Measurement Of Contracts With Participation Features – FAQ | IFRS

Measurement of contracts with participation features

Entities that issue participating contracts (referred to in the standard as contracts with participation features) provide policyholders with a financial return on the premiums they pay by sharing the performance of underlying items with policyholders. Participating contracts can include cash flows with different characteristics, for example:

  • Cash flows that do not vary with returns from underlying items, e.g., death benefits and financial guarantees Measurement of contracts with participation features
  • Cash flows that vary with returns from underlying items — either via a contractual link to the returns on underlying items or through an entity’s right to exercise discretion in determining payments to policyholders Measurement of contracts with participation features

The cash flows of some contracts can affect the cash flows to other contracts via a process sometimes referred to as “mutualisation”. Measurement of contracts with participation features

IFRS 17 includes an adaptation to the general model to cater for some of these features. It distinguishes two types of contracts with participation features that are eligible for modifications to the general model: insurance contracts with direct participation features; and investment contracts with discretionary participation features. Direct participation features and discretionary participation features are explained below (see 2 and 4 below).

Insurance contracts with direct participation features apply a modified version of the general model called the variable fee approach. Insurance contracts without direct participation features must apply the general model without adaptation even though such contracts may have participation features (see 1 below). Participating contracts are not excluded from applying the premium allocation approach, but they may be unlikely to meet the eligibility criteria (as the coverage period may be significantly in excess of one year).

Participating contracts in the world Measurement of contracts with participation features

There is a wide variety of participating contracts in issue worldwide. For example, in Germany, insurance companies must return at least 90% of the investment profits on certain contracts to the policyholders, but may give more. In other European countries, realised investment gains are distributed to the policyholder, but the insurance company has discretion over the timing of realising the gains. In the United Kingdom, bonuses are added to the policyholder account at the discretion of the insurer. Typically, these are based on the investment return generated by the underlying assets, but sometimes they include allowance for profits from other contracts.

Participation in underlying items can be discretionary (e.g., in the case of with-profit or universal life contracts); or they can be non-discretionary (e.g., In the case of unit linked contracts, where all returns on underlying items are paid to policyholders without the exercise of discretion).

For IFRS 17 measurement purposes the distinction between contracts with direct participation features, and those without direct participation features is important.

Consideration

Determining how to faithfully represent the complex features of some participating contracts was one of the greatest challenges the IASB faced in finalising IFRS 17.

It is important to note that the differences between the variable fee approach for direct participation contracts and the general model applied to all other contracts exist for subsequent measurement only. As the requirements for initial measurement are the same for both models, any differences in measurement on initial recognition between contracts would be the result of differences in the terms and conditions of those contracts, but not the application of different measurement models.

1. Insurance contracts without direct participation features

Participating insurance contracts without direct participation features must apply the general model without adaptation, even though such contracts may have participation features (also referred to as indirect participating contracts).

The terms of some insurance contracts without direct participation features give an entity discretion over the cash flows to be paid to policyholders. A change in discretionary cash flows is regarded as relating to future service, and, accordingly, adjusts the CSM. To determine how to identify a change in discretionary cash flows, an entity should specify at inception of the contract, the basis on which it expects to determine its commitment under the contract, for example, the commitment could be based on a fixed interest rate, or returns that vary based on specified asset returns.

An entity should use that specification to distinguish between the effect of changes in assumptions that relate to financial risk on that commitment (which do not adjust the CSM) and the effect of discretionary changes to that commitment (which adjust the CSM) — see ‘General model IFRS 17 Insurance contracts‘.

If an entity cannot specify at inception of the contract, what it regards as its commitment under the contract and what it regards as discretionary, it must consider its commitment to be the return implicit in the estimate of the fulfilment cash flows at inception of the contract, updated to reflect current assumptions for financial risk.

Example – Adjust the CSM for the effects of a change in discretionary cash flows

Entities A and B issue identical groups of insurance contracts without direct participation features one day before a reporting period ends. The contracts have a coverage period of five years. The policyholder receives the higher of a fixed death benefit or an account balance if he or she dies during the coverage period or an account balance at the end of the coverage period if he or she survives the coverage period. The contract transfers significant insurance risk, although for the purposes of illustrating the effect of discretion over amounts credited to policyholder account balances, we disregard the death benefit cost.

