PSAK 36

statement of financial accounting standard 36

indonesian institute of accountants

accounting for life insurance

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statement of financial accounting standard 36

accounting for life insurance

contents

paragraphforeword

foreword from central committee ofthe indonesian institute of accountants

foreword from the ministry of financeforeword from the indonesian insurance council

introduction 01 - 20characteristics of the life insurance industry 02scope and application 03 - 05definition 06 - 20

presentation of financial statements 21 - 29balance sheet 21 - 25income statement 26 - 28notes to the financial statements 29

revenue 30 - 32short term premium contract 30long term premium contract 31other revenue 32

expenses 33 - 36claim expenses 33 - 35acquisition expenses 36

assets 37 - 39investments 38reinsurance receivables 39

liabilities 40 - 44liability for future policy benefit 41estimation of claim liability 42unearned premium 43reinsurance liability 44

disclosure 45effective date 46

attachments

samples of financial statements1. balance sheet2. income statement (single step)3. statement of cash flows (direct method)4. statement of cash flows (indirect method)

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foreword

deregulation and de-bureaucratisation measures taken by the government have given significant flexibility and opportunity to the public, including insurance companies, to develop and play a greater role in the social and economic life of this country.

faced with new challenges, insurance companies need to create a system to improve the flow of their business activities, to manage and to maintain their financial condition. one such system required is a financial accounting standard for more informative, more accurate financial statements of life insurance companies.

recognising this, the indonesian institute of accountants in cooperation with the indonesian insurance council and the directorate of insurance-ministry of finance, has developed an accounting standard for life insurance industry.

this accounting standard is set (1) in the spirit of harmonising with international financial standards, but (2) using as a reference official accounting standards of modern countries such as fasb/fas of the u.s., (3) considering the needs of public company financial statements and the global stock exchange, (4) considering rules and regulations of the insurance law, (5) considering opinions of the government, experts, practitioners and watchers during setting process and public hearing, (6) considering condition and culture of the indonesian business, (7) in the spirit and in perspective of the macro economics.

this standard has been set based on the decision of the indonesian institute of accountants. this standard is expected to (1) give protection to the policy holders and the public, (2) build an insurance business which is conservative, prudent and healthy, (3) make use of globally accepted accounting technology in efforts to create a more prosperous indonesian society.

accounting standard for life insurance is a new standard that requires the participation of all parties to ensure the dissemination, comprehension, application and future revisions of the standard.

the indonesian institute of accountants wish to thank to:

mr. drs. mar'ie muhammad minister of financemr. dr. ir. bambang subianto directorate general of financial institutionsmr. drs. sophar l. toruan, mpa director of insurancerdrs. kartomo wiryobroto director of supervisory of

accountants and appraisers

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the chairperson and members of the steering committee of the standard-setting project, as follows:

1. chairperson : drs. sophar l. toruan, mpa2. member : drs. kartomo wiryobroto3. member : drs. murniati firman4. member : drs. vjh boentaran5. member : drs. jusuf halim6. member : didi achdijat, fsai

the chairperson and members of the formulating team of the standard setting project, as follows:

1. chairperson : drs. jan hoesada, mm2. secretary : drs. firdaus djaelani, ma3. member : drs. bambang heryanto4. member : drs. brata antakusuma5. member : drs. agust. sudjiono6. member : didi adrianto hadrian7. member : bambang sumantoro8. member : drs. achmad wahidin9. member : dr. nur indriantoro10. member : drs. rusdy daryono11. member : h. kasir iskandar, fsai12. member : drs. warnedy, msc.13. member : drs. ruchyat kosasih

the secretariat of the formulating team of the standard-setting project, as follows:

1. agus prawoto, s.h., m.a.2. ronny agandhi, mec.3. darul dimasqy k, s.e.4. agus suparto, s.e.5. fatati sriwahyuni, s.e.6. fitri amanda, s.e., m.b.a.7. asep rahmansyah, s.e.8. salusra satria, s.e., m.a.f.

all sponsors, information sources, and attendants of the public hearing of the concept publication of the accounting standard of life insurance. without their prayers, supports, commitments, spirits, and attention of the parties stated above, this accounting standard would not have been completed.

