
IFRS 9; and
(b) its activities are predominantly connected with insurance, as
described in paragraph 20D, at its annual reporting date that
immediately precedes 1 April 2016, or at a subsequent annual
reporting date as specified in paragraph 20G.

20C An insurer applying the temporary exemption from IFRS 9 is permitted to elect
to apply only the requirements for the presentation of gains and losses on
financial liabilities designated as at fair value through profit or loss in
paragraphs 5.7.1(c), 5.7.75.7.9, 7.2.14 and B5.7.5B5.7.20 of IFRS 9. If an insurer
elects to apply those requirements, it shall apply the relevant transition
provisions in IFRS 9, disclose the fact that it has applied those requirements and
provide on an ongoing basis the related disclosures set out in paragraphs 1011
of IFRS 7 (as amended by IFRS 9 (2010)).

20D An insurers activities are predominantly connected with insurance if, and only
if:

(a) the carrying amount of its liabilities arising from contracts within the
scope of this IFRS, which includes any deposit components or embedded
derivatives unbundled from insurance contracts applying paragraphs
712 of this IFRS, is significant compared to the total carrying amount of
all its liabilities; and

(b) the percentage of the total carrying amount of its liabilities connected
with insurance (see paragraph 20E) relative to the total carrying amount
of all its liabilities is:

(i) greater than 90 per cent; or

(ii) less than or equal to 90 per cent but greater than 80 per cent, and
the insurer does not engage in a significant activity unconnected
with insurance (see paragraph 20F).

20E For the purposes of applying paragraph 20D(b), liabilities connected with
insurance comprise:
(a) liabilities arising from contracts within the scope of this IFRS, as
described in paragraph 20D(a);
(b) non-derivative investment contract liabilities measured at fair value
through profit or loss applying IAS 39 (including those designated as at
fair value through profit or loss to which the insurer has applied the
requirements in IFRS 9 for the presentation of gains and losses (see
paragraphs 20B(a) and 20C)); and

2 The Board issued successive versions of IFRS 9 in 2009, 2010, 2013 and 2014.

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(c) liabilities that arise because the insurer issues, or fulfils obligations
arising from, the contracts in (a) and (b). Examples of such liabilities
include derivatives used to mitigate risks arising from those contracts
and from the assets backing those contracts, relevant tax liabilities such
as the deferred tax liabilities for taxable temporary differences on
liabilities arising from those contracts, and debt instruments issued that
are included in the insurers regulatory capital.

20F In assessing whether it engages in a significant activity unconnected with

insurance for the purposes of applying paragraph 20D(b)(ii), an insurer shall
consider:

(a) only those activities from which it may earn income and incur expenses;
and

(b) quantitative or qualitative factors (or both), including publicly available

information such as the industry classification that users of financial
statements apply to the insurer.

20G Paragraph 20B(b) requires an entity to assess whether it qualifies for the
temporary exemption from IFRS 9 at its annual reporting date that immediately
precedes 1 April 2016. After that date:

(a) an entity that previously qualified for the temporary exemption from
IFRS 9 shall reassess whether its activities are predominantly connected
with insurance at a subsequent annual reporting date if, and only if,
there was a change in the entitys activities, as described in paragraphs
20H20I, during the annual period that ended on that date.

(b) an entity that previously did not qualify for the temporary exemption
from IFRS 9 is permitted to reassess whether its activities are
predominantly connected with insurance at a subsequent annual
reporting date before 31 December 2018 if, and only if, there was a
change in the entitys activities, as described in paragraphs 20H20I,
during the annual period that ended on that date.

20H For the purposes of applying paragraph 20G, a change in an entitys activities is
a change that:
(a) is determined by the entitys senior management as a result of external
or internal changes;
(b) is significant to the entitys operations; and

(c) is demonstrable to external parties.

Accordingly, such a change occurs only when the entity begins or ceases to
perform an activity that is significant to its operations or significantly changes
the magnitude of one of its activities; for example, when the entity has acquired,
disposed of or terminated a business line.

20I A change in an entitys activities, as described in paragraph 20H, is expected to

be very infrequent. The following are not changes in an entitys activities for the
purposes of applying paragraph 20G:

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(a) a change in the entitys funding structure that in itself does not affect
the activities from which the entity earns income and incurs expenses.
(b) the entitys plan to sell a business line, even if the assets and liabilities
are classified as held for sale applying IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations. A plan to sell a business line could change the
entitys activities and give rise to a reassessment in the future but has yet
to affect the liabilities recognised on its statement of financial position.

20J If an entity no longer qualifies for the temporary exemption from IFRS 9 as a
result of a reassessment (see paragraph 20G(a)), then the entity is permitted to
continue to apply the temporary exemption from IFRS 9 only until the end of
the annual period that began immediately after that reassessment.
Nevertheless, the entity must apply IFRS 9 for annual periods beginning on or
after 1 January 2021. For example, if an entity determines that it no longer
qualifies for the temporary exemption from IFRS 9 applying paragraph 20G(a) on
31 December 2018 (the end of its annual period), then the entity is permitted to
continue to apply the temporary exemption from IFRS 9 only until 31 December
2019.

20K An insurer that previously elected to apply the temporary exemption from
IFRS 9 may at the beginning of any subsequent annual period irrevocably elect
to apply IFRS 9.

