IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Wiley lFRS: Practicallmplementation Guide and Workbook

424

7.3 Information that helps users understand the amount, timing, and uncertainty of future cash flows is required . The terms and conditions of insurance contracts that have a material affect on the amount, timing, and uncertainty of the insurer's future cash flows also have to be disclosed. 7.4 Information about the actual claims as compared with previous estimates needs disclosure, and information about interest rate risk and credit rate risk that lAS 32 would require should be shown. 7.5 Information about exposures to interest rate risk or market risk under embedded derivatives contained in a host insurance contract should be shown if the insurer does not show the embedded derivatives at fair value. However, insurers do not need to disclose the fair value of their insurance contracts at present but need to disclose the gains and losses from purchasing reinsurance contracts. Practical Insight A typical insurer's balance sheet might comprise these assets and liabilities and be covered by the following IFRS : Assets Investments Property Investments contracts Insurance contracts Other assets Liabilities Equity Insurance liabilities Investment contractliabilities Other liabilities IASIIFRS lAS 39 lAS 16/40 lAS 18 IFRS4 vanous lAS 32/39 IFRS4 lAS 39 vanous Facts Entity A writes a single policy for a $ I,000 premium and expects claims to be made of $600 in year 4. At the time of writing the policy, there are commission costs paid of $200. Assume a discount rate of 3% risk-free. The entity says that if a provision for risk and uncertainty were to be made , it would amount to $250, and that this risk would expire evenly over years 2, 3, and 4. Under existing policies, the entity would spread the net premiums, the claims expense, and the commissioning costs over the first two years of the policy . Investment returns in years 1 and 2 are $20 and $40 respectively. Required Show the treatment of this policy using a deferral and matching approach in years 1 and 2 that would be acceptable under IFRS 4. How would the treatment differ if a "fair value" approach were used? Solution Deferral and Matching (IFRS 4): CaseStudy2

Year I 500 (300) (l00) 100 -.1Q 120

Year 2 500 (300) (l00)

Premiumearned Claimsexpense Commission costs Underwriting profit Investment return Profit

100 -.AQ 140

If a fair value approach were used, the whole of the premium earned would be credited in year I. The expected claims would be provided for on a discounted basis and then unwound over the period to year 4. The provision for risk and uncertainty would be made in year 1 and unwound over the following three years. Commission costs would all be charged in year I also. The investment returns would be treated in the same way as in the deferral approach.