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by the blessing of the almighty god, this accounting standard is approved by the central committee of the indonesian institute of accountants.

jakarta, april 26 1996

the central committee ofthe indonesian institute of

accountants

drs. soedarjonochairperson

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statement of financial accounting standard 36, accounting for life insurance, was adopted by a meeting of the indonesian accounting principles committee on march 22, 1996 and was ratifited by the national council of the indonesian institute of accountants on april 26, 1996.

jakarta, april 26, 1996

national councilindonesian accounting principles committee

drs. jusuf halim chairpersondrs. ipg ary suta, mba vice-

chairpersondrs. mirza mochtar, mba secretarydr. wahjudi prakarsa memberdr. katjep k. abdoelkadir memberdrs. jan hoesada, ak., mm memberdrs. hein g. surjaatmadja memberdrs. sobo sitorus memberdrs. timoty r. marnandus, mbamemberdrs. mirawati sudjono, msc memberdr. nur indrianto memberdrs. rusdy daryono memberdra. siti ch. fadjriah memberdrs. osman sitorus memberdra. istini t. siddharta memberdrs. jusuf wibisana memberdra. yosefa sayekti member

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speech fromthe director general of financial institutions

ministry of finance

we thank to god, for the legalisation of this financial accounting standard for life insurance companies.

current developments in the global economy has placed the service industry in a strategic position. the increase in the service industry including insurance, has given significant contribution to the economic growth of a country.

in response to the increase in the trade of insurance services, requiring similar perceptions and interpretations to all insurance business practitioners, a financial accounting standard for life insurance is needed.

by standardising financial accounting and reporting we hope that all parties, involved in the insurance industry, will be able to use the standard as a guide when setting up the accounting system, as a reference in reviewing life insurance companies as well as in decision-making process.

last but not least, we hope that this financial accounting standard, developed in cooperation with the indonesian insurance industry and the indonesian institute of accountants, will be of benefit to all of us by assisting developments in the accounting profession and in the accounting systems of life insurance companies.


director general of financial institutions

dr. ir. bambang subianto

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speech fromthe general chairperson of indonesian insurance council

on the approvement of financial accounting standard 36 on life insurance accounting

we all believe that a standard financial accounting procedure is needed in every industry, including the insurance industry.

the application of different accounting systems in accounting for insurance companies makes it difficult to compare companies. in addition, insurance laws and regulations require the application of a standard accounting system.

for this purpose, an 'exposure draft' for financial accounting standard 36, accounting for life insurance companies, has been produced in cooperation between the indonesian institute of accountants and indonesian insurance council (formalised by an agreement dated june 1, 1995). further, the central committee of the indonesian institute of accountants has legalised that draft so that now we have the statement of financial accounting standard for life insurance companies.

we hope that members of the indonesian insurance council adjust their financial accounting procedure with this financial accounting standard.

we would like to thank to the central committee of the indonesian institute of accountants and its members for their assistance to the indonesian insurance council in preparing both statement of financial accounting standard which will benefit development in indonesia's insurance industry.

we also hope that this cooperation will continue in the future.


the indonesian insurance council

b. munir sjamsoeddingeneral chairperson

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psak 36 accounting for life insurance

introduction

01 the insurance industry grows in line with the growth of the business world. the rise of the insurance industry is a natural consequence and uavoidable in a situation in whch many business people and members of the public have the inclination to avoid or transfer the risks of financial loss. the insurance industry assumes or insures part of those risks in return for insurance premiums from the entrepreneur or the insured.

the type of risk insured under life insurance includes death, accidents and disabilities, and loss of ability to earn income. the insurance industry will insure all or part of the financial risk suffered by the insured resulting from events or situations that have been insured for during the period of the insurance contract.

the life insurance business has specific characteristics that make insurance transaction and insurance accounting unique. the premium is received or known, while the claim or insurance benefit has not arisen and it is uncertain as to occurrencefor several products, the insurance claims are surrounded by uncertainties as to the ccurrence as wll as amounts.

this statement addresses the accounting treatment for transactions which are specifically related to the life insurance industry. other general matters or matters that are not addressed in this statement should be treated in accordance with generally accepted accounting principles.

characteristics of the life insurance industry

02 the business of life insurance has the following characteristics:

- life insurance bsiness represent a system of protection against risk of financial loss resulting from the death of an individual as well as an effort to accumulated funds from the general public.