First-time adopter
20L A first-time adopter, as defined in IFRS 1 First-time Adoption of International Financial
Reporting Standards, may apply the temporary exemption from IFRS 9 described
in paragraph 20A if, and only if, it meets the criteria described in paragraph 20B.
In applying paragraph 20B(b), the first-time adopter shall use the carrying
amounts determined applying IFRSs at the date specified in that paragraph.

20M IFRS 1 contains requirements and exemptions applicable to a first-time adopter.

Those requirements and exemptions (for example, paragraphs D16D17 of
IFRS 1) do not override the requirements in paragraphs 20A20Q and 39B39J of
this IFRS. For example, the requirements and exemptions in IFRS 1 do not
override the requirement that a first-time adopter must meet the criteria
specified in paragraph 20L to apply the temporary exemption from IFRS 9.

20N A first-time adopter that discloses the information required by paragraphs

39B39J shall use the requirements and exemptions in IFRS 1 that are relevant to
making the assessments required for those disclosures.

Temporary exemption from specific requirements in IAS 28

20O Paragraphs 3536 of IAS 28 Investments in Associates and Joint Ventures require an
entity to apply uniform accounting policies when using the equity method.
Nevertheless, for annual periods beginning before 1 January 2021, an entity is
permitted, but not required, to retain the relevant accounting policies applied
by the associate or joint venture as follows:
(a) the entity applies IFRS 9 but the associate or joint venture applies the
temporary exemption from IFRS 9; or

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(b) the entity applies the temporary exemption from IFRS 9 but the associate
or joint venture applies IFRS 9.

20P When an entity uses the equity method to account for its investment in an
associate or joint venture:

(a) if IFRS 9 was previously applied in the financial statements used to apply
the equity method to that associate or joint venture (after reflecting any
adjustments made by the entity), then IFRS 9 shall continue to be
applied.
(b) if the temporary exemption from IFRS 9 was previously applied in the
financial statements used to apply the equity method to that associate or
joint venture (after reflecting any adjustments made by the entity), then
IFRS 9 may be subsequently applied.

20Q An entity may apply paragraphs 20O and 20P(b) separately for each associate or
joint venture.

Changes in accounting policies

21 Paragraphs 2230 apply both to changes made by an insurer that already applies
IFRSs and to changes made by an insurer adopting IFRSs for the first time.

22 An insurer may change its accounting policies for insurance contracts if,
and only if, the change makes the financial statements more relevant to
the economic decision-making needs of users and no less reliable, or
more reliable and no less relevant to those needs. An insurer shall judge
relevance and reliability by the criteria in IAS 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 IAS 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 2729); 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, without applying those policies consistently to all similar liabilities as

3 In this paragraph, insurance liabilities include related deferred acquisition costs and related
intangible assets, such as those discussed in paragraphs 31 and 32.

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IAS 8 would otherwise require. If an insurer designates liabilities for this

election, it shall continue to apply current market interest rates (and, if
applicable, the other current estimates and assumptions) consistently in all
periods to all these liabilities until they are extinguished.

Continuation of existing practices

25 An insurer may continue the following practices, but the introduction of any of
them does not satisfy paragraph 22:
(a) measuring insurance liabilities on an undiscounted basis.

(b) measuring contractual rights to future investment management fees at

an amount that 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 IFRS.

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 insurers financial statements will become less relevant
and reliable if it introduces an accounting policy that reflects future investment
margins in the measurement of insurance contracts, unless those margins affect
the contractual payments. Two examples of accounting policies that reflect
those margins are:
(a) using a discount rate that reflects the estimated return on the insurers
assets; or
(b) projecting the returns on those assets at an estimated rate of return,
discounting those projected returns at a different 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 insurers existing accounting

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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 reflects the
estimated return on the insurers assets.

29 In some measurement approaches, the discount rate is used to determine the

present value of a future profit margin. That profit margin is then attributed to
different periods using a formula. In those approaches, the discount rate affects
the measurement of the liability only indirectly. In particular, the use of a less
appropriate discount rate has a limited or no effect on the measurement of the
liability at inception. However, in other approaches, the discount rate
determines the measurement of the liability directly. In the latter case, because
the introduction of an asset-based discount rate has a more significant effect, it
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 insurers 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 IFRS 3, an insurer shall, at the acquisition date, measure at fair
value the insurance liabilities assumed and insurance assets acquired in a business
combination. However, an insurer is permitted, but not required, to use an
expanded presentation that splits the fair value of acquired insurance contracts
into two components:
(a) a liability measured in accordance with the insurers accounting policies
for insurance contracts that it issues; and

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(b) an intangible asset, representing the difference between (i) the fair value
of the contractual insurance rights acquired and insurance obligations
assumed and (ii) the amount described in (a). The subsequent
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 IAS 36 Impairment of Assets and IAS 38. However, IAS 36 and IAS 38 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 element
as a liability.