At contract inception, the entities:

  • Receive premiums of CU1,000
  • Specify that their commitment under the contract is to credit interest to the account balances at a rate equal to the return on a internally specified pool of assets, minus a 2% spread
  • Expect investment returns from the specified pools of assets to be 10% a year
  • Expect to pay benefits at maturity of the contracts of CU1,469 (i.e., to credit interest at the rate of 8% a year for five years (CU1,000 x 1.08^5 = CU1,469)
  • Recognise fulfilment cash flows of CU912 (CU1,469 ÷ 1.1^5)
  • Recognise a CSM of CU88 (CU1,000 — CU912)

At the first subsequent reporting date (one day later), both entities revise their expectations of returns from the specified pool of assets downward from 10% to 9% a year

Entity A’s stated policy is that it will maintain its 2% spread. Therefore, Entity A:

  • Expects to credit interest to the account balances of its policyholders at the rate of 7% a year
  • Expects to pay benefits at maturity of CU1,403 (CU1,000 x 1.07^5 = CU1,403)
  • Measures fulfilment cash flows at the reporting date of CU912 (CU1,403 ÷ 1.09^5 = CU912)
  • Maintains the CSM of the group of contracts at CU88 because the measurement of fulfilment cash flows has not changed (assume accretion of interest and release of CSM to profit or loss in one day is insignificant)

Entity B decides to apply its discretion and reduce the spread that it deducts from the return on the specified pool of assets from 2% to 1% a year. Therefore, Entity B:

  • Expects to credit interest to the account balances of its policyholders at the rate of 8% a year (9% expected annual return, minus 1% spread)
  • Expects to pay benefits at maturity of CU1,469
  • Measures fulfilment cash flows at the reporting date of CU956 (CU1,469 ÷ 1.09^5 = CU956)
  • Adjusts the CSM for the group of contracts from CU88 to CU44 to reflect the adjustment to fulfilment cash flows resulting from an increase in fulfilment cash flows caused by its discretion to change the basis of policyholder payments (CU912 — CU956 = -CU44, CSM of CU88 — CU44 = CU44)

2. Contracts with direct participation features

Insurance contracts with direct participation features apply a modified version of the general model called the variable fee approach. One of the concerns that respondents had with the application of the general model to insurance contracts with participation features was that it could result in the reporting of artificial volatility in profit or loss. This volatility could arise from a mismatch between the accounting treatment of investment gains and losses on underlying items attributable to policyholders, and the accounting treatment of the liability to those policyholders. The requirement in the general model to report the impacts of all changes in financial assumptions in comprehensive income (rather than by adjusting the CSM) was also considered to create artificial profit volatility in cases where the returns from underlying items would be paid to policyholders.

The variable fee approach, therefore, addresses these concerns by adjusting the general model as explained in ‘Subsequent measurement CSM using the variable fee approach’.

Insurance contracts with direct participation features (direct participating contracts) are insurance contracts that are substantially investment-related service contracts under which an entity promises an investment return based on underlying items (i.e., items that determine some of the amounts payable to a policyholder). Hence, these contracts are defined as insurance contracts for which, on inception all of the following apply [IFRS 17 B101]:

  • The contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items.
  • The entity expects to pay the policyholder an amount equal to a substantial share of the fair value returns from the underlying items.
  • The entity expects a substantial proportion of any change in the amounts paid to the policyholder to vary with the change in fair value of the underlying items.

The variable fee approach considers the share that an entity has of the underlying items to represent a fee for investment and other services that it provided to the policyholders. An entity can have a share in the fair value of underlying items through a number of mechanisms. For example, it may maintain an account balance for each policyholder to which it credits premiums paid and returns from underlying items and deducts charges that are a proportion of the underlying items or a proportion of the returns on the underlying items. The entity’s interest in underlying items is not treated as equivalent to a direct holding in those underlying items in the variable approach, but as a variable fee that the entity charges the policyholder, expressed as a share of the fair value of the underlying items.

An entity’s obligation to the policyholder in contracts with direct participation features is considered to be the net amount of [IFRS 17 B104]:

  • An obligation to pay the policyholder an amount equal to the fair value of the underlying items
    And
  • A variable fee the entity will deduct from the fair value of underlying items comprising the entity’s share of the fair value of underlying items, less fulfilment cash flows that do not vary based on the returns on underlying items
  • Since the entity’s share in the underlying items is considered a variable fee for investment management and other services, changes in the expected value of this fee for services to be provided in the future are adjusted against the contractual service margin

2.1. Assessing eligibility for the variable fee approach

An entity assesses whether a contract has direct participation features using its expectations at inception of the contract and does not reassess the conditions, unless the contract is modified [IFRS 17 B102].