- premium represents revenue to the insurance enterprise, in addition to return on investments which constitutes an activity that cannot be separated in the life insurance business.

- the main function of investments is to meet all benefit obligations due to the policyholders.

- financial liabilities of life insurance enterprises are affected by uncertainty as to occurrence of an event, which influences the presentation of the financial statements.

- financial statements are influenced by estimates, such as estimates of the liability for the future policy benefits which is based on actuarial calculations, estimates of unearned premium income,

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estimates of the amount of the total cllaim liability, and estimates of the incurred but not reported claims.

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- policyholders pay the insurance premiums or deposits to the insurance enterprise before the insured event occurs. these payments represent revenues to the insurance enterprise. when the i nsurance contract is agreed, the insurance enterprise does not usually know whether or not it will pay the insurance benefits, what the amount of payment is going to be, and if payment is made when it should be made. this will influence the issues if revenue recognition and the measurement of expenses.

- life insurance enterprises should meet the financial health criteria in accordance with regulations in the insurance industry, such as solvency margin.

scope and application

03 a life insurance enterprise can take one of the following legal forms: a corporation, a cooperaive, alimited liability enterprise or a joint venture.

04 this statement is intended to be applied in the presentation of the financial statements of life insurance enterprises. any circumstances not addressed by this statement should be accounted for in accordance with generally accepted accounting principles. when the enterprise’s main transactions are related to life insurance transactions, this statement should be applied.

05 the life insurance business is influenced by rules and regulations which may differ from generally accepted accounting principles. financial statements presented in accordance with this statement are not intended to comply with specific rules

definition

06 a life insurance contract is classified into short term contract or long term contract depending whether the contract will be in efffect for a certain period of time. the factors which should be considered when determining whether the contract is expected to be in effect for a certain period of time are:

a. short term contract. in this type of contract, the amount of premium charged, amount of coverage given or other policy terms can be amended by the insurance enterprise at the policy renewal date.

b. long term contract. this contract is usually irrevocable, renewal is guaranteed and other terms caonnot be amended unilaterally. long term contracts also include service or other functions performed by insurance enterprises

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07 subordinated liability is a loan from shareholders or other parties, which in the event of liquidation, is settled after the payment of other liabilities. this liability is intended to improve the solvency margin.

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08 solvency margin is a measurement used to assess an insurance company’s ability in fulfilling its liabilities to the policyholders, which is reflected by comparison between allowable net value and the company’s liabilities.

09 grace period is a period in which the policy is in effect, but the policyholders have not been required to pay the premiums at the date they are supposedly due.

10 gross premium is a premium received from policy holder.

11 premium receivable is a claim of premium to the policyhoder which is due and is still within the grace period

12 unearned premium is a part of the gross premium which has not been recognised as revenue since the period covered extends beyond the end of the current period.

13 reinsurance premium is a part of the gross permium which is due to the reinsurer based on the reinsurance agreement.

14 reinsurance receivable is a claim to the reinsurer which arises from reinsurance transcations, in relation to the receipt of reinsurance premium, reinsurance commission, profit commission and reinsurance claim.

15 reinsurance payable is a liablility that arises from reinsurance transactions in relation to the charging or reinsurance premium, reinsurance commission, profit commission and reinsurance claim.

16 claim and insurance benefit are expenses which consist of: claims and insurance benefits where payment is based on the occurrence of an insured event. such claims and benefits include dath claim, disability claim and health insurance claim; claims and benefits due on maturity date; and claims and benefits due to surrender of the contract.

17 reinsurance claim is part of the claim that becomes a liability of the reinsurer in accordance with the reinsurance agreement.

18 liability for future policy benefit (in insurance technical term it is called a premium reserve) is an obligation to the policyholders that concerns the premium that is due, including grace period premium.

19 estimated of claim liability is claim where the amount and/or the responsibility has not been determined, including the incurred but not reported claims.

20 acquisition cost are costs related to new insurance contracts or

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renewals, including commissions and other expenses (such as salaries of underwiting employees).

