a) IFRS4 Insurance Contracts (IASB, 2004a) This standard represents the completion of ‘Phase I’ of the IASB’s project on insurance contracts. We focus here on those aspects that relate to life assurance. Here the standard imposes only limited requirements and by and large leaves existing practices—in all their variety—unchanged. Substantial revisions were made to the proposals put forward in the exposure draft ED5, following the comments submitted. In order to make even this limited progress the IASB has had to depart from its Framework of principles in several respects, and the standard was approved by only eight members of the fourteen-member Board. But the IASB has put down some markers for ‘Phase II’ of the project, which it is committed to completing ‘without delay’, although no deadline has as yet been set for this.
The standard focuses on insurance (including reinsurance) contracts rather than on the entities that conduct insurance business and an area of particular difficulty for these entities in implementation will be distinguishing which contracts contain ‘significant’ insurance risk and are therefore to be accounted for under IFRS4 and which fall to be accounted for as ‘financial instruments’ under IAS39 (IASB, 2004b)—itself still being amended. The IASB has (with one exception) reserved for Phase II discussion of whether there are circumstances in which contracts have to be ‘unbundled’ into insurance and investment/deposit elements. IFRS4 does not address accounting by policyholders (other than by insurers ceding to reinsurers or reinsurers themselves retroceding).
Its main features relating to life insurance include (see paras. IN3-IN12):
Until Phase II is completed, insurers may generally continue their existing accounting policies for insurance contracts and are exempt from applying the criteria in IAS8 that entities normally have to apply for developing an accounting policy where no IFRS applies specifically to an item. Insurers who do not already do so must however make a ‘liability adequacy test’ (for the adequacy of recognised insurance liabilities) and an impairment test for reinsurance assets, with any deficiency to be recognised in profit and loss.
An insurer may change its accounting policies for insurance contracts only if, as a result, the financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. In particular an insurer cannot introduce any of the following practices, although it may continue to use accounting policies that involve them:
measuring insurance liabilities on an undiscounted basis.
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.
using non-uniform accounting policies for the insurance liabilities of subsidiaries.
An insurer may introduce an accounting policy that involves measuring only certain designated liabilities consistently in each period to reflect current market interest rates (and, if the insurer so elects, other current estimates and assumptions) without being required to apply the change in accounting policies consistently to all similar liabilities.
An insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if it already measures them with sufficient prudence, it should not introduce additional prudence.