A contractual right for policyholders to participate in a clearly identified pool of underlying items can arise from the terms of the contract or from law or regulation. The key point is that the policyholder’s right to participate in the returns of the pool of underlying items is enforceable [IFRS 17 B105].

Underlying items are defined as Items that determine some of the amounts payable to a policyholder. Underlying items can comprise any items, for example, a reference portfolio of assets, net assets of the entity, or a specified subset of the entity’s net assets. An entity does not need to hold the underlying items to be eligible for the variable fee approach. However, whether an entity holds the underlying item or not is relevant to the presentation of insurance finance income and expense (see ‘Disaggregating insurance finance result’).

A clearly identified pool of underlying items does not exist when [IFRS 17 B106]:

  • An entity can change the underlying items that determine the amount of the entity’s obligation with retrospective effect.
  • There are no underlying items identified, even if the policyholder could be provided with a return that generally reflects the entity’s overall performance and expectations, or those of a subset of assets the entity holds.

To treat an entity’s share in underlying items as a fee, analogous to fees charged by an investment manager in an investment management contract, IFRS 17 requires that the entity should expect:

  • To pay the policyholder an amount equal to a substantial share of the fair value returns on the underlying items.
  • A substantial proportion of any changes in the amounts to be paid to the policyholders to vary with the changes in the fair value of underlying items.

IFRS 17 provides guidance that the term “substantial” in both requirements should be considered in the context of the objective of insurance contracts with direct participation features being contracts under which the entity provides investment-related services and is compensated for the services by a fee that is determined by reference to the underlying items. An entity’s expectations of the proportion of changes in the fair value of underlying items accruing to policyholders in different scenarios is considered over the duration of the group of insurance contracts on a present value probability-weighted average basis [IFRS 17 B107].

For example, if the entity expects to pay a substantial share of the fair value returns on underlying items, subject to a guarantee of a minimum return, there will be scenarios in which [IFRS 17 B108]:

  • Cash flows that the entity expects to pay to the policyholder vary with changes in the fair value of the underlying items, because the guaranteed return and other cash flows that do not vary based on the returns on underlying items do not exceed the fair value return on the underlying items.
  • Cash flows that the entity expects to pay to the policyholder do not vary with the changes in the fair value of the underlying items because the guaranteed return and other cash flows that do not vary based on the returns on underlying items exceed the fair value return on the underlying items.

The entity’s assessment of the variability of contracts that include such guarantees will reflect a present value probability-weighted average of all scenarios.

Consideration

Participating contracts differ significantly between jurisdictions. Not all participating contracts will meet the criteria to be accounted for as direct participation contracts. An entity will need to exercise judgement when deciding whether a contract contains direct participation features and, therefore, will be eligible to apply the variable fee approach. However, while the degree to which a contract may meet or fail the eligibility criteria will vary, the outcome is binary. Examples of products that are generally expected to be in scope are UK-style with-profits contracts, unit-linked contracts and Continental European contracts with 90% participation.

If underlying items are not measured on a fair value basis in an entity’s financial statements, this does not preclude them from qualifying for the variable fee approach. The eligibility depends on the expectation of payments of a substantial share of the fair value returns to the policyholder rather than the accounting measurement of the underlying items.

Many participating contracts contain options and guarantees, for example, minimum return guarantees and guaranteed annuity options. The impact of options and guarantees on the eligibility criteria for the variable fee approach will require the use of judgement. The question as to whether a contract includes direct participation features can depend on the effect of these guarantees and options on the expected value of the cash flows at inception. The effect of scenarios that result in the guarantee being payable, on a probability-weighted basis, should be such that a substantial share of the expected returns payable to the policyholder are still based on the fair value of the underlying items.

An entity is not permitted to use the variable fee approach for reinsurance contracts held or to apply that approach to reinsurance contracts issued [IFRS 17 B109 and BC249-249].