(b) shall, if it recognises the discretionary participation feature separately

from the guaranteed element, classify that feature as either a liability or
a separate component of equity. This IFRS does not specify how the
issuer determines whether that feature is a liability or equity. The issuer
may split that feature into liability and equity components and shall use
a consistent accounting policy for that split. The issuer shall not classify
that feature as an intermediate category that is neither liability nor
equity.
(c) may recognise all premiums received as revenue without separating any
portion that relates to the equity component. The resulting changes in
the guaranteed element 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 IAS 1 Presentation of Financial Statements).
(d) shall, if the contract contains an embedded derivative within the scope
of IFRS 9, apply IFRS 9 to that embedded derivative.

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(e) shall, in all respects not described in paragraphs 1420 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 2130.

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 classifies the entire discretionary participation feature as a
liability, it shall apply the liability adequacy test in paragraphs 1519 to
the whole contract (ie both the guaranteed element and the
discretionary participation feature). The issuer need not determine the
amount that would result from applying IFRS 9 to the guaranteed
element.
(b) if the issuer classifies part or all of that feature as a separate component
of equity, the liability recognised for the whole contract shall not be less
than the amount that would result from applying IFRS 9 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
IFRS 9 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 IFRS 7 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.

35A The temporary exemptions in paragraphs 20A, 20L and 20O and the overlay
approach in paragraph 35B are also available to an issuer of a financial
instrument that contains a discretionary participation feature. Accordingly, all
references in paragraphs 3(a)3(b), 20A20Q, 35B35N, 39B39M and 4649 to an
insurer shall be read as also referring to an issuer of a financial instrument that
contains a discretionary participation feature.

Presentation

The overlay approach

35B An insurer is permitted, but not required, to apply the overlay approach
to designated financial assets. An insurer that applies the overlay
approach shall:

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(a) reclassify between profit or loss and other comprehensive income

an amount that results in the profit or loss at the end of the
reporting period for the designated financial assets being the
same as if the insurer had applied IAS 39 to the designated
financial assets. Accordingly, the amount reclassified is equal to
the difference between:
(i) the amount reported in profit or loss for the designated
financial assets applying IFRS 9; and
(ii) the amount that would have been reported in profit or loss
for the designated financial assets if the insurer had
applied IAS 39.

(b) apply all other applicable IFRSs to its financial instruments, except
as described in paragraphs 35B35N, 39K39M and 4849 of this
IFRS.

35C An insurer may elect to apply the overlay approach described in

paragraph 35B only when it first applies IFRS 9, including when it first
applies IFRS 9 after previously applying:
(a) the temporary exemption from IFRS 9 described in paragraph 20A;
or

(b) only the requirements for the presentation of gains and losses on
financial liabilities designated as at fair value through profit or
loss in paragraphs 5.7.1(c), 5.7.75.7.9, 7.2.14 and B5.7.5B5.7.20 of
IFRS 9.

35D An insurer shall present the amount reclassified between profit or loss and other
comprehensive income applying the overlay approach:
(a) in profit or loss as a separate line item; and

(b) in other comprehensive income as a separate component of other

comprehensive income.

35E A financial asset is eligible for designation for the overlay approach if, and only
if, the following criteria are met:

(a) it is measured at fair value through profit or loss applying IFRS 9 but
would not have been measured at fair value through profit or loss in its
entirety applying IAS 39; and

(b) it is not held in respect of an activity that is unconnected with contracts

within the scope of this IFRS. Examples of financial assets that would
not be eligible for the overlay approach are those assets held in respect of
banking activities or financial assets held in funds relating to investment
contracts that are outside the scope of this IFRS.

35F An insurer may designate an eligible financial asset for the overlay approach
when it elects to apply the overlay approach (see paragraph 35C). Subsequently,
it may designate an eligible financial asset for the overlay approach when, and
only when:
(a) that asset is initially recognised; or

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(b) that asset newly meets the criterion in paragraph 35E(b) having
previously not met that criterion.

35G An insurer is permitted to designate eligible financial assets for the overlay
approach applying paragraph 35F on an instrument-by-instrument basis.

35H When relevant, for the purposes of applying the overlay approach to a newly
designated financial asset applying paragraph 35F(b):
(a) its fair value at the date of designation shall be its new amortised cost
carrying amount; and

(b) the effective interest rate shall be determined based on its fair value at
the date of designation.

35I An entity shall continue to apply the overlay approach to a designated financial
asset until that financial asset is derecognised. However, an entity:
(a) shall de-designate a financial asset when the financial asset no longer
meets the criterion in paragraph 35E(b). For example, a financial asset
will no longer meet that criterion when an entity transfers that asset so
that it is held in respect of its banking activities or when an entity ceases
to be an insurer.

(b) may, at the beginning of any annual period, stop applying the overlay
approach to all designated financial assets. An entity that elects to stop
applying the overlay approach shall apply IAS 8 to account for the
change in accounting policy.

35J When an entity de-designates a financial asset applying paragraph 35I(a), it shall
reclassify from accumulated other comprehensive income to profit or loss as a
reclassification adjustment (see IAS 1) any balance relating to that financial
asset.

35K If an entity stops using the overlay approach applying the election in
paragraph 35I(b) or because it is no longer an insurer, it shall not subsequently
apply the overlay approach. An insurer that has elected to apply the overlay
approach (see paragraph 35C) but has no eligible financial assets (see
paragraph 35E) may subsequently apply the overlay approach when it has
eligible financial assets.

