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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 17 / 51

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  • deletes the ‘sunset’ clause that would have terminated the exemption 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—in 2007 (in case Phase II is not completed by then).

  • allows certain acquisition costs for contracts that involve the provision of investment management services to be treated as an asset.

  • changes the prohibition on introducing asset-based discount rates into a rebuttable presumption against doing this.

  • introduces an option for an insurer to change its accounting policies so that it remeasures designated insurance liabilities in each period for changes in interest rates (i.e. the election may apply to some liabilities but not to all similar liabilities as IAS8 would otherwise require).

  • amends IAS40 to allow separate elections as to whether to use the fair value model or the cost model for two classes of investment property held. One election is for investment property backing contracts that pay a return linked directly to the fair value of, or returns from, that investment property. The other election is for all other investment property.

  • deletes the proposed requirement to disclose the fair value of insurance contracts from 2006.

Many of these changes were made so as not to require insurers to have to develop new accounting systems that might not then be required following Phase II, or that would require excessive effort to develop before adequate guidance is available in Phase II.

The Board has made the following tentative decisions regarding Phase II that affect life insurance (see paras. BC6-9):

  • The approach should be an ‘asset-and-liability’ approach directly identifying and measuring the contractual rights and obligations under insurance contracts, rather than creating deferrals of inflows and outflows.

  • Assets and liabilities arising from insurance contracts should be measured at their fair value31, except that:

    • 1.

      recognising the lack of market transactions, an entity may use entity- specific assumptions and information when market-based information is not available without undue cost and effort.

    • 2.

      in the absence of market evidence to the contrary, the estimated fair value of an insurance liability shall not be less, but may be more, than the entity would charge to accept new contracts with identical contractual terms and remaining maturity from new policyholders. It follows that an insurer would not recognise a net gain at inception of an insurance contract, unless such market evidence is available.

  • As implied by the definition of fair value:

    • 1.

      an undiscounted measure is inconsistent with fair value.

    • 2.

      expectations about the performance of assets should not be incorporated into the measurement of an insurance contract, directly or

31 However, in IASB Insight, July 2004, the Chairman states (p.7), with regard to the appointment of three new advisory groups (one for insurance, one for financial instruments, and one for performance reporting), that ‘I want to emphasise that we have not reached any decisions on these three projects. The advisory groups will therefore start with a clean slate. The IASB has made no commitment to a full fair value approach on insurance and financial instruments.’

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