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Overview of Indian Accounting Standard (Ind AS) 104

Overview of Ind AS 104 Insurance Contracts

The objective of this Standard is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described as an insurer).

In particular, this Ind AS requires:

(a) limited improvements to accounting by insurers for insurance contracts;

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.

Definitions

Insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Insurance risk is any risk, other than financial risk, transferred from the holder of a contract to the issuer.

Insured event is an uncertain future event that is covered by an insurance contract and creates insurance risk.

Insurer is the party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs.

Policyholder is a party that has a right to compensation under an insurance contract if an insured event occurs.

The Standard applies to:

  • all insurance contracts (including reinsurance contracts) that the entity issues;
  • reinsurance contracts that entity holds;
  • financial instruments that entity issues with a discretionary participation feature. Ind AS 107, Financial Instruments: Disclosures, requires disclosure about financial instruments, including financial instruments that contain such features.

The Standard exempts an insurer from some requirements of other Ind AS. However, the Standard:

(a) prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions);

(b) requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets

(c) requires an insurer to keep insurance liabilities in its statement of financial position until they are discharged or cancelled, or expire, and not to offset (i) insurance liabilities against related reinsurance assets (ii) income/expenses from reinsurance contract against expense/income from related insurance contract.

This Standard will also not be applied to

  • product warranties issued directly by a manufacturer, dealer or retailer;
  • employers’ assets and liabilities under employee benefit plans & retirement benefit obligations reported by defined benefit retirement plans;
  • contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item;
  • financial guarantee contracts unless the issuer entity has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer entity may elect to (i) apply either Ind AS 32, Ind AS 107 and Ind AS 109 or this Standard to such contracts (ii) may make that election contract by contract, but the election for each contract is irrevocable;
  • contingent consideration payable or receivable in a business combination;
  • direct insurance contracts that the entity holds as a policyholder (other than reinsurance contracts that entity holds).

The Ind AS permits an insurer to change its accounting policies for insurance contracts only if the change makes the financial statements more relevant and no less reliable, or more reliable and no less relevant. In particular, an insurer may continue any of the following practices, although it may continue using accounting policies that involve them:

(a) measuring insurance liabilities on an undiscounted basis;

(b) 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;

(c) using non-uniform accounting policies for the insurance contracts of subsidiaries.

The Ind AS permits an insurer to change its accounting policies so that it re-measures designated insurance liabilities to reflect current market interest rates and recognises changes in those liabilities in profit or loss. Without this permission, an insurer would have been required to apply the change in accounting policies consistently to all similar liabilities.

The Ind AS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise from insurance contracts;

(b) the nature and extent of risks arising from insurance contracts.

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