Interaction with other requirements

35L Paragraph 30 of this IFRS permits a practice that is sometimes described as
shadow accounting. If an insurer applies the overlay approach, shadow
accounting may be applicable.

35M Reclassifying an amount between profit or loss and other comprehensive income
applying paragraph 35B may have consequential effects for including other
amounts in other comprehensive income, such as income taxes. An insurer
shall apply the relevant IFRS, such as IAS 12 Income Taxes, to determine any such
consequential effects.

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First-time adopter
35N If a first-time adopter elects to apply the overlay approach, it shall restate
comparative information to reflect the overlay approach if, and only if, it
restates comparative information to comply with IFRS 9 (see paragraphs E1E2
of IFRS 1).

Disclosure

Explanation of recognised amounts

36 An insurer shall disclose information that identifies and explains the
amounts in its financial statements arising from insurance contracts.

37 To comply with paragraph 36, an insurer shall disclose:

(a) its accounting policies for insurance contracts and related assets,
liabilities, income and expense.
(b) the recognised assets, liabilities, income and expense (and, if it presents
its statement of cash flows using the direct method, cash flows) arising
from insurance contracts. Furthermore, if the insurer is a cedant, it shall
disclose:
(i) gains and losses recognised in profit or loss on buying
reinsurance; and

(ii) if the cedant defers and amortises gains and losses arising on
buying reinsurance, the amortisation 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) [deleted]

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(c) information about insurance risk (both before and after risk mitigation by
reinsurance), including information about:
(i) sensitivity to insurance risk (see paragraph 39A).

(ii) concentrations of insurance risk, including a description of how

management determines concentrations and a description of the
shared characteristic that identifies each concentration (eg type
of insured event, geographical area, or currency).

(iii) actual claims compared with previous estimates (ie claims

development). The disclosure 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 3142 of IFRS 7 would require if the insurance contracts were
within the scope of IFRS 7. However:
(i) an insurer need not provide the maturity analyses required by
paragraph 39(a) and (b) of IFRS 7 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 statement of financial position.
(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 IFRS 7. Such an insurer shall also provide the
disclosures required by paragraph 41 of IFRS 7.
(e) information about exposures to market risk arising from embedded
derivatives contained in a host insurance contract if the insurer is not
required to, and does not, measure the embedded derivatives at fair
value.

39A To comply with paragraph 39(c)(i), an insurer shall disclose either (a) or (b) as
follows:

(a) a sensitivity analysis that shows how profit or loss and equity would have
been affected if changes in the relevant risk variable that were
reasonably possible at the end of the reporting period had occurred; the
methods and assumptions used in preparing the sensitivity analysis; and
any changes from the previous period in the methods and assumptions
used. However, if an insurer uses an alternative method to manage
sensitivity 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 IFRS 7.

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(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 insurers future cash
flows.

Disclosures about the temporary exemption from IFRS 9

39B An insurer that elects to apply the temporary exemption from IFRS 9 shall
disclose information to enable users of financial statements:
(a) to understand how the insurer qualified for the temporary
exemption; and

(b) to compare insurers applying the temporary exemption with

entities applying IFRS 9.

39C To comply with paragraph 39B(a), an insurer shall disclose the fact that it is
applying the temporary exemption from IFRS 9 and how the insurer concluded
on the date specified in paragraph 20B(b) that it qualifies for the temporary
exemption from IFRS 9, including:
(a) if the carrying amount of its liabilities arising from contracts within the
scope of this IFRS (ie those liabilities described in paragraph 20E(a)) was
less than or equal to 90 per cent of the total carrying amount of all its
liabilities, the nature and carrying amounts of the liabilities connected
with insurance that are not liabilities arising from contracts within the
scope of this IFRS (ie those liabilities described in paragraphs 20E(b) and
20E(c));
(b) if the percentage of the total carrying amount of its liabilities connected
with insurance relative to the total carrying amount of all its liabilities
was less than or equal to 90 per cent but greater than 80 per cent, how
the insurer determined that it did not engage in a significant activity
unconnected with insurance, including what information it considered;
and

(c) if the insurer qualified for the temporary exemption from IFRS 9 on the
basis of a reassessment applying paragraph 20G(b):

(i) the reason for the reassessment;

(ii) the date on which the relevant change in its activities occurred;
and

(iii) a detailed explanation of the change in its activities and a

qualitative description of the effect of that change on the
insurers financial statements.

39D If, applying paragraph 20G(a), an entity concludes that its activities are no
longer predominantly connected with insurance, it shall disclose the following
information in each reporting period before it begins to apply IFRS 9:
(a) the fact that it no longer qualifies for the temporary exemption from
IFRS 9;
(b) the date on which the relevant change in its activities occurred; and

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(c) a detailed explanation of the change in its activities and a qualitative

description of the effect of that change on the entitys financial
statements.

39E To comply with paragraph 39B(b), an insurer shall disclose the fair value at the
end of the reporting period and the amount of change in the fair value during
that period for the following two groups of financial assets separately:

(a) financial assets with contractual terms that give rise on specified dates to
cash flows that are solely payments of principal and interest on the
principal amount outstanding (ie financial assets that meet the
condition in paragraphs 4.1.2(b) and 4.1.2A(b) of IFRS 9), excluding any
financial asset that meets the definition of held for trading in IFRS 9, or
that is managed and whose performance is evaluated on a fair value
basis (see paragraph B4.1.6 of IFRS 9).