2.2. Subsequent measurement CSM using the variable fee approach

Subsequent measurement of the CSM in accordance with the variable fee approach. The variable fee approach differs from the general model in the measurement of the CSM subsequent to initial recognition of a group of contracts. For a group of insurance contracts with direct participation features, the carrying amount of the CSM of the group at the end of the reporting period equals the carrying amount at the beginning of the reporting period adjusted, as follows [IFRS 17 45]:

Example – movement in the carrying amount of the CSM in a period

A) CSM at the beginning of the period

X

B) Effect of new contracts added to the group

X

C) Entity’s share of the change in the fair value of underlying items (see exceptions and alternative calculation below)

X or (X)

D) Change in fulfilment cash flows relating to future service (see exceptions and alternative calculation below)

X or (X)

E) Effect of currency exchange differences

X or (X)

F) Amount of CSM recognised in profit or loss as insurance revenue because of the transfer of services in the period

(X)

G) CSM at the end of the period

X

An entity’s share of the change in the fair value of underlying items reflects changes in the fair value of underlying items and changes in the proportion of underlying items the entity expects to receive, e.g., in the form of future charges it expects to deduct from policyholder account balances. The entity’s expected share of underlying items would change if it changes its assumptions regarding, inter alia, the expected duration (persistency) of contracts.

The entity adjusts the carrying amount of the CSM at the beginning of a reporting period by the entity’s share of the change in the fair value of underlying items, except to the extent that [IFRS 17 45(b)]:

  • The entity applies the risk mitigation exception for risks arising from its share of the fair value return on underlying items (see 2.3 below),
  • The entity’s share of a decrease in the fair value of the underlying items exceeds the carrying amount of the CSM, giving rise to a loss recognised as part of the insurance service result (the group is or becomes onerous in the period), or
  • The entity’s share of an increase in the fair value of the underlying items reverses losses recognised in prior periods.

The entity adjusts the carrying amount of the CSM at the beginning of a reporting period by the changes in fulfilment cash flows relating to future service, except to the extent that [IFRS 17 45(c)]:

  • The entity applies the risk mitigation exception in respect of financial guarantees (see 2.3 below),
  • Increases in the fulfilment cash flows exceed the carrying amount of the CSM, giving rise to a loss as part of the insurance service result (the group is, or becomes, onerous in the period), or
  • Decreases in the fulfilment cash flows are allocated to the loss component of the liability for remaining coverage.

An entity is not required to identify the adjustments to the CSM separately. For example, an entity can combine items (C) and (D) in the table above and achieve the same net adjustment to the CSM of a group of contracts as [IFRS 17 B114]:

  • The change in the total fair value of the underlying items (equals the change in the entity’s share plus the obligation to pay to the policyholders their share of the fair value of the underlying items).
  • The change in the total fulfillment cash flows in the period (equals the change in fulfilment cash flows relating to future service plus the obligation to pay to the policyholders their share of the fair value of the underlying items).

Consideration

Calculating the total change in the fair value of underlying items and the total change in fulfilment cash flows in a period might be easier administratively than separating the policyholder’s share of the change in the fair value of underlying items from each of these (“gross”) items. However, disaggregating this change might provide useful information, better reflect the sources of measurement changes, and result in greater consistency with the insurance contract roll-forward analyses for contracts accounted for under the general model.

An entity that does not separate the changes in its share of the fair value of underlying items from changes in the policyholder’s share is likely to need to disclose the roll-forward of the carrying amount of insurance contracts with direct participation features separately from the roll-forward for other insurance contracts, because the gross amounts of insurance finance income or expenses and changes in fulfilment cash flows relating to future services (including the policyholders’ share of the change in the fair value of underlying items), may be significantly different in size and nature from corresponding amounts for contracts subject to the general model.

Except in situations when a group of contracts is onerous, or to the extent the entity applies the risk mitigation exception (see 2.3 below), the effect of the general model and the variable fee approach may be compared, as follows: Measurement of contracts with participation features

Comparison ofGeneral modelVariable fee approach

Insurance finance income or expenses (total) recognised in statement of financial performance

Measurement of contracts with participation features

Measurement of contracts with participation features

Measurement of contracts with participation features

– Change in the carrying amount of fulfilment cash flows arising from the time value of money and financial risk

– Accretion of interest on the CSM at rate locked at initial recognition

– Any difference between the present value of a change in fulfilment cash flows measured at current rates and locked rates that adjust the CSM

– Change in the fair value of underlying items

Measurement of contracts with participation features

Measurement of contracts with participation features

Measurement of contracts with participation features

Changes in the carrying amount of fulfilment cash flows arising from the time value of money and financial risk

Recognised immediately in the statement of financial performance [IFRS 17 87-89]

Adjusts the CSM [IFRS 17 87(c) and B113(b)

Discount rates for accretion of, and adjustment to, the CSM

Rates determined at initial recognition

Rate included in the balance sheet measurement (i.e., current rates) {IFRS 17 BC250]

