Projects: Insurance Contracts and Revenue Recognition

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PROJECT NO. 1
Q1. Title of the project
Insurance contracts
Q2. The reason why the project was added to the work programme of the accounting standard-setting body The insurance industry is a significant and increasingly international industry and insurance contracts expose entities to uncertain and long term obligations. In recent years, insurance contracts of accounting fail to provide users the information that they need to understand the insurer’s performance, financial position and risk exposure. Furthermore, International Financial Reporting Standards does not define and address specific insurance issues. So the insurers do not have an idea how to deal with these issues under current IFRSs. As a result, it is time to develop great diversity in the accounting practices of the insurance industry. Q3. The alternative approaches that the course of action may have taken The exposure draft (ED) proposes to replace IFRS 4 with a high quality standard that satisfies the needs of users. The several changes are presented as followed: 1. Building on the proposals in the discussion paper.

2. Unified accounting for all insurance contracts.
3. Improvements to financial reporting.
4. A principle-based standard that reflects the economics of insurance contracts. 5. IFRSs and US GAAP
Q4. Explain the course of action proposed in the exposure draft In the exposure draft, a single measurement model was proposed, which focuses on a current assessment of the amount, timing and uncertainty of the future cash flows that the insurers expect the existing insurance contracts to generate as it fulfils them. The ‘building blocks’ have been used to measure an insurance liability. In the new measurement model, total insurance liability is composed of four aspects which are residual margin, risk adjustment, time value of money, current estimates of future cash flows. The building block approach creates information about the changes in the insurance liability and its performance during the period and it also makes the accounting information more understandable, relevant and comparable, which in turn improves the quality of insurers’ financial reporting.

Q5. Support or dissenting views on proposed course of action and the response from China Accounting Standard Committee There are some feedbacks and responses to the discussion paper proposal. 1. Current exit value. Respondents believed that a current exit value based on the notion of transfer is inappropriate because third parties are not transfer insurance liabilities. 2. Building block approach. Some of the respondents argued that whether the current accounting contracts satisfy user’s needs and is simpler and less costly to apply. 3. Use of expected value rather than a single outcome. The majority of the respondents supported this proposal. 4. Explicit risk margin. Some respondents asked for more guidance on how the risk adjustment should be determined, while most of respondents favoured this proposal. China Accounting Standard Committee agrees with most proposals in the ED except some of the aspects: 1. Presentation of financial statement: CASC recommend using the traditional way of presentation for the statement of comprehensive income in insurance industry rather than adopting the ED’s proposed summarized margin approach. 2. CASC believes that the financial instrument with discretionary participation features do not meet the definition of insurance contracts. Besides these two aspects, CASC also disagree with the approach to estimate risk adjustment, whether interest should be accreted on the residual margin, the modified measurement approach for some short-duration insurance contracts, impairment model for reinsurance assets, and transitional provisions. Q6. Current status of the project

1. Overview of the tentative decisions
* A high level overview of the IASB’s insurance contracts project (February 2013) * Tentative decisions to date: a...
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