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presentation of financial statements

balance sheet

21 in presenting the balance sheet, assets and liabilities are not classified into current or non-current items, but emphasis on the investment accounts and liabilities to policy holders accounts. in this manner, the financial statements reflect a company’s ability to fulfil its obligations to the policy holders.

22 assets are presented by listing the investment accounts first, followed by other asset accounts. other asset accounts are presented in the order of liquidity.

23 liabilities are presented by listing “liability to the policy holders” account first, followed by other liabilities. other liabilities are presented in order of maturity.

24 subordinated liabilities, if any, are presented after other liabilities and before equity.

25 equity is presented in compliance with the generally accepted accounting principles.

income statement

26 income statements are presented using the single step method.

27 premium income is in a manner reflecting the amount the gross premium, reinsurance premium, and change in unearned premium income. reinsurance premium is presented as a reduction of gross premium.

28 investment income is presented by deducting direct investment costs from investment revenue. gain (loss) from the sale of investment, and foreign exchange differences which relate to the investment is presented as a part of the investment income.

notes to financial statements

29 notes to the financial statements include disclosures as mandated by the generally accepted accounting principle, except as stated otherwise in paragraph 45.

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revenue

short term contract premium

30 short term contracts premium (some type of credit life insurance, such as credit life insurance) is recognised as revenue during the contract period in proportion to the amount of insurance coverage. if the risk period is significantly different from the contract period, the premium is recognised as revenue over the risk period in proportion to the insurance coverage. as a reslut, premium is recongnised as income on a straight line basis over the contract period (or the risk period, if different), unless the insurance coverage declines in accordance with a predetermined schedule.

long term premium contract

31 long term contracts premium (whole life contracts and guaranteed renewable term life contracts) are recognised as income from the policyholders when the policy is come due. the obligation for costs expected to arise in relation to the contract is recognised during current period and the renewal period. the present value of estimated future policy benefit which will be paid to the policyholder or their representatives, less the present value of estimated premium which will be received (liability for future policy benefits), is recognised at the time the premium income is recognised. these estimates are based on assumptions such as expected investment income, mortality, morbidity, termination and expenses determined at the time the insurance contract was signed. other income

32 reinsurance commission and reinsurance profit commission is recognised as other income.

expenses

claim expenses

33 claims include settled claims, outstanding claims and claims incurred but not reported.

34 the amount of claims outstanding, including claims incurred but not reported, are calculated based on an estimate the claim liability. changes in the amount of estimation of claim liability, as a result of further reviewing process and differences between the amount of claim estimation and claim actually paid, are recognised as additions to or deductions from expenses in the income statement for the period such changes occur.

35 reinsurance claims are recognised as a deduction from claim

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expenses in the period where the claim expense is recognised.

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acquisition costs

36 acquisition costs are allocated using actuarial calculation since the liability for future policy benefits uses the net level premium method.

assets

37 asset accounts are recorded in accordance with generally accepted accounting principles except specifically stated in this statement.

investments

38 accounting treatment for investments should be in accordance with sfas no. 13, accounting for investments, and sfas no. 15, accounting for investment in associates, except for marketable securities where the accounting treatment should be as follows:

1. debt securities that are intended to be held until maturity are stated at acquisition cost, net of amortization of premium or discount. when determining this amount, an enterprise should consider its experienses relating to the sale and transfer of securities. an enterprise cannot classify a debt security in this category if the enterprise intends to hold the security only for an unspecified period. therefore, debt securities cannot classified in this category if the enterprise intends to sell the securities, for examole, to deal with the following situations:

(a) there are changes in the market interest rate and changes related to similar risks;

(b) there are liquidity needsthat arise;(c) there are changes in the availability and alternative investment

returns; (d) changes in foreign exchange risk.

2. debt and equity securities which are classified as trading securities are stated at market value. trading in this case reflects active purchases and sales and is often intended to abtain benefit from short term price differences. equity securities classified under this category are those for which fair values can be determined, that is when there is quotation of bid and ask prices available from a stock exchange registered with bapepam. for debt securities with no quoted market prices, the estomated fair values can be determined through various techniques of price determination, such as discounted cash flow analysis. unrealized gain or losses resulting from increase (decrease) in market price is reported in the current year’s income statement.