2.3. Mitigating financial risks with derivatives Measurement of contracts with participation features

Amounts payable to policyholders create risks for an entity, particularly if the amounts payable are independent of the amounts that the entity receives from investments, for example, if the insurance contract includes guarantees. An entity is also at risk from possible changes in its share of the fair value returns on underlying items, and may purchase derivatives to mitigate such risks. When applying IFRS 9, such derivatives are measured at fair value through profit or loss [IFRS 17 BC250]. Measurement of contracts with participation features

For contracts with direct participation features, the CSM is adjusted for the changes in the fulfilment cash flows, including changes that the derivatives are intended to mitigate (unlike contracts without direct participating features where the CSM is not adjusted for such changes). Consequently, the change in the value of the derivative would be recognised in profit or loss. However, unless the group of insurance contracts was onerous, there would be no equivalent charge or credit in profit or loss to reflect changes in the carrying amount of the fulfilments cash flows, creating an accounting mismatch. A similar accounting mismatch arises if the entity uses derivatives to mitigate risk arising from its share of the fair value return on underlying items [IFRS 17 BC251-253].

An entity can choose not to adjust the CSM to reflect some or all of the changes to fulfiment cash flow or the entity’s share of underlying items resulting from financial risk [IFRS 17 B115]. The choice is only permitted if the entity has a previously documented risk management objective and strategy for using derivatives to mitigate financial risk arising from insurance contracts and, in applying that objective and strategy [IFRS 17 B116]: Measurement of contracts with participation features

  • The entity uses a derivative to manage the financial risk arising from the insurance contracts. Measurement of contracts with participation features
  • An economic offset exists between the insurance contracts and the derivative; i.e., the values of the insurance contract and the derivative generally move in opposite directions because they respond in a similar way to the changes in the risk being mitigated. An entity must not consider accounting measurement differences in assessing the economic offset.
  • Credit risk does not dominate the economic offset. Measurement of contracts with participation features

If any of the conditions above are no longer met, an entity must not apply the risk mitigation accounting from that date, nor make any adjustments for changes previously recognised in profit or loss [IFRS 17 B118]. Measurement of contracts with participation features

Considerations

The exemption, in the case of risk mitigation, from the requirement of the variable fee approach to adjust the CSM for changes in financial assumptions relating to future service is an important feature. It was introduced to reduce accounting mismatches that would otherwise arise from economic risk mitigation where movements in the fair value of derivatives are reported in profit and loss. The guidance in the standard raises some questions about the practical application of this approach. For example, how to interpret and apply the provision for “some or all changes” to be excluded from CSM when determining the effects from financial risks to report in profit or loss.

The standard does not explain how the change in the fulfilment cash flows related to the financial risks covered by the risk mitigation approach should be presented. The objective of the risk mitigating approach is to avoid mismatches in profit or loss arising from the profit and loss treatment of the derivatives used for risk mitigation. Therefore, presenting the identified changes in the fulfilment cash flows as part of insurance finance income or expense would be logical.

3. Contracts with cash flows that can affect, or be affected by, the cash flows to other contracts

The cash flows of some contracts can affect the cash flows to other contracts via a process sometimes referred to as “mutualisation”. Contracts are mutualised if they result in policyholders subordinating their claims or cash flows to those of other policyholders, thereby reducing the direct exposure of the entity to a collective risk. Some contracts require the policyholder to share the returns on some specified pool of underlying items with policyholders of other contracts and, either [IFRS 17 B67]:

  • The policyholder bears a reduction in the share of the returns on the underlying items because of payments to policyholders of other contracts that share in that pool, including payments arising under guarantees made to policyholders of those other contracts Measurement of contracts with participation features
    Or Measurement of contracts with participation features
  • Policyholders of other contracts bear a reduction in their share of returns on the underlying items because of payments to the policyholder, including payments arising from guarantees made to the policyholder. Measurement of contracts with participation features

If the contracts are in different groups, the fulfilment cash flows of each group reflect the extent to which cash flows of a group are affected by cash flows to policyholders in other groups. The fulfilment cash flows for a group [IFRS 17 B68]: Measurement of contracts with participation features

  • Include payments arising from the terms of existing contracts to policyholders of contracts in other groups, regardless of whether those payments are expected to be made to current or future policyholders. Measurement of contracts with participation features
  • Exclude payments to policyholders in the group that have been included in the fulfilment cash flows of another group.

