Presentation Insurance Contracts – FAQ | IFRS

Presentation Insurance contracts

IFRS 17 specifies minimum amounts of information that need to be presented on the face of the statement of financial position and statement of financial performance. These are supplemented by disclosures to explain the amounts recognized on the face of the primary financial statements (see ‘Disclosure of Insurance contracts’).

IFRS 17 requires separate presentation of amounts relating to insurance contracts issued and reinsurance contracts held in the primary statements. There is nothing to prevent an entity from providing further sub-analysis of the required line items (which may make the relationship of the reconciliations to the face of the statement of financial position more understandable). Indeed, IAS 1 Presentation of Financial Statements requires presentation of additional line items (including the disaggregation of line items specifically required), headings and subtotals on the face of the statements of financial position and financial performance when such presentation is relevant to an understanding of the entity’s financial position or financial performance [IAS 1 54-56 and IAS 1 82-86].

1. Statement of financial position

An entity is required to aggregate groups of insurance contracts issued and reinsurance contracts held that are in an asset or liability position at each reporting date in order to present separately on the Statement of financial position groups of [IFRS 17 78, IAS 1 54 (da) and IAS 1 54 (ma)]:

  • Insurance contracts issued that are assets, and those that are liabilities
  • Reinsurance contracts held that are assets, and those that are liabilities

Any assets or liabilities for insurance acquisition cash flows recognized before the corresponding insurance contracts are recognized (see ‘Initial recognition of Insurance contracts‘) are to be included in the carrying amount of the related groups of insurance contracts issued [IFRS 17 79].

The presentation requirements differ significantly from those required by IFRS 9 in respect of financial instruments. They are also likely to differ significantly from those applied previously by an insurer under IFRS 4, for example under IFRS 17:

  • Individual positive and negative contract balances within a group will be aggregated (netted) on the statement of financial position
  • All rights and obligations arising from an insurance contract are presented net in one line of the statement of financial position unless the components of the contract are separated and accounted for under a different IFRS (see ‘Separation of Insurance Contracts‘). The rights and obligations presented net would include, for example, policyholder loans, insurance premiums receivable, liabilities for incurred claims and deferred acquisition costs.

There is no requirement for disclosure of balances for the general model, premium allocation approach, or variable fee approach to be shown separately on the face of the statement of financial position. Nor is there a requirement for the components of the contract balances (for example, the CSM) to be presented on the face of the statement of financial position.

There is nothing to prevent an entity from providing further sub-analysis of the insurance and reinsurance assets and liabilities (which may make the relationship of the reconciliations to the face of the statement of financial position more understandable). Indeed, IAS 1 states that additional line items (including the disaggregation of those items specifically required), headings and subtotals should be presented on the face