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3. other debt and equity securities not included inthe above categories are classified as “available for sale securities” and are stated at market price. debt securities included in this category are securities held for an unspecified period, for instance, the security will eventually be sold to meet liquidity needs or as a part of a company’s risk management strategy. unrealised gains (losses) as a result of increases (decreases) in price are not recognised in income statements but are separately presented in the equity component.

reinsurance receivables

39 reinsurance receivables cannot be offset against reinsurance payables unless the reinsurance contract specially allow for the right of offset. if a credit balance arise from the offsetting of the reinsurances receivable against the reinsurance payable, the balance should be presented in the liability section as reinsurance payale.

liabilities

40 liability accounts should be recorded in accordance with generally accepted accounting principles, except they are specially specifically stated in this standard.

liability for future policy benefit

41 liability for future policy benefit is stated in balance sheet based on actuarial calculations.

estimatied claim liability

42 estimation of claim liability on short term contract, in particular for health and accident insurance, are stated at the estimated amount based on the insurance technical review.

unearned premium income

43 unearned premium income on short term health and accident insurance contracts is calculated by applying the following rules:

a. in aggregate, without considering the end of the policy period, and the mount calculated based on a certain percentage of the premium retained for each insurance, or ;

b. individually for each of insurance and the amount of unearned premium revenue is calculated in proportion to the amount of protection given, during the insurance period or risk period, which is consistent with the premium revenue realised as explained in

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paragraph 30.

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reinsurance payable

44 reinsurance payable cannot be offset against reinsurance receivable unless the reinsurance contract specifically allows for the right of offset. if a debit balance arises from the offsetting of the reinsurance receivable and payable, this balance should presented in the asset section as reinsurance receivable

disclosure

45 the following disclosures are required:

a. accounting policies on:- premium revenue recognition and method of determining

liability for future policy benefits and unearned premium income

- reinsurance transactions, including explanations of their nature, objective and effect of such transaction on the company’s operation;

- recognition of claim expenses and the method of determining estimeted claims retained; and

- other important accounting policies as mandated by the prevailing financial accounting standard.

b. deferred acquisition costs. disclosures in relation to the nature, amount, type and expense allocation method used to amortise deferred acquisition costs.

c. liability to the policy holders. details of liabilities to the policy holders and explanation on method, assumption and system of calculation used as a base to determine such liability.

d. subordinated loan. explanations on characteristics of subordinated loan, interest rate and value of remaining loan.

e. mutual life insurance equity. explanation on nature as well as rules and regulations related to the mutual life insurance equity; explanations on method and amounts distributed to the policy holders.

f. gross premium revenue. disclosure on first year premium and details of its renewal based on the group and the type of insurance.

g. claim and benefit. disclosure on type, amount and reasons for significant increase in claim and benefit.

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effective date

46 this standard becomes operative for the presentation and preparation of financial statements for the period beginning on or after january 1, 1996. early application is highly recommended.

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attachment

example of financial statements

1. balance sheet

p.t. asuransi jiwa abcbalance sheetsdecember 31, 19x2 and 19x1

assets liability and equity19x2 19x1 19x2 19x1

obligatory deposit xx xx liab. for futurenon-obligatory deposit xx xx policy benefit xx xxtime deposit xx xx est. of claim payable . xx xxcapital stocks xx xx claim payable xx xxbonds xx xx unearned premiummoney market securities xx xx income xx xxdirect participation xx xxland and building xx xx total liab. to policymortgage loan xx xx holders xx xxpolicy loan xx xxother investments xx xx premium deposits xx xxtotal investment xx xx reinsurance payable xx xx

commission payable xx xxcash and bank xx xx undistributed earningspremium receivable xx xx attributable to policyreinsurance receivable xx xx holders xx xxinvestment income receivable xx xx accrued expenses xx xxother receivables xx xx subordinated debt xx xxprepaid expenses xx xxfixed assets