(b) all financial assets other than those specified in paragraph 39E(a); that is,
any financial asset:

(i) with contractual terms that do not give rise on specified dates to
cash flows that are solely payments of principal and interest on
the principal amount outstanding;
(ii) that meets the definition of held for trading in IFRS 9; or

(iii) that is managed and whose performance is evaluated on a fair

value basis.

39F When disclosing the information in paragraph 39E, the insurer:

(a) may deem the carrying amount of the financial asset measured applying
IAS 39 to be a reasonable approximation of its fair value if the insurer is
not required to disclose its fair value applying paragraph 29(a) of IFRS 7
(eg short-term trade receivables); and

(b) shall consider the level of detail necessary to enable users of financial
statements to understand the characteristics of the financial assets.

39G To comply with paragraph 39B(b), an insurer shall disclose information about
the credit risk exposure, including significant credit risk concentrations,
inherent in the financial assets described in paragraph 39E(a). At a minimum,
an insurer shall disclose the following information for those financial assets at
the end of the reporting period:
(a) by credit risk rating grades as defined in IFRS 7, the carrying amounts
applying IAS 39 (in the case of financial assets measured at amortised
cost, before adjusting for any impairment allowances).

(b) for the financial assets described in paragraph 39E(a) that do not have
low credit risk at the end of the reporting period, the fair value and the
carrying amount applying IAS 39 (in the case of financial assets
measured at amortised cost, before adjusting for any impairment
allowances). For the purposes of this disclosure, paragraph B5.5.22 of
IFRS 9 provides the relevant requirements for assessing whether the
credit risk on a financial instrument is considered low.

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39H To comply with paragraph 39B(b), an insurer shall disclose information about
where a user of financial statements can obtain any publicly available IFRS 9
information that relates to an entity within the group that is not provided in the
groups consolidated financial statements for the relevant reporting period. For
example, such IFRS 9 information could be obtained from the publicly available
individual or separate financial statements of an entity within the group that
has applied IFRS 9.

39I If an entity elected to apply the exemption in paragraph 20O from particular
requirements in IAS 28, it shall disclose that fact.

39J If an entity applied the temporary exemption from IFRS 9 when accounting for
its investment in an associate or joint venture using the equity method (for
example, see paragraph 20O(a)), the entity shall disclose the following, in
addition to the information required by IFRS 12 Disclosure of Interests in Other
Entities:
(a) the information described by paragraphs 39B39H for each associate or
joint venture that is material to the entity. The amounts disclosed shall
be those included in the IFRS financial statements of the associate or
joint venture after reflecting any adjustments made by the entity when
using the equity method (see paragraph B14(a) of IFRS 12), rather than
the entitys share of those amounts.

(b) the quantitative information described by paragraphs 39B39H in

aggregate for all individually immaterial associates or joint ventures.
The aggregate amounts:

(i) disclosed shall be the entitys share of those amounts; and

(ii) for associates shall be disclosed separately from the aggregate
amounts disclosed for joint ventures.

Disclosures about the overlay approach

39K An insurer that applies the overlay approach shall disclose information
to enable users of financial statements to understand:
(a) how the total amount reclassified between profit or loss and other
comprehensive income in the reporting period is calculated; and
(b) the effect of that reclassification on the financial statements.

39L To comply with paragraph 39K, an insurer shall disclose:

(a) the fact that it is applying the overlay approach;

(b) the carrying amount at the end of the reporting period of financial assets
to which the insurer applies the overlay approach by class of financial
asset;

(c) the basis for designating financial assets for the overlay approach,
including an explanation of any designated financial assets that are held
outside the legal entity that issues contracts within the scope of this
IFRS;

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(d) an explanation of the total amount reclassified between profit or loss

and other comprehensive income in the reporting period in a way that
enables users of financial statements to understand how that amount is
derived, including:
(i) the amount reported in profit or loss for the designated financial
assets applying IFRS 9; and
(ii) the amount that would have been reported in profit or loss for
the designated financial assets if the insurer had applied IAS 39.
(e) the effect of the reclassification described in paragraphs 35B and 35M on
each affected line item in profit or loss; and
(f) if during the reporting period the insurer has changed the designation of
financial assets:

(i) the amount reclassified between profit or loss and other

comprehensive income in the reporting period relating to newly
designated financial assets applying the overlay approach
(see paragraph 35F(b));

(ii) the amount that would have been reclassified between profit or
loss and other comprehensive income in the reporting period if
the financial assets had not been de-designated
(see paragraph 35I(a)); and

(iii) the amount reclassified in the reporting period to profit or loss

from accumulated other comprehensive income for financial
assets that have been de-designated (see paragraph 35J).

