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IFRS 4 : The Insurance Contracts

Date Added: January 13, 2011 06:53:32 AM
Author: pironedu
Category: Blogs: Business

It also specifies accounting for reinsurance contracts issued or held by an entity. The standard applies to these contracts, irrespective of whether the entity is regulated as an insurer and whether the contract is regarded as an insurance contract for legal purposes. An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance risk does not include financial risk (eg risk of changes in market prices or interest rates). IFRS 4 has been issued as a short-term measure to fill a gap in IFRSs. In the absence of IFRS 4, entities would be required to account for insurance contracts following precedents in other standards, and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework for the Preparation and Presentation of Financial Statements. For most entities, applying those precedents and the Framework could have resulted in substantial changes in accounting. In most respects, IFRS 4 allows an entity to continue to account for insurance contracts under its previous accounting policies. However, the standard makes some limited improvements to accounting for insurance contracts : Catastrophe provisions and equalisation provisions are not permitted.They are not liabilities. The adequacy of insurance liabilities must be tested at the end of each reporting period. The liability adequacy test is based on current estimates of future cash flows.Any deficiency is recognised in profit or loss. Furthermore, reinsurance assets are tested for impairment. Insurance liabilities are presented without offsetting them against related reinsurance assets. Discretionary participation features (as found in with-profits and participating contracts) must be reported as liabilities or as equity (or split into liability and equity components).They may not be reported separately from liabilities and equity. Some insurance contracts contain both an insurance component and a deposit component. In some cases the entity must ‘unbundle’ the components and account for them separately. This requirement is particularly relevant for financial reinsurance. The IFRS restricts accounting policy changes. Any changes in accounting for insurance contracts must result in information that is more relevant and no less reliable or more reliable and no less relevant. PIRON offers IFRS Training, ACCA Course, CIMA Classes, CPA USA and CFA Qualification and Join IFRS, ACCA, CIMA, CPA and CFA from PIRON - ACCA Gold Approved and CIMA Quality Learning Partner.
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