- land xx xx equity- building xx xx authorised cap....shares acc. depr. (xx) (xx) @rp. ...- other fixed assets xx xx subscribed and paid in cap. acc. depr. (xx) (xx) ....shares xx xx

other assets additional paid in cap./- deferred acq. cost xx xx xx xx

retained earnings xx xxtotal equity xx xx

total assets xx xx total liab.&eq. xx xx

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2. income statement (single step)

p.t. asuransi jiwa abcincome statementfor the years ended december 31, 19x1 and 19x2

19x2 19x1

incomepremium income

gross premium xx xxless: reinsurance premium (xx) (xx)less (add) increase (decrease)

of unearned premium income (xx) (xx)total premium income xx xx

investment income xx xxfinancial institution pension fund service income xx xxother income xx xx

total revenue xx xx

expenses

claim and benefit xx xxdeducted by: reinsurance claim recovery (xx) (xx)add (less) : increase (decrease) in liability

for future policy benefit and estimation of claimpayable xx xx

amortisation of deferred acquisition cost xx xxmarketing xx xxgeneral and administrative xx xxother income (expenses) xx xx

total expenses xx xx

profit (loss) before tax xx xxincome tax xx xxcurrent year net income xx xxdividend xx xxretained earnings, beginning of the year xx xxretained earnings, end of the year xx xx

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3. statement of cash flows (direct method)

p.t. asuransi jiwa abcstatement of cash flowsfor the years ended december 31, 19x2 and 19x1

19x2 19x1

cash flows from operating activitiespremium receipt xx xxreinsurance claim receipt xx xxother receipts xx xxpayment for reinsurance premium (xx) (xx)payment for commission (xx) (xx)payment for claim (xx) (xx)payment for general and administrative expense (xx) (xx)payment for tax (xx) (xx)payment for other costs (xx) (xx)

net cash flows from/for operating activities a xx xx

cash flows from investing activitiesreceipt from investment income xx xxliquidation of deposit xx xxliquidation of bonds xx xxproceed from sale of equity and debt securities xx xxproceed from sale of fixed assets xx xxadditions to deposit (xx) (xx)acquisition of equity and debt securities (xx) (xx)acquisition of fixed assets (xx) (xx)acquisition of other investments (xx) (xx)

net cash flows from/for investing activities b xx xx

cash flows from financing activitiesreceipt of subordinated debt xx xxproceeds in paid in capital xx xxpayment of subordinated loan (xx) (xx)payment of cash dividend (xx) (xx)

net cash flows from/for financing activities c xx xx

net increase (decrease) in cash a+b+c xx xxbalance of cash & cash equivalentbeginning of period xx xxbalance of cash & cash equivalentend of period xx xx

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4. cash flows (indirect method)

p.t. asuransi jiwa abcstatement of cash flowsfor the years ended december 31, 19x2 and 19x1

19x2 19x1

cash flows from operating activitiesincome before tax xx xxadjustments for noncash expenses

fixed assets depreciation xx xxamortisation of intangible assets xx xx

operating income before changes in working capital xx xxdecrease (increase) in current assetsincrease (decrease) in current liabilities:

(increase) in premium receivable,reinsurance receivable, accrued investment income,other receivables, (xx) (xx)decrease in prepayment xx xxincrease in liability for future policy benefit,estimation of claim liability, claim payable,unearned premium income xx xx

net cash from insurance main operations xx xxpayment of corporate income tax (xx) (xx)payment of interest (xx) (xx)cash flows from operations xx xxother income xx xxnet cash from operating activities a xx xx

cash flows from investing activitiesnet investment income xx xxadjustment for noncash expenditure

investment depreciation xx xxinvestment amortisation xx xx

cash flows from investing activities xx xxdecrease (increase) in statutory deposit, ordinary

deposit (xx) (xx)decrease (increase) in shares, obligation, marketable

securities (xx) (xx)decrease (increase) in direct investment (xx) (xx)cash flows from investment accounts b xx xx

cash flows from financing activitiesproceed from share emission xx xx

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receipt from subordinated loan xx xxpayment of dividend (xx) (xx)cash flows from financing activities c xx xx

net increase (decrease) in cash a+b+c xx xxbalance of cash & cash equivalent, beginning of period xx xxbalance of cash & cash equivalent, end of period xx xx

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PSAK 36

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