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AASB 4 - Insurance Contracts - August 2015
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Turn the raw legal text into a practical explanation grounded in AASB 4 - Insurance Contracts - August 2015.
32 An insurer acquiring a portfolio of insurance contracts may use the expanded presentation described in paragraph 31.
33 The intangible assets described in paragraphs 31 and 32 are excluded from the scope of AASB 136 Impairment of Assets and AASB 138. However, AASB 136 and AASB 138 apply to customer lists and customer relationships reflecting the expectation of future contracts that are not part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer.
Discretionary participation features
Discretionary participation features in insurance contracts
34 Some insurance contracts contain a discretionary participation feature as well as a guaranteed element. The issuer of such a contract:
(a) may, but need not, recognise the guaranteed element separately from the discretionary participation feature. If the issuer does not recognise them separately, it shall classify the whole contract as a liability. If the issuer classifies them separately, it shall classify the guaranteed element as a liability.
(b) shall, if it recognises the discretionary participation feature separately from the guaranteed element, classify that feature as either a liability or a separate component of equity. This Standard does not specify how the issuer determines whether that feature is a liability or equity. The issuer may split that feature into liability and equity components and shall use a consistent accounting policy for that split. The issuer shall not classify that feature as an intermediate category that is neither liability nor equity.
(c) may recognise all premiums received as revenue without separating any portion that relates to the equity component. The resulting changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability shall be recognised in profit or loss. If part or all of the discretionary participation feature is classified in equity, a portion of profit or loss may be attributable to that feature (in the same way that a portion may be attributable to non-controlling interests). The issuer shall recognise the portion of profit or loss attributable to any equity component of a discretionary participation feature as an allocation of profit or loss, not as expense or income (see AASB 101 Presentation of Financial Statements).
(d) shall, if the contract contains an embedded derivative within the scope of AASB 9, apply AASB 9 to that embedded derivative.
(e) shall, in all respects not described in paragraphs 14–20 and 34(a)–(d), continue its existing accounting policies for such contracts, unless it changes those accounting policies in a way that complies with paragraphs 21–30.
Discretionary participation features in financial instruments
35 The requirements in paragraph 34 also apply to a financial instrument that contains a discretionary participation feature. In addition:
(a) if the issuer classifies the entire discretionary participation feature as a liability, it shall apply the liability adequacy test in paragraphs 15–19 to the whole contract (ie both the guaranteed element and the discretionary participation feature). The issuer need not determine the amount that would result from applying AASB 9 to the guaranteed element.
(b) if the issuer classifies part or all of that feature as a separate component of equity, the liability recognised for the whole contract shall not be less than the amount that would result from applying AASB 9 to the guaranteed element. That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 9 exempts that option from measurement at fair value. The issuer need not disclose the amount that would result from applying AASB 9 to the guaranteed element, nor need it present that amount separately. Furthermore, the issuer need not determine that amount if the total liability recognised is clearly higher.
(c) although these contracts are financial instruments, the issuer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in the carrying amount of the liability.
(d) although these contracts are financial instruments, an issuer applying paragraph 20(b) of AASB 7 to contracts with a discretionary participation feature shall disclose the total interest expense recognised in profit or loss, but need not calculate such interest expense using the effective interest method.
35A The temporary exemptions in paragraphs 20A, 20L and 20O and the overlay approach in paragraph 35B are also available to an issuer of a financial instrument that contains a discretionary participation feature. Accordingly, all references in paragraphs 3(a)–3(b), 20A–20Q, 35B–35N, 39B–39M and 46–49 to an insurer shall be read as also referring to an issuer of a financial instrument that contains a discretionary participation feature.
Presentation
The overlay approach
35B An insurer is permitted, but not required, to apply the overlay approach to designated financial assets. An insurer that applies the overlay approach shall:
(a) reclassify between profit or loss and other comprehensive income an amount that results in the profit or loss at the end of the reporting period for the designated financial assets being the same as if the insurer had applied AASB 139 to the designated financial assets. Accordingly, the amount reclassified is equal to the difference between:
(i) the amount reported in profit or loss for the designated financial assets applying AASB 9; and
(ii) the amount that would have been reported in profit or loss for the designated financial assets if the insurer had applied AASB 139.
(b) apply all other applicable Standards to its financial instruments, except as described in paragraphs 35B–35N, 39K–39M and 48–49 of this Standard.
35C An insurer may elect to apply the overlay approach described in paragraph 35B only when it first applies AASB 9, including when it first applies AASB 9 after previously applying:
(a) the temporary exemption from AASB 9 described in paragraph 20A; or
(b) only the requirements for the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss in paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and B5.7.5–B5.7.20 of AASB 9.
35D An insurer shall present the amount reclassified between profit or loss and other comprehensive income applying the overlay approach:
(a) in profit or loss as a separate line item; and
(b) in other comprehensive income as a separate component of other comprehensive income.