Example – Modification of an insurance contract

Reference: IFRS 17 B69  Measurement of contracts with participation features

To the extent that payments to policyholders in one group are reduced from a share in the returns on underlying items of CU350 to CU250 because of payments of a guaranteed amount to policyholders in another group, the fulfilment cash flows of the first group would include the payments of CU100 (i.e., would be CU350). The fulfilment cash flows of the second group would exclude CU100 of the guaranteed amount. Measurement of contracts with participation features

Different practical approaches may be used to determine the fulfilment cash flows of groups of contracts that affect or are affected by cash flows to policyholders of contracts in other groups. In some cases, an entity might be able to identify the change in the underlying items and resulting change in the cash flows only at a higher level of aggregation than the groups. In such cases, the entity must allocate the effect of the change in the underlying items to each group on a systematic and rational basis [IFRS 17 B70].

After all coverage has been provided to the contracts in a group, the fulfilment cash flows may still include payments expected to be made to current policyholders in other groups or future policyholders. An entity is not required to continue to allocate such fulfilment cash flows to specific groups, but instead, may recognise and measure a liability for such fulfilment cash flows arising from all groups [IFRS 17 B71]. Measurement of contracts with participation features

Consideration

  • Entities should be aware that “mutualisation” only applies in the specific circumstances where policyholders have subordinated their claims to those of other policyholders, thereby reducing the direct exposure of the entity to a collective risk. Cash flows to policyholders of contracts without participation features will typically be independent of amounts paid to other contracts. For example, holders of motor insurance contracts are generally not affected by amounts paid to holders of other motor insurance contracts issued by the same entity.
  • The standard does not limit the application of mutualisation to direct participating contracts, so, in principle, it could apply to other types of participating contracts too. However, meeting the contractual criteria of mutualisation will arguably be more challenging the more the contract features are dissimilar to those of a direct participating contract.
  • To the extent mutualisation applies across groups of contracts written in different reporting periods, an entity will be able to offset losses on some groups with profits from other groups when measuring the affected groups. The question arises as to whether an entity will achieve the same outcome by measuring the affected groups together on the basis of the combined risk sharing of those groups. Although the standard does not prohibit the use of practical expedients that would achieve the same outcome, an entity would have to substantiate the measurement outcome in the same way, taking into account all relevant aspects of the measurement. For example, an entity must not only consider the effect of loss recognition, but also the release pattern of the CSM over the coverage period.

4. Investment contracts with discretionary participation features

An investment contract with discretionary participation features does not contain significant insurance risk. Nevertheless, these contracts are within the scope of IFRS 17, provided the entity also issues insurance contracts [IFRS 17 3(c)]. Measurement of contracts with participation features

A financial instrument with discretionary participation features is a financial instrument that provides a particular investor with the contractual right to receive, as a supplement to an amount not subject to the discretion of the issuer, additional amounts: Measurement of contracts with participation features

  • That are expected to be a significant portion of the total contractual benefits
  • The timing or size of these amounts are contractually at the discretion of the issuer
    And Measurement of contracts with participation features
  • That are contractually based on: Measurement of contracts with participation features
    • The returns on a specified pool of contracts or a specified type of contract
    • Realised and/or unrealised investment returns on a specified pool of assets held by the issuer
      Or Measurement of contracts with participation features
    • The profit or loss of the entity or fund that issues the contract [IFRS 17 Appendix A, see IFRS Jargon]

As investment contracts without discretionary participation features do not transfer insurance risk, IFRS 17 requires certain modifications [IFRS 17 71]:

  • The date of initial recognition is the date the entity becomes party to the contract. This is consistent with the requirements for recognition of a financial instrument in IFRS 9 and is likely to be earlier than the date of initial recognition for an insurance contract (see ‘Initial recognition of insurance contracts’).
  • The contract boundary is modified so that cash flows are within the contract boundary if they result from a substantive obligation of the entity to deliver cash at a present or future date. The entity has no substantive obligation to deliver cash if it has the practical ability to set a price for the promise to deliver the cash that fully reflects the amount of cash promised and related risks. Measurement of contracts with participation features
  • The allocation of the CSM is modified so that the entity recognises the CSM over the duration of a group of contracts in a systematic way that reflects the transfer of investment services under the contract. Measurement of contracts with participation features

Consideration

The release of the CSM for investment contracts with discretionary participation features is not driven by coverage units (see ‘Release of the CSM in profit or loss’ in ‘Contractual service margin’), but by investment services provided over the life of the contracts. It appears as if this requirement is similar to the revenue recognition guidance contained in IFRS 15. Given that IFRS 15 would apply to investment contracts without discretionary participation features, it may make sense for this to be consistent with other investment management contracts.

 

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