Cash Flows Within The Contract Boundary – FAQ | IFRS

Cash flows within the contract boundary

Cash flows within the boundary of an insurance contract are those that relate directly to the fulfilment of the contract, including those for which the entity has discretion over the amount or timing. IFRS 17 provides the following examples of such cash flows [IFRS 17 B65]:

  • Premiums and related cash flows Cash flows within the contract boundary
  • Claims and benefits, including reported claims not yet paid, incurred claims not yet reported and expected future claims within the contract boundary Cash flows within the contract boundary
  • Payments to policyholders (or on behalf of policyholders) that vary depending on underlying items
  • Payments to policyholders resulting from embedded derivatives, for example, options and guarantees
  • An allocation of insurance acquisition cash flows attributable to the portfolio to which the contract belongs
  • Claims handling costs Cash flows within the contract boundary
  • Contractual benefit costs paid in kind Cash flows within the contract boundary
  • Policy administration and maintenance costs, including recurring commissions that are expected to be paid to intermediaries
  • Transaction-based taxes and levies (such as premium taxes) Cash flows within the contract boundary
  • Payments by the insurer in a fiduciary capacity to meet tax obligations incurred by the policyholder, and related receipts
  • Claim recoveries, such as salvage and subrogation (to the extent they are not recognised as separate assets)
  • An allocation of fixed and variable overheads directly attributable to fulfilling insurance contracts. (Such overheads are allocated to groups of contracts using methods that are systematic and rational, and are consistently applied to all costs that have similar characteristics)
  • Any other costs that may be charged specifically to the policyholder under the terms of the contract Cash flows within the contract boundary
  • Insurance acquisition cash flows are those arising from the cost of selling, underwriting and starting a group of insurance contracts that are directly attributable to the portfolio of insurance contracts to which the group belongs. Such cash flows include cash flows that are not directly attributable to individual contracts or groups of insurance contracts within the portfolio.

There is no restriction of insurance acquisition cash flows to only those resulting from successful efforts. Therefore, the directly attributable costs of an underwriter of a portfolio of motor insurance contracts, for example, need not be apportioned between costs for contracts issued and the cost of efforts that did not result in the issuance of a contract.

IFRS 17 provides a list of cash flows that should not be included in cash flows that arise as an entity fulfils an existing insurance contract, these include, for example [IFRS 17 B66]:

  • Investment returns (accounted for separately under applicable IFRSs)
  • Cash flows (payments or receipts) that arise under reinsurance contracts held (accounted for separately)
  • Cash flows that may arise from future insurance contracts, i.e., cash flows outside the boundary of existing contracts
  • Cash flows relating to costs that cannot be directly attributed to the portfolio of insurance contracts that contain the contract, such as some product development and training costs; these are recognised in profit or loss when incurred
  • Cash flows that arise from abnormal amounts of wasted labour or other resources that are used to fulfil the contract; such costs are recognised in profit or loss when incurred
  • Income tax payments and receipts the insurer does not pay or receive in a fiduciary capacity
  • Cash flows between different components of the reporting entity, such as policyholder and shareholder funds, if these cash flows do not change the amounts paid to policyholders
  • Cash flows arising from components separated from the insurance contract and accounted for using other applicable IFRSs


  • As a change to many existing accounting practices under IFRS 4, no explicit deferred acquisition cost assets exist. Instead, the insurance acquisition cash flows are included as a “negative liability” within the measurement of the CSM on initial recognition. Because the CSM can never be negative, there is no longer a need to perform any recoverability assessments for acquisition costs deferred.
  • Investment returns are not part of the fulfilment cash flows of a contract because measurement of the contract should not depend on the assets that the entity holds. However, where a contract includes participation features, the measurement of the fulfilment cash flows should include the effect of returns from underlying items in those cash flows. The “Illustrative Examples” that accompany IFRS 17 explain that asset management is part of the activities the entity must undertake to fulfil the contract when there is an account balance calculated using returns from specified assets and fees charged by the entity (see illustration 5 in section 3.3). In our view, an entity should incorporate asset management expenses in a way that is consistent with how it considers the returns from the assets it is holding in the estimates of fulfilment cash flows, based on the product features. So if investment returns from underlying items are included in fulfilment cash flows then the asset management expenses that relate to those returns should also be included.

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