These examples accompany, but are not part of, IFRS 17. They illustrate aspects of IFRS 17 but are not intended to provide interpretative guidance.
IE1 | These examples portray hypothetical situations illustrating how an entity might apply some of the requirements in IFRS 17 to particular aspects of the accounting for contracts within the scope of IFRS 17 based on the limited facts presented. The analysis in each example is not intended to represent the only manner in which the requirements could be applied, nor are the examples intended to apply only to the specific product illustrated. Although some aspects of the examples may be presented in actual fact patterns, fact patterns in those examples are simplified and all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying IFRS 17. |
IE2 | These examples address specific requirements in IFRS 17:
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IE3 | In these examples:
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IE3A | In June 2020, the International Accounting Standards Board (Board) amended IFRS 17 and made the following amendments to these examples:
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IE4 | This example illustrates how an entity measures a group of insurance contracts on initial recognition that is onerous on initial recognition, and a group of insurance contracts that is not onerous on initial recognition. |
IE5 | An entity issues 100 insurance contracts with a coverage period of three years. The coverage period starts when the insurance contracts are issued. It is assumed, for simplicity, that no contracts will lapse before the end of the coverage period. |
IE6 | The entity expects to receive premiums of CU900 immediately after initial recognition; therefore, the estimate of the present value of the future cash inflows is CU900. |
IE7 | The entity estimates the annual cash outflows at the end of each year as follows:
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IE8 | The entity estimates the risk adjustment for non-financial risk on initial recognition as CU120. |
IE9 | In this example all other amounts are ignored, for simplicity. |
IE10 | The measurement of the group of insurance contracts on initial recognition is as follows:
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IE11 | Immediately after initial recognition, the entity receives the premium of CU900 and the carrying amount of the group of insurance contracts changes as follows:
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IE12 | This example illustrates how an entity subsequently measures a group of insurance contracts, including a situation when the group of insurance contracts becomes onerous after initial recognition. |
IE13 | This example also illustrates the requirement that an entity discloses a reconciliation from the opening to the closing balances of each component of the liability for the group of insurance contracts in paragraph 101. |
IE14 | Example 2 uses the same fact pattern as Example 1A on initial recognition. In addition:
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IE15 | At the end of Year 2 the incurred expenses differ from those expected for that year. The entity also revises the fulfilment cash flows for Year 3 as follows:
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IE16 | On initial recognition, the entity measures the group of insurance contracts and estimates the fulfilment cash flows at the end of each subsequent year as follows:
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IE17 | At the end of Year 1, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:
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IE18 | At the end of Year 2, the following events occur:
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IE19 | Thus, the estimates of the revised fulfilment cash flows at the end of Year 2 are as follows (the fulfilment cash flows for Year 1 and Year 3 are provided for comparison):
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IE20 | At the end of Year 2, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:
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IE21 | At the end of Year 3 the coverage period ends, so the remaining contractual service margin is recognised in profit or loss. In this example, all claims are paid when incurred; therefore, the remaining obligation is extinguished when the revised cash outflows are paid at the end of Year 3. |
IE22 | At the end of Year 3, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:
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IE23 | The amounts recognised in the statement of financial position and the statement of profit or loss summarise the amounts analysed in the tables above as follows:
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IE24 | At the end of Year 2, the following events occur:
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IE25 | Thus, the estimates of the revised fulfilment cash flows at the end of Years 2 and 3 are as follows (the fulfilment cash flows for Year 1 are provided for comparison):
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IE26 | At the end of Year 2, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:
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IE27 | At the end of Year 3, the coverage period ends and the group of contracts is derecognised. Applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format of the reconciliation of the insurance contract liability required by paragraph 101 is as follows:
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IE28 | The amounts recognised in the statement of financial position and the statement of profit or loss summarise the amounts analysed in the tables above as follows:
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IE29 | This example illustrates how an entity could present the insurance service result, comprising insurance revenue minus insurance service expenses, in the statement of profit or loss. |
IE30 | This example also illustrates the disclosure requirements in paragraph 100 to reconcile the carrying amount of the insurance contracts: (a) from the opening to the closing balances by each component and (b) to the line items presented in the statement of profit or loss. |
IE31 | The illustrations of presentation requirements in Examples 3A and 3B are based on Examples 2A and 2B respectively. |
IE32 | In both Example 3A and Example 3B, the entity estimates in each year that an investment component of CU100 is to be excluded from insurance revenue and insurance service expenses presented in profit or loss, applying paragraph 85. |
IE33 | At the end of Year 1, the entity provided the reconciliation required by paragraph 100 between the amounts recognised in the statement of financial position and the statement of profit or loss, separately for the liability for remaining coverage and the liability for incurred claims. A possible format for that reconciliation for Year 1 is as follows:
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IE34 | In Year 2, the actual claims of CU150 are lower than expected. The entity also revises its estimates relating to the fulfilment cash flows in Year 3. Consequently, the entity recognises in profit or loss the effect of the revised claims relating to Year 2, and adjusts the contractual service margin for changes in the fulfilment cash flows for Year 3. This change is only related to incurred claims and does not affect the investment component. |
IE35 | A possible format of the reconciliation required by paragraph 100 between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 2 is as follows:
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IE36 | In Year 3, there is no further change in estimates and the entity provides a possible format of the reconciliation required by paragraph 100 between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 3 as follows:
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IE37 | The amounts presented in the statement of profit or loss corresponding to the amounts analysed in the tables above are:
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IE38 | This example uses the same assumptions for Year 1 as those in Example 3A. Consequently, the analysis of Year 1 is the same as for Example 3A. The presentation requirements for Year 1 are illustrated in Example 3A and are not repeated in Example 3B. |
IE39 | A possible format of the reconciliation required by paragraph 100 between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 2 is as follows:
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IE40 | A possible format of the reconciliation required by paragraph 100 between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 3 is as follows:
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IE41 | The amounts presented in the statement of profit or loss corresponding to the amounts analysed in the tables above are:
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IE42 | The following two examples illustrate the requirements in paragraphs B31–B35 for separating non‑insurance components from insurance contracts. |
IE43 | An entity issues a life insurance contract with an account balance. The entity receives a premium of CU1,000 when the contract is issued. The account balance is increased annually by voluntary amounts paid by the policyholder, increased or decreased by amounts calculated using the returns from specified assets and decreased by fees charged by the entity. |
IE44 | The contract promises to pay the following:
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IE45 | The entity has a claims processing department to process the claims received and an asset management department to manage investments. |
IE46 | An investment product that has equivalent terms to the account balance, but without the insurance coverage, is sold by another financial institution. |
IE47 | The entity considers whether to separate the non‑insurance components from the insurance contract. |
IE48 | The existence of an investment product with equivalent terms indicates that the components may be distinct, applying paragraph B31(b). However, if the right to death benefits provided by the insurance coverage either lapses or matures at the same time as the account balance, the insurance and investment components are highly interrelated and are therefore not distinct, applying paragraph B32(b). Consequently, the account balance would not be separated from the insurance contract and would be accounted for applying IFRS 17. |
IE49 | Claims processing activities are part of the activities the entity must undertake to fulfil the contract, and the entity does not transfer a good or service to the policyholder because the entity performs those activities. Thus, applying paragraph B33, the entity would not separate the claims processing component from the insurance contract. |
IE50 | The asset management activities, similar to claims processing activities, are part of the activities the entity must undertake to fulfil the contract, and the entity does not transfer a good or service other than insurance contract services to the policyholder because the entity performs those activities. Thus, applying paragraph B33, the entity would not separate the asset management component from the insurance contract. |
IE51 | An entity issues a stop-loss contract to an employer (the policyholder). The contract provides health coverage for the policyholder’s employees and has the following features:
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IE52 | The entity considers whether to separate the claims processing services. The entity notes that similar services to process claims on behalf of customers are sold on the market. |
IE53 | The criteria for identifying distinct non-insurance services in paragraph B34 are met in this example:
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IE54 | Additionally, the criteria in paragraph B35 that establishes if the service is not distinct are not met because the cash flows associated with the claims processing services are not highly interrelated with the cash flows associated with the insurance coverage, and the entity does not provide a significant service of integrating the claims processing services with the insurance components. In addition, the entity could provide the promised claims processing services separately from the insurance coverage. |
IE55 | Accordingly, the entity separates the claims processing services from the insurance contract and accounts for them applying IFRS 15 Revenue from Contracts with Customers. |
IE56 | This example illustrates adjustments to the contractual service margin of insurance contracts without direct participation features for:
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IE57 | An entity issues 200 insurance contracts with a coverage period of three years. The coverage period starts when the insurance contracts are issued. |
IE58 | The contracts in this example:
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IE59 | The entity receives a single premium of CU15 at the beginning of the coverage period. Policyholders will receive the value of the account balance:
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IE60 | The entity calculates the policyholder account balances at the end of each year as follows:
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IE61 | The entity specifies that its commitment under the contract is to credit interest to the policyholder’s account balance at a rate equal to the return on an internally specified pool of assets minus two percentage points, applying paragraph B98. |
IE62 | On initial recognition of the group of contracts, the entity:
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IE63 | In Year 1, the return on the specified pool of assets is 10 per cent, as expected. However, in Year 2 the return on the specified pool of assets is only 7 per cent. Consequently, at the end of Year 2, the entity:
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IE64 | In this example all other amounts are ignored, for simplicity. |
IE65 | On initial recognition, the entity measures the group of insurance contracts and estimates the fulfilment cash flows at the end of each subsequent year as follows:
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IE66 | Applying paragraphs B98–B99, to determine how to identify a change in discretionary cash flows, an entity shall specify at inception of the contract the basis on which it expects to determine its commitment under the contract, for example, based on a fixed interest rate, or on returns that vary based on specified asset returns. An entity uses this specification to distinguish between the effect of changes in assumptions that relate to financial risk on that commitment (which does not adjust the contractual service margin) and the effect of discretionary changes to that commitment (which adjusts the contractual service margin). |
IE67 | In this example, the entity specified at inception of the contract that its commitment under the contract is to credit interest to the policyholder account balances at a rate equal to the return on a specified pool of assets minus two percentage points. Because of the entity’s decision at the end of Year 2, this spread decreased from two percentage points to one percentage point. |
IE68 | Consequently, at the end of Year 2, the entity analyses the changes in the policyholder account balances between the result of changes in financial assumptions and the exercise of discretion, as follows:
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IE69 | The entity summarises the estimates of future cash flows for Years 2 and 3 in the table below.
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IE70 | Applying paragraphs B98–B99, the entity distinguishes between the effect of changes in assumptions that relate to financial risk and the effect of discretionary changes on the fulfilment cash flows as follows:
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IE71 | A possible format for the reconciliation of the insurance contract liability required by paragraph 101 for Year 2 is as follows:
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IE72 | This example illustrates the determination of insurance acquisition cash flows on initial recognition and the subsequent determination of insurance revenue, including the portion of premium related to the recovery of the insurance acquisition cash flows. |
IE73 | This example also illustrates the requirement to disclose the analysis of the insurance revenue recognised in the period applying paragraph 106. |
IE74 | An entity issues a group of insurance contracts with a coverage period of three years. The coverage period starts when the insurance contracts are issued. |
IE75 | On initial recognition, the entity determines the following:
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IE76 | In this example for simplicity, it is assumed that:
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IE77 | On initial recognition, the entity measures the group of insurance contracts and estimates the fulfilment cash flows at the end of each subsequent year as follows:
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IE78 | The entity recognises the contractual service margin and insurance acquisition cash flows in profit or loss for each year as follows:
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IE79 | The entity recognises the following amounts in profit or loss:
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IE80 | A possible format for the analysis of the insurance revenue required by paragraph 106 is as follows:
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IE81 | This example illustrates how, for an onerous group of insurance contracts, an entity reverses losses from the loss component of the liability for remaining coverage when the group becomes profitable. |
IE82 | An entity issues 100 insurance contracts with a coverage period of three years. The coverage period starts when the insurance contracts are issued and the services are provided evenly over the coverage period. It is assumed, for simplicity, that no contracts will lapse before the end of the coverage period. |
IE83 | The entity expects to receive premiums of CU800 immediately after initial recognition, therefore, the estimates of the present value of cash inflows are CU800. |
IE84 | The entity estimates annual future cash outflows to be CU400 at the end of each year (total CU1,200). The entity estimates the present value of the future cash outflows to be CU1,089, using a discount rate of 5 per cent a year that reflects the characteristics of nominal cash flows that do not vary based on the returns on any underlying items, determined applying paragraph 36. The entity expects claims will be paid when incurred. |
IE85 | The risk adjustment for non-financial risk on initial recognition equals CU240 and it is assumed the entity will be released from risk evenly over the coverage period of three years. |
IE86 | In this example all other amounts, including the investment component are ignored, for simplicity. |
IE87 | On initial recognition, the entity measures the group of insurance contracts and estimates the fulfilment cash flows at the end of each subsequent year as follows:
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IE88 | In Year 1 all events occur as expected on initial recognition. |
IE89 | At the end of Year 2, the entity revises its estimates of future cash outflows for Year 3 to CU100, instead of CU400 (a decrease in the present value of CU286). The risk adjustment for non‑financial risk related to those cash flows remains unchanged. |
IE90 | In Year 3, all events occur as expected at the end of Year 2. |
IE91 | At the end of Year 1, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin. Using this information, a possible format for the reconciliation of the insurance contract liability required by paragraph 101 is as follows:
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IE92 | A possible format for a reconciliation between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 1 required by paragraph 100 is as follows:
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IE93 | Applying paragraph 50(a), the entity allocates specified subsequent changes in fulfilment cash flows of the liability for remaining coverage on a systematic basis between the loss component of the liability for remaining coverage and the liability for remaining coverage excluding the loss component. The table below illustrates the systematic allocation of the changes in fulfilment cash flows for the liability for remaining coverage in Year 1.
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IE94 | At the end of Year 2, applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin, as follows:
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IE95 | A possible format for a reconciliation between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 2 required by paragraph 100 is as follows:
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IE96 | The table below illustrates the systematic allocation of the changes in fulfilment cash flows for the liability for remaining coverage in Year 2.
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IE97 | At the end of Year 3, the coverage period ends and the group of insurance contracts is derecognised. Applying paragraphs B96–B97, the entity analyses the source of changes in the fulfilment cash flows during the year to decide whether each change adjusts the contractual service margin, as follows:
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IE98 | A possible format for a reconciliation between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 3 required by paragraph 100 is as follows:
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IE99 | This example illustrates the measurement of groups of insurance contracts with direct participation features. |
IE100 | An entity issues 100 contracts that meet the criteria for insurance contracts with direct participation features applying paragraph B101. The coverage period is three years and starts when the insurance contracts are issued. |
IE101 | An entity receives a single premium of CU150 for each contract at the beginning of the coverage period. Policyholders will receive either:
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IE102 | The entity calculates the account balance for each contract (the underlying items) at the end of each year as follows:
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IE103 | The entity purchases the specified pool of assets and measures the assets at fair value through profit or loss. This example assumes that the entity sells assets to collect annual charges and pay claims. Hence, the assets that the entity holds equal the underlying items. |
IE104 | On initial recognition of the contracts, the entity:
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IE105 | During the coverage period, there are changes in the time value of the guarantee and changes in the fair value returns on underlying items, as follows:
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IE106 | In this example all other amounts are ignored, for simplicity. |
IE107 | On initial recognition, the entity measures the group of insurance contracts and estimates the fulfilment cash flows at the end of each subsequent year as follows:
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IE108 | Applying paragraphs 45 and B110–B114, to account for the contractual service margin of the insurance contracts with direct participation features (see the table after paragraph IE111 for the reconciliation of the contractual service margin), the entity needs to:
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IE109 | The entity determines the fair value of the underlying items at the end of each reporting period as follows:
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IE110 | The entity determines the changes in the fulfilment cash flows as follows:
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IE111 | Applying paragraph 45, the entity determines the carrying amount of the contractual service margin at the end of each reporting period as follows:
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IE112 | The amounts recognised in the statement of profit or loss for the period are as follows:
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IE113 | This example illustrates the premium allocation approach for simplifying the measurement of the groups of insurance contracts. |
IE114 | An entity issues insurance contracts on 1 July 20x1. The insurance contracts have a coverage period of 10 months that ends on 30 April 20x2. The entity’s annual reporting period ends on 31 December each year and the entity prepares interim financial statements as of 30 June each year. |
IE115 | On initial recognition the entity expects:
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IE116 | Furthermore, in this example:
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IE117 | Subsequently:
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IE118 | The group of insurance contracts qualifies for the premium allocation approach applying paragraph 53(b). In addition, the entity expects that:
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IE119 | Further, applying paragraph 59(a), the entity chooses to recognise the insurance acquisition cash flows as an expense when it incurs the relevant costs. |
IE120 | The effect of the group of insurance contracts on the statement of financial position is as follows:
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IE121 | Applying paragraph 100, the entity provides the reconciliation:
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IE122 | A possible format of the reconciliation required by paragraph 100 is as follows:
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IE123 | The amounts included in the statement of profit or loss are as follows:
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IE124 | This example illustrates the measurement on initial recognition of a group of reinsurance contracts that an entity holds. |
IE125 | An entity enters into a reinsurance contract that in return for a fixed premium covers 30 per cent of each claim from the underlying insurance contracts. |
IE126 | The entity measures the underlying group of insurance contracts on initial recognition as follows:
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IE127 | Applying paragraph 23, the entity establishes a group comprising a single reinsurance contract held. In relation to this reinsurance contract held:
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IE128 | In this example the risk of non-performance of the reinsurer and all other amounts are ignored, for simplicity. |
IE129 | The measurement of the reinsurance contract held is as follows:
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IE130 | This example illustrates the subsequent measurement of the contractual service margin arising from a reinsurance contract held, when the underlying group of insurance contracts is not onerous and, separately, when the underlying group of insurance contracts is onerous. |
IE131 | This example is not a continuation of Example 11. |
IE132 | An entity enters into a reinsurance contract that in return for a fixed premium covers 30 per cent of each claim from the underlying insurance contracts (the entity assumes that it could transfer 30 per cent of non-financial risk from the underlying insurance contracts to the reinsurer). |
IE133 | In this example the effect of discounting, the risk of non-performance of the reinsurer and other amounts are ignored, for simplicity. |
IE134 | Applying paragraph 23, the entity establishes a group comprising a single reinsurance contract held. |
IE135 | Immediately before the end of Year 1, the entity measures the group of insurance contracts and the reinsurance contract held as follows:
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IE136 | At the end of Year 1 the entity revises its estimate of the fulfilment cash outflows of the underlying group of insurance contracts as follows:
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IE137 | At the end of Year 1 the entity measures the insurance contract liability and the reinsurance contract asset as follows:
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IE138 | At the end of Year 1 the entity measures the insurance contract liability and the reinsurance contract asset as follows:
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IE138A | This example illustrates the initial and subsequent measurement of reinsurance contracts held when one of the groups of underlying insurance contracts is onerous. |
IE138B | At the beginning of Year 1, an entity enters into a reinsurance contract that in return for a fixed premium covers 30 per cent of each claim from the groups of underlying insurance contracts. The underlying insurance contracts are issued at the same time as the entity enters into the reinsurance contract. |
IE138C | In this example for simplicity it is assumed:
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IE138D | Some of the underlying insurance contracts are onerous on initial recognition. Thus, applying paragraph 16, the entity establishes a group comprising the onerous contracts. The remainder of the underlying insurance contracts are expected to be profitable and, applying paragraph 16, in this example the entity establishes a single group comprising the profitable contracts. |
IE138E | The coverage period of the underlying insurance contracts and the reinsurance contract held is three years starting from the beginning of Year 1. Services are provided evenly across the coverage periods. |
IE138F | The entity expects to receive premiums of CU1,110 on the underlying insurance contracts immediately after initial recognition. Claims on the underlying insurance contracts are expected to be incurred evenly across the coverage period and are paid immediately after the claims are incurred. |
IE138G | The entity measures the groups of underlying insurance contracts on initial recognition as follows:
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IE138H | Applying paragraph 61, the entity establishes a group comprising a single reinsurance contract held. The entity pays a premium of CU315 to the reinsurer immediately after initial recognition. The entity expects to receive recoveries of claims from the reinsurer on the same day that the entity pays claims on the underlying insurance contracts. |
IE138I | Applying paragraph 63, the entity measures the estimates of the present value of the future cash flows for the group of reinsurance contracts held using assumptions consistent with those used to measure the estimates of the present value of the future cash flows for the groups of underlying insurance contracts. Consequently, the estimate of the present value of the future cash inflows is CU270 (recovery of 30 per cent of the estimates of the present value of the future cash outflows for the groups of underlying insurance contracts of CU900). |
IE138J | At the end of Year 2, the entity revises its estimates of the remaining fulfilment cash outflows of the groups of underlying insurance contracts. The entity estimates that the fulfilment cash flows of the groups of underlying insurance contracts increase by 10 per cent, from future cash outflows of CU300 to future cash outflows of CU330. Consequently, the entity estimates the fulfilment cash flows of the reinsurance contract held also increase, from future cash inflows of CU90 to future cash inflows of CU99. |
IE138K | The entity measures the group of reinsurance contracts held on initial recognition as follows:
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IE138L | At the end of Year 1, the entity measures the insurance contract liability and the reinsurance contract asset as follows:
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IE138M | At the end of Year 2, the entity measures the insurance contract liability and the reinsurance contract asset as follows:
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IE138N | A possible format of the reconciliation required by paragraph 100 between the amounts recognised in the statement of financial position and the statement of profit or loss for Year 2 is as follows:
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IE138O | The amounts presented in the statement of profit or loss corresponding to the amounts analysed in the tables above are:
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IE139 | This example illustrates the initial recognition of a group of insurance contracts acquired in a transfer that is not a business combination. |
IE140 | An entity acquires insurance contracts in a transfer from another entity. The seller pays CU30 to the entity to take on those insurance contracts. |
IE141 | Applying paragraph B93 the entity determines that the insurance contracts acquired in a transfer form a group applying paragraphs 14–24, as if it had entered into the contracts on the date of the transaction. |
IE142 | On initial recognition, the entity estimates the fulfilment cash flows to be:
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IE143 | The entity does not apply the premium allocation approach to the measurement of the insurance contracts. |
IE144 | In this example all other amounts are ignored, for simplicity. |
IE145 | Applying paragraph B94, the consideration received from the seller is a proxy for the premium received. Consequently, on initial recognition, the entity measures the insurance contract liability as follows:
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IE146 | This example illustrates the initial recognition of a group of insurance contracts acquired in a business combination within the scope of IFRS 3 Business Combinations. |
IE147 | An entity acquires insurance contracts as part of a business combination within the scope of IFRS 3 and it:
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IE148 | On initial recognition, the entity estimates that the fair value of the group of insurance contracts is CU30 and the fulfilment cash flows are as follows:
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IE149 | The entity does not apply the premium allocation approach to the measurement of the insurance contracts. |
IE150 | In this example all other amounts are ignored, for simplicity. |
IE151 | Applying paragraph B94, the fair value of the group of insurance contracts is a proxy for the premium received. Consequently, on initial recognition, the entity measures the liability for the group of insurance contracts as follows:
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IE152 | Paragraph 88 allows an entity to make an accounting policy choice to disaggregate insurance finance income or expenses for the period to include in profit or loss an amount determined by a systematic allocation of the expected total finance income or expenses over the duration of the group of insurance contracts. |
IE153 | This example illustrates the two ways of systematically allocating the expected total insurance finance income or expenses for insurance contracts for which financial risk has a substantial effect on the amounts paid to the policyholders as set out in paragraph B132(a). |
IE154 | An entity issues 100 insurance contracts with a coverage period of three years. Those contracts:
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IE155 | On initial recognition of the group of insurance contracts:
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IE156 | At the end of Year 1, the market interest rate falls from 10 per cent a year to 5 per cent a year and the entity revises its expected future cash flows to be paid in Year 3. |
IE157 | In this example all other amounts, including the risk adjustment for non-financial risk, are ignored for simplicity. |
IE158 | Applying paragraph 88, the entity chooses to disaggregate insurance finance income or expenses for the period to include in profit or loss an amount determined by a systematic allocation of the expected total finance income or expenses over the duration of the contracts, as follows:
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IE159 | Applying paragraph B132(a)(i), the entity uses a rate that allocates the remaining revised expected finance income or expenses over the remaining duration of the group of contracts at a constant rate (an ‘effective yield approach’). The effective yield approach is not the same as the effective interest method as defined in IFRS 9 Financial Instruments. |
IE160 | The constant rate at the date of initial recognition of the contracts of 10 per cent a year is calculated as (CU1,890 ÷ CU1,420)⅓ – 1. Consequently, the estimates of the present value of the future cash flows included in the carrying amount of the insurance contract liability at the end of Year 1 are CU1,562, calculated as CU1,420 × 1.1. |
IE161 | At the end of Year 1, the market interest rate falls from 10 per cent a year to 5 per cent a year. Consequently, the entity revises its expectations about future cash flows as follows:
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IE162 | At the end of Year 1 the entity revises the constant rate used to allocate expected insurance finance income or expenses to reflect the expected reduction in the future cash flows at the end of Year 3 from CU1,890 to CU1,802:
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IE163 | The effect of the change in discount rates on the carrying amounts of the estimates of the present value of the future cash flows, included in the carrying amount of the insurance contract liability, is shown in the table below:
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IE164 | The insurance finance income and expenses, arising from the fulfilment cash flows, included in profit or loss and other comprehensive income are as follows:
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IE165 | Applying paragraph B132(a)(ii), the entity uses an allocation based on the amounts credited in the period and expected to be credited in future periods (a ‘projected crediting rate approach’). In addition, applying paragraph B130(b), the entity needs to ensure that the allocation results in the amounts recognised in other comprehensive income over the duration of the group of contracts totalling to zero. In order to do so, the entity calculates a series of discount rates applicable to each reporting period which, when applied to the initial carrying amount of the liability equals the estimate of future cash flows. This series of discount rates is calculated by multiplying the expected crediting rates in each period by a constant factor (K). |
IE166 | On initial recognition the entity expects to achieve a return on underlying items of 10 per cent each year and to credit the policyholder account balances by 8 per cent each year (the expected crediting rate). Consequently, the entity expects to pay policyholders CU1,890 at the end of Year 3 (CU1,500 × 1.08 × 1.08 × 1.08 = CU1,890). |
IE167 | In Year 1, the entity credits the policyholder account balances with a return of 8 per cent a year, as expected at the date of initial recognition. |
IE168 | At the end of Year 1, the market interest rate falls from 10 per cent a year to 5 per cent a year. Consequently, the entity revises its expectations about cash flows as follows:
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IE169 | The entity allocates the remaining expected finance income or expenses over the remaining life of the contracts using the series of discount rates calculated as the projected crediting rates multiplied by the constant factor (K). The constant factor (K) and the series of discount rates based on crediting rates at the end of Year 1 are as follows:
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IE170 | The carrying amount of the liability at the end of Year 1 for the purposes of allocating insurance finance income or expenses to profit or loss is CU1,562 (CU1,420 × 1.08 × 1.0184). |
IE171 | The actual crediting rates for Years 2 and 3 are as expected at the end of Year 1. The resulting accretion rate for Year 2 is 10 per cent (calculated as (1.08 × 1.0184) – 1) and for Year 3 is 4.9 per cent (calculated as (1.03 × 1.0184) – 1).
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IE172 | The insurance finance income and expenses included in profit or loss and other comprehensive income are as follows:
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IE173 | This example illustrates the presentation of insurance finance income or expenses when an entity applies the approach in paragraph 89(b) (‘the current period book yield approach’). This approach applies when an entity holds the underlying items for insurance contracts with direct participation features. |
IE174 | An entity issues 100 insurance contracts with a coverage period of three years. The coverage period starts when the insurance contracts are issued. |
IE175 | The contracts in this example:
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IE176 | The entity receives a single premium of CU15 for each contract at the beginning of the coverage period (total future cash inflows of CU1,500). |
IE177 | The entity promises to pay policyholders on maturity of the contract an accumulated amount of returns on a specified pool of bonds minus a charge equal to 5 per cent of the premium and accumulated returns calculated at that date. Thus, policyholders that survive to maturity of the contract receive 95 per cent of the premium and accumulated returns. |
IE178 | In this example all other amounts, including the risk adjustment for non-financial risk, are ignored for simplicity. |
IE179 | The entity invests premiums received of CU1,500 in zero coupon fixed income bonds with a duration of three years (the same as the returns promised to policyholders). The bonds return a market interest rate of 10 per cent a year. At the end of Year 1, market interest rates fall from 10 per cent a year to 5 per cent a year. |
IE180 | The entity measures the bonds at fair value through other comprehensive income applying IFRS 9 Financial Instruments. The effective interest rate of the bonds acquired is 10 per cent a year, and that rate is used to calculate investment income in profit or loss. For simplicity, this example excludes the effect of accounting for expected credit losses on financial assets. The value of the bonds held by the entity is illustrated in the table below:
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IE181 | Applying paragraph 89(b), the entity elects to disaggregate insurance finance income or expenses for each period to include in profit or loss an amount that eliminates accounting mismatches with income or expenses included in profit or loss on the underlying items held. |
IE182 | Applying paragraphs 45 and B110–B114 to account for the insurance contracts with direct participation features, the entity needs to analyse the changes in fulfilment cash flows to decide whether each change adjusts the contractual service margin (see the table after paragraph IE184 illustrating the reconciliation of the contractual service margin). |
IE183 | Applying paragraphs B110–B114, the entity analyses the source of changes in the fulfilment cash flows as follows:
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IE184 | Applying paragraph 45, the entity determines the carrying amount of the contractual service margin at the end of each reporting period as follows:
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IE185 | The amounts recognised in the statement(s) of financial performance for the period are as follows:
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IE186 | This example illustrates the transition requirements for insurance contracts without direct participation features for which retrospective application is impracticable and an entity chooses to apply the modified retrospective transition approach. |
IE187 | An entity issues insurance contracts without direct participation features and aggregates those contracts into a group applying paragraphs C9(a) and C10. The entity estimates the fulfilment cash flows at the transition date applying paragraphs 33–37 as the sum of:
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IE188 | The entity concludes that it is impracticable to apply IFRS 17 retrospectively. As a result, the entity chooses, applying paragraph C5, to apply the modified retrospective approach to measure the contractual service margin at the transition date. Applying paragraph C6(a), the entity uses reasonable and supportable information to achieve the closest outcome to retrospective application. |
IE189 | The entity determines the contractual service margin at the transition date by estimating the fulfilment cash flows on initial recognition applying paragraphs C12–C15 as follows:
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IE190 | The contractual service margin at the transition date equals CU20 and is calculated as follows:
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IE191 | As a result, the carrying amount of the insurance contract liability at the transition date equals CU740, which is the sum of the fulfilment cash flows of CU720 and the contractual service margin of CU20. |
IE192 | This example illustrates the transition requirements for insurance contracts with direct participation features when retrospective application is impracticable and an entity chooses to apply the modified retrospective transition approach. |
IE193 | An entity issued 100 insurance contracts with direct participation features five years before the transition date and aggregates those contracts into a group, applying paragraphs C9(a) and C10. |
IE194 | Under the terms of the contracts:
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IE195 | The following events took place in the five year period prior to the transition date:
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IE196 | Applying paragraphs 33–37, the entity estimates the fulfilment cash flows at the transition date to be CU922, comprising the estimates of the present value of the future cash flows of CU910 and a risk adjustment for non-financial risk of CU12. The fair value of the underlying items at that date is CU948. |
IE197 | The entity makes the following estimates:
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IE198 | The entity applies a modified retrospective approach to determine the contractual service margin at the transition date, applying paragraph C17 as follows:
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IE199 | Consequently, the carrying amount of the insurance contract liability at the transition date equals CU940, which is the sum of the fulfilment cash flows of CU922 and the contractual service margin of CU18. |
This appendix sets out the amendments to the Illustrative Examples for other IFRS Standards that are a consequence of the International Accounting Standards Board issuing IFRS 17 Insurance Contracts.
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The amendments contained in this appendix when this Standard was issued in 2017 have been incorporated into the guidance on the relevant Standards included in this volume.
| 1 | There is no prescribed method for the calculation of the time value of a guarantee, and a calculation of an amount separate from the rest of the fulfilment cash flows is not required. (back) |