39M If an entity applied the overlay approach when accounting for its investment in
an associate or joint venture using the equity method, the entity shall disclose
the following, in addition to the information required by IFRS 12:

(a) the information described by paragraphs 39K39L for each associate or

joint venture that is material to the entity. The amounts disclosed shall
be those included in the IFRS financial statements of the associate or
joint venture after reflecting any adjustments made by the entity when
using the equity method (see paragraph B14(a) of IFRS 12), rather than
the entitys share of those amounts.
(b) the quantitative information described by paragraphs 39K39L(d) and
39L(f), and the effect of the reclassification described in paragraph 35B
on profit or loss and other comprehensive income in aggregate for all
individually immaterial associates or joint ventures. The aggregate
amounts:

(i) disclosed shall be the entitys share of those amounts; and

(ii) for associates shall be disclosed separately from the aggregate
amounts disclosed for joint ventures.

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Effective date and transition

40 The transitional provisions in paragraphs 4145 apply both to an entity that is

already applying IFRSs when it first applies this IFRS and to an entity that
applies IFRSs for the first time (a first-time adopter).

41 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies this IFRS
for an earlier period, it shall disclose that fact.

41A Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4), issued in August
2005, amended paragraphs 4(d), B18(g) and B19(f). An entity shall apply those
amendments for annual periods beginning on or after 1 January 2006. Earlier
application is encouraged. If an entity applies those amendments for an earlier
period, it shall disclose that fact and apply the related amendments to IAS 39
and IAS 324 at the same time.

41B IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 30. An entity shall apply those amendments for
annual periods beginning on or after 1 January 2009. If an entity applies IAS 1
(revised 2007) for an earlier period, the amendments shall be applied for that
earlier period.

41C [Deleted]

41D [Deleted]

41E IFRS 13 Fair Value Measurement, issued in May 2011, amended the definition of fair
value in Appendix A. An entity shall apply that amendment when it applies
IFRS 13.

41F [Deleted]

41G IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended
paragraphs 4(a) and (c), B7, B18(h) and B21. An entity shall apply those
amendments when it applies IFRS 15.

41H IFRS 9, as issued in July 2014, amended paragraphs 3, 4, 7, 8, 12, 34, 35, 45,
Appendix A and paragraphs B18B20 and deleted paragraphs 41C, 41D and 41F.
An entity shall apply those amendments when it applies IFRS 9.

41I IFRS 16, issued in January 2016, amended paragraph 4. An entity shall apply
that amendment when it applies IFRS 16.

Disclosure
42 An entity need not apply the disclosure requirements in this IFRS to comparative
information that relates to annual periods beginning before 1 January 2005,
except for the disclosures required by paragraph 37(a) and (b) about accounting
policies, and recognised assets, liabilities, income and expense (and cash flows if
the direct method is used).

4 When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.

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43 If it is impracticable to apply a particular requirement of paragraphs 1035 to

comparative information that relates to annual periods beginning before
1 January 2005, an entity shall disclose that fact. Applying the liability adequacy
test (paragraphs 1519) to such comparative information might sometimes be
impracticable, but it is highly unlikely to be impracticable to apply other
requirements of paragraphs 1035 to such comparative information.
IAS 8 explains the term impracticable.

44 In applying paragraph 39(c)(iii), an entity need not disclose information about

claims development that occurred earlier than five years before the end of the
first financial year in which it applies this IFRS. Furthermore, if it is
impracticable, when an entity first applies this IFRS, to prepare information
about claims development that occurred before the beginning of the earliest
period for which an entity presents full comparative information that complies
with this IFRS, the entity shall disclose that fact.

Redesignation of financial assets

45 Notwithstanding paragraph 4.4.1 of IFRS 9, when an insurer changes its
accounting policies for insurance liabilities, it is permitted, but not required, to
reclassify some or all of its financial assets so that they are measured at fair value
through profit or loss. This reclassification is permitted if an insurer changes
accounting policies when it first applies this IFRS and if it makes a subsequent
policy change permitted by paragraph 22. The reclassification is a change in
accounting policy and IAS 8 applies.

Applying IFRS 4 with IFRS 9

Temporary exemption from IFRS 9

46 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
(Amendments to IFRS 4), issued in September 2016, amended paragraphs 3 and
5, and added paragraphs 20A20Q, 35A and 39B39J and headings after
paragraphs 20, 20K, 20N and 39A. An entity shall apply those amendments,
which permit insurers that meet specified criteria to apply a temporary
exemption from IFRS 9, for annual periods beginning on or after 1 January 2018.

47 An entity that discloses the information required by paragraphs 39B39J shall

use the transitional provisions in IFRS 9 that are relevant to making the
assessments required for those disclosures. The date of initial application for
that purpose shall be deemed to be the beginning of the first annual period
beginning on or after 1 January 2018.

The overlay approach

48 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
(Amendments to IFRS 4), issued in September 2016, amended paragraphs 3 and
5, and added paragraphs 35A35N and 39K39M and headings after paragraphs
35A, 35K, 35M and 39J. An entity shall apply those amendments, which permit
insurers to apply the overlay approach to designated financial assets, when it
first applies IFRS 9 (see paragraph 35C).

49 An entity that elects to apply the overlay approach shall:

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(a) apply that approach retrospectively to designated financial assets on

transition to IFRS 9. Accordingly, for example, the entity shall recognise
as an adjustment to the opening balance of accumulated other
comprehensive income an amount equal to the difference between the
fair value of the designated financial assets determined applying IFRS 9
and their carrying amount determined applying IAS 39.
(b) restate comparative information to reflect the overlay approach if, and
only if, the entity restates comparative information applying IFRS 9.

