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Wednesday 27 August 2014

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IASB Meeting Summaries and Observer Notes


 IASB January 2013


 

The IASB held an education session on 29 January 2013 to continue its discussions of the proposed Insurance Contracts Standard. The IASB discussed the presentation of insurance contract revenue when there are changes in the pattern of expected claims, and the transition proposals for insurance contract revenue. In addition, the IASB discussed how to measure insurance contracts that had been previously acquired in a business combination on transition.

No decisions were taken.



The IASB and FASB met on 30 January 2013 to continue their joint discussions of the proposed Insurance Contracts Standard. The boards discussed the presentation of insurance contract revenue when there are changes in the pattern of expected claims, and the transition proposals for insurance contract revenue.


Allocation of insurance contract revenue upon a change in the pattern of expected claims

The boards tentatively decided that, if there is a change in the expected pattern of future claims, the remaining insurance contract revenue should be reallocated prospectively to reflect the latest estimates of that pattern.

Thirteen IASB members and all FASB members agreed with this decision.


Transition for insurance contract revenue

The IASB tentatively decided that, on transition, an insurer should estimate the amount of revenue to be recognised in future periods by estimating the residual margin or initial loss included in the liability for remaining coverage. In estimating that residual margin or loss, an insurer shall assume that the risk adjustment at inception is assumed to equal the risk adjustment on transition.

Fourteen IASB members agreed with this decision.

In addition, the IASB decided that when retrospective application is impracticable, an insurer shall estimate the residual margin by maximising the use of objective data. In other words, an insurer should not calibrate the residual margin to the insurance liability as it was measured using previous GAAP.

All IASB members agreed with this decision.


The FASB tentatively decided that for contracts accounted for under the building block approach that are in-force at transition, the amount of the revenue to be recognised after transition should be determined as follows:
• For contracts for which the margin is determined through retrospective application, the insurance contract revenue remaining to be earned as of the date of transition should be determined retrospectively by using the assumptions applied in the retrospective determination of the margin.
• For contracts for which retrospective application is impracticable for determining the margin because it would require significant estimates that are not based solely on objective information, the remaining insurance contract revenue to be earned should be presumed to equal the amount of the liability for remaining coverage (excluding any investment components) recorded at the date of transition (plus accretion of interest).
o The liability for remaining coverage for these contracts at the date of transition should be presumed not to consist of any losses on initial recognition or of changes in estimate of future cash flows recognised in profit or loss after the inception of the contracts.
o The remaining insurance contract revenue to be earned shall be limited to the total expected cumulative consideration for in-force policies in the portfolio (plus interest accretion and less investment component receipts).
o The remaining insurance contract revenue should be allocated to periods subsequent to the date of transition in proportion to the value of coverage (and any other services) that the insurer has provided for the period (ie applying the pattern of expected claims and expenses and release of margin).
All FASB members agreed with this decision.



The IASB met on 31 January 2013 to consider sweep issues in the Insurance Contracts project.


Sweep issues


Definition and scope

The IASB tentatively decided:
• not to address policyholder accounting (except for cedants) in the insurance contracts project;
• not to create specific guidance on grandfathering the definition of an insurance contract; and
• not to create specific guidance on takaful.

Recognition

The IASB tentatively decided to revise the recognition point to clarify that the recognition point for deferred annuities is the earlier of the start of the coverage period or the date on which the first premium becomes due. In the absence of a contractual due date, the premium is deemed to be due when received.

Measurement

The IASB tentatively decided:
• to clarify that the cash flows relating to tax payments should be evaluated and treated like any other cash flows;
• not to address discounting of deferred taxes in the Insurance Contracts project; and
• not to create specific guidance on tacit renewals or cash bonuses.

Reinsurance

The IASB tentatively decided:
• not to impose a limit on unfavourable adjustments against the positive residual margin on reinsurance contracts held by a cedant; and
• to confirm the proposal in the 2010 Exposure Draft that an insurer should treat ceding commissions as a reduction of premiums ceded to the reinsurer.

Premium allocation approach

The IASB tentatively decided:
• to align the requirements to reduce the liability for remaining coverage in the premium allocation approach with the requirements for releasing the residual margin in the building block approach; and
• for contracts accounted for using the premium allocation approach, to provide an insurer with relief from disclosing a maturity analysis of cash flows for the liability for remaining coverage.

Business combinations and portfolio transfers

The IASB tentatively decided:
• to confirm the proposal in the 2010 Exposure Draft that different requirements should apply to business combinations and portfolio transfers; and
• not to create explicit guidance on the allocation period of the residual margin in a business combination or portfolio transfer.
Implementation guidance

The IASB tentatively decided:
• not to carry forward the implementation guidance that currently accompanies IFRS 4 Insurance Contracts to the new Standard; and
• to add an explicit explanation that not carrying forward implementation guidance of IFRS 4 does not mean that the IASB rejected it.

Twelve IASB members agreed with these decisions. One member was absent and one abstained.

Implementation guidance


The IASB tentatively decided:
• not to carry forward the implementation guidance that currently accompanies IFRS 4 Insurance Contracts to the new Standard; and
• to add an explicit explanation that not carrying forward implementation guidance of IFRS 4 does not mean that the IASB rejected it.
Twelve IASB members agreed with these decisions. One member was absent and one abstained.


Next steps


The IASB has nearly completed its technical discussions needed to finalise its Revised Exposure Draft on insurance contracts. At its February 2013 meeting, the IASB will discuss transition for business combinations.

The IASB will also be asked to decide the length of the comment period, and for permission to ballot. The FASB will continue its discussions on the Insurance Contracts project at its meeting on 6 February 2013.


Date: 1/29/2013