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The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation.
International Financial Reporting Standards
Reflecting changes in expected profitability of
insurance contracts
Andrea Pryde IASB staff Izabela Ruta IASB staff
2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
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Agenda
2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
2
What is the issue?
Alternative solutions in 2010 Exposure Draft and 2013 Exposure
Draft
Proposal in the revised exposure draft
Understanding the proposals Prospective adjustment
Which cash flows?
Summary: comparison of proposals
More information about the project
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What is the issue? 3
Balance Sheet
Fulfilment cash flows
Contractual service margin (Expected profit)
Discounting: An adjustment that converts future cash flows
into
current amounts
Future cash flows: Expected cash flows from premiums and
claims and benefits
Risk adjustment: An assessment of the uncertainty about the
amount of future cash flows
The balance sheet amount reflects:
the expected contract profit from the
insurance contract; and
a current estimate of the amount of
future cash flows from the insurance
contract, adjusted to reflect the timing
and uncertainty relating to those cash
flows.
Issue: How to account for changes in cash
flows?
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Alternative solutions in 2010 Exposure Draft and 2013 Exposure
Draft
IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
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4
2010 Exposure Draft
Effect of change in estimates of cash flows
recognised immediately in profit or loss -
contractual service margin* not updated.
Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
Pro
fit or
loss a
ssocia
ted w
ith
contr
actu
al serv
ice m
arg
in
Current proposal
Adjust contractual service margin for changes in
estimates of cash flows to better reflect future
profitability.
* In 2010 Exposure Draft named residual margin
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Proposal in revised exposure draft
Subsequent measurement
30 The remaining amount of the contractual service margin at the
end of the reporting period is the carrying amount at the start of
the reporting period:
(a) (b) ()
c) plus a favourable difference between the current and previous
estimates of the present value of future cash flows, if those
future cash flows relate to future coverage and other future
services (see paragraph B68);
(d) minus an unfavourable change in the future cash flows: (i)
if the change arises from a difference between the current and
previous estimate
of the present value of future cash flows that relate to future
coverage and other
future services; and
(ii) to the extent that the contractual service margin is
sufficient to absorb an
unfavourable change. The contractual service margin shall not be
negative.
31 An entity shall recognise in profit or loss any changes in
the future cash flows that, in accordance with paragraph 30, do not
adjust the contractual service margin (see paragraph B68).
2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
5
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Understanding proposals - prospective adjustment
2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
6
How does it work?
At the end of year 3, the remaining contractual service margin
equals CU40. Entity revises estimate of cash flows and as a result
there is unfavourable change in expected cash outflows of CU50. How
to account for this change?
The entity account for the change as follows: increases
fulfilment cash flows of CU50,
decreases remaining contractual service margin of CU40 to zero
(because it
could not be negative) and recognises the difference of CU10 as
an expense in
profit or loss.
Adjust contractual service margin for the difference between the
current and previous estimates of the present value of future cash
flows prospective adjustment!
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Understanding proposals which cash flows?
Adjust margin
Change in expected cash inflows
Net changes related to delay or acceleration of repayment of
investment
When mirroring applies - cash flows that relate to future
coverage such as
asset management fee
Do not adjust margin
Incurred claims because relate to past coverage
When mirroring applies - cash flows that vary directly with
underlying items unless relate to future coverage
2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
7
Adjust contractual service margin for cash flows that relate to
future coverage and other future service. Paragraph B68 provides
examples of such cash flows, as follows:
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Illustration 1: change in investment
2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
8
Assume:
4 year contract that contain investment - promise of deposit
repayment such as CSV
Expected cash outflows at inception equals CU200 each year
In year 2, there are changes in incurred cash flows and future
estimates as follows:
Entity decreases the contractual service margin for CU5 - net
increase from investment of CU10 and decrease in future insurance
by CU15.
Entity presents change in insurance (CU5) immediately in profit
or loss as part of incurred claims.
Year1 Year 2 Year 3 Year 4 Total
Expected cash outflows 200 200 200 200 800
Total change comprising: - 15 35 (40) 10
Change in investment - 10 20 (40) (10)
Change in insurance - 5 15 - 20
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Frequently asked questions
Change in risk
Complexity need to split between changes (adjust margin) and
relief from risk (recognised in p&l)
Transparency changes in risk important in assessing insurance
performance
Change in discount rate
It doesnt affect future profitability of the contract
Would likely result in accounting mismatch
2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
9
Question: Why not adjust for other changes in fulfilment cash
flows such as changes in risk or changes in discount rate?
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Summary: comparison of proposals
IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
10
Current proposal
Adjust contractual service margin for changes in future cash
flows related to future services
Meaning would better reflect profits recognised when the service
is provided.
Consequence in the year of change, information about the change
provided only in the notes.
Consistency - with revenue recognition model and
premium-allocation approach
More difficult need to decide which cash flows relate to future
coverage
Previous proposal
All changes in cash flows recognised immediately in profit or
loss:
Meaning informs immediately about changes in circumstances.
Consequence - After change, profits recognised based on original
estimates (could show profit for loss-making contracts). Also
changes could be reversed next period.
Consistency with IFRS 9
Simpler there is no need to split cash flows between those that
adjust the contractual service margin and those that do not.
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2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org
Thank you 12