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Appendix A
Defined terms
This appendix is an integral part of the IFRS.
cedant The policyholder under a reinsurance contract.
deposit component A contractual component that is not accounted for as a derivative
under IFRS 9 and would be within the scope of IFRS 9 if it were a
separate instrument.
direct insurance An insurance contract that is not a reinsurance
contract contract.

discretionary A contractual right to receive, as a supplement to guaranteed

participation feature 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 IFRS 13.)
financial guarantee A contract that requires the issuer to make specified payments to
contract reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the
original or modified terms of a debt instrument.
financial risk The risk of a possible future change 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.
guaranteed benefits Payments or other benefits to which a particular policyholder or
investor has an unconditional right that is not subject to the
contractual discretion of the issuer.
guaranteed element An obligation to pay guaranteed benefits, included in a
contract that contains a discretionary participation feature.

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insurance asset An insurers net contractual rights under an insurance

contract.
insurance contract 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. (See Appendix B for guidance on this
definition.)
insurance liability An insurers net contractual obligations under an insurance
contract.
insurance risk Risk, other than financial risk, transferred from 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 cedants 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.

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Appendix B
Definition of an insurance contract
This appendix is an integral part of the IFRS.
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 B2B4);

(b) payments in kind (paragraphs B5B7);

(c) insurance risk and other risks (paragraphs B8B17);
(d) examples of insurance contracts (paragraphs B18B21);

(e) significant insurance risk (paragraphs B22B28); 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 contract, even if the loss arises from an event that occurred
before the inception of the contract. In other insurance contracts, the insured
event is an event that occurs during the term of the contract, even if the
resulting loss is discovered after the end of the contract term.

B4 Some insurance contracts cover events that have already occurred, but whose
financial effect is still uncertain. An example is a reinsurance contract that
covers the direct insurer against adverse development of claims already reported
by policyholders. In such contracts, the insured event is the discovery of the
ultimate cost of those claims.

Payments in kind
B5 Some insurance contracts require or permit payments to be made in kind.
An example is when the insurer replaces a stolen article directly, instead of
reimbursing the policyholder. Another example is when an insurer uses its own
hospitals and medical staff to provide medical services covered by the contracts.

B6 Some fixed-fee service contracts in which the level of service depends on an

uncertain event meet the definition of an insurance contract in this IFRS but are
not regulated as insurance contracts in some countries. One example is a
maintenance contract in which the service provider agrees to repair specified
equipment after a malfunction. The fixed service fee is based on the expected
number of malfunctions, but it is uncertain whether a particular machine will
break down. The malfunction of the equipment adversely affects its owner and
the contract compensates the owner (in kind, rather than cash). Another

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example is a contract for car breakdown services in which the provider agrees,
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 the IFRS to the contracts described in paragraph B6 is likely to be no

more burdensome than applying the IFRSs that would be applicable if such
contracts were outside the scope of this IFRS:

(a) There are unlikely to be material liabilities for malfunctions and

breakdowns that have already occurred.
(b) If IFRS 15 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 IFRS, 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 2230.

(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 1519 of this IFRS. If this IFRS did not apply to these
contracts, the service provider would apply IAS 37 to determine whether
the contracts are onerous.

(d) For these contracts, the disclosure requirements in this IFRS are unlikely
to add significantly to disclosures required by other IFRSs.

Distinction between insurance risk and other risks

B8 The definition of an insurance contract refers to insurance risk, which this IFRS
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 definition of financial risk in Appendix A includes a list of financial and

non-financial variables. That list includes non-financial variables that are not
specific to a party to the contract, such as an index of earthquake losses in a
particular region or an index of temperatures in a particular city. It excludes
non-financial variables that are specific to a party to the contract, such as the
occurrence or non-occurrence of a fire that damages or destroys an asset of that
party. Furthermore, the risk of changes in the fair value of a non-financial asset
is not a financial risk if the fair value reflects not only changes in market prices
for such assets (a financial variable) but also the condition of a specific
non-financial asset held by a party to a contract (a non-financial variable). For
example, if a guarantee of the residual value of a specific car exposes the
guarantor to the risk of changes in the cars physical condition, that risk is
insurance risk, not financial risk.

B10 Some contracts expose the issuer to financial risk, in addition to significant
insurance risk. For example, many life insurance contracts both guarantee a
minimum rate of return to policyholders (creating financial risk) and promise

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death benefits that at some times significantly exceed the policyholders account
balance (creating insurance risk in the form of mortality risk). Such contracts
are insurance contracts.

B11 Under some contracts, an insured event triggers the payment of an amount
linked to a price index. 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 eventthe 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 IFRS).

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 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 deceaseds 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 holder is adversely affected
by a reduction in the cash flows from the asset. Conversely, the definition of an
insurance contract refers to an uncertain event for which an adverse effect on
the policyholder is a contractual precondition for payment. This contractual
precondition does not require the insurer to investigate whether the event
actually caused an adverse effect, but permits the insurer to deny payment if it is
not satisfied that the event caused an adverse effect.

B15 Lapse or persistency risk (ie the risk that the counterparty will cancel the
contract earlier or later than the issuer had expected in pricing the contract) is
not insurance risk because the payment to the counterparty is not contingent on
an uncertain future event that adversely affects the counterparty. Similarly,
expense risk (ie the risk of unexpected increases in the administrative costs
associated with the servicing of a contract, rather than in costs associated with
insured events) is not insurance risk because an unexpected increase in expenses
does not adversely affect the counterparty.

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B16 Therefore, a contract that exposes the issuer to lapse risk, persistency risk or
expense risk is not an insurance contract unless it also exposes the issuer to
insurance risk. However, if the issuer of that contract mitigates that risk by
using a second contract to transfer part of that risk to another party, the second
contract exposes that other party to insurance risk.

B17 An insurer can accept significant insurance risk from the policyholder 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 eventthe survival of the
annuitant or pensionerto 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 IFRS 9 and are within
the scope of IAS 325 and IFRS 9, not this IFRS (see paragraph 4(d)).
Nevertheless, if an issuer of financial guarantee contracts has previously
asserted explicitly that it regards such contracts as insurance contracts

5 When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.

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and has used accounting applicable to insurance contracts, the issuer

may elect to apply either IAS 326 and IFRS 9 or this IFRS to such financial
guarantee contracts.
(h) product warranties. Product warranties issued by another party for
goods sold by a manufacturer, dealer or retailer are within the scope of
this IFRS. However, product warranties issued directly by a
manufacturer, dealer or retailer are outside its scope, because they are
within the scope of IFRS 15 and IAS 37.
(i) title insurance (ie insurance against the discovery of defects in title to
land that were not apparent when the insurance contract was written).
In this case, the insured event is the discovery of a defect in the title, not
the defect itself.

(j) travel assistance (ie compensation in cash or in kind to policyholders for

losses suffered while they are travelling). Paragraphs B6 and B7 discuss
some contracts of this kind.

(k) catastrophe bonds that provide for reduced payments of principal,

interest or both if a specified event adversely affects the issuer of the
bond (unless the specified event does not create significant insurance
risk, for example if the event is a change in an interest rate or foreign
exchange rate).
(l) insurance swaps and other contracts that require a payment based on
changes in climatic, geological or other physical variables 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 future event occurs, but do not require, as a
contractual precondition for payment, that the event adversely affects

6 When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.

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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 IFRS 9).
(f) a credit-related guarantee (or letter of credit, credit derivative default
contract or credit insurance contract) that requires payments even if the
holder has not incurred a loss on the failure of the debtor to make
payments when due (see IFRS 9).
(g) contracts that require a payment based on a climatic, geological or other
physical variable that is not specific to a party to the contract (commonly
described as weather derivatives).

(h) catastrophe bonds that provide for reduced payments of principal,

interest or both, based on a climatic, geological or other physical variable
that is not specific to a party to the contract.

B20 If the contracts described in paragraph B19 create financial assets or financial
liabilities, they are within the scope of IFRS 9. Among other things, this means
that the parties to the contract use what is sometimes called deposit accounting,
which involves the following:

(a) one party recognises the consideration received as a financial liability,

rather than as revenue.

(b) the other party recognises the consideration paid as a financial asset,
rather than as an expense.

B21 If the contracts described in paragraph B19 do not create financial assets or
financial liabilities, IFRS 15 applies. Under IFRS 15, 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
which the entity expects to be entitled.

Significant insurance risk

B22 A contract is an insurance contract only if it transfers significant insurance risk.
Paragraphs B8B21 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

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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, 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.

(c) a payment conditional on an event that does not cause a significant loss
to the holder of the contract. For example, consider a contract that
requires the issuer to pay one million currency units if an asset suffers
physical damage causing an insignificant economic loss of one currency
unit to the holder. In this contract, the holder transfers to the insurer
the insignificant risk of losing one currency unit. At the same time, the
contract creates non-insurance risk that the issuer will need to pay
999,999 currency units if the specified event occurs. Because the issuer
does not accept significant insurance risk from the holder, this contract
is not an insurance contract.

(d) possible reinsurance recoveries. The insurer accounts for these

separately.

B25 An insurer shall assess the significance of insurance risk contract by contract,
rather than by reference to materiality to the financial statements.7 Thus,
insurance risk may be significant even if there is a minimal probability of
material losses for a whole book of contracts. This contract-by-contract
assessment makes it easier to classify a contract as an insurance contract.
However, if a relatively homogeneous book of small contracts is known to
consist of contracts that all transfer insurance risk, an insurer need not examine
each contract within that book to identify a few non-derivative contracts that
transfer insignificant insurance risk.

7 For this purpose, contracts entered into simultaneously with a single counterparty (or contracts
that are otherwise interdependent) form a single contract.

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B26 It follows from paragraphs B23B25 that if 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 policyholders 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
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 the issuer until the option is exercised, because
the insurer remains free to price the annuity on a basis that reflects the
insurance risk transferred to the insurer at that time. However, if the contract
specifies the annuity rates (or a basis for setting the annuity rates), the contract
transfers insurance risk to the issuer at inception.

B30 A contract that qualifies as an insurance contract remains an insurance contract

until all rights and obligations are extinguished or expire.

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Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005. If an entity adopts this IFRS for an earlier period, these amendments shall be
applied for that earlier period.

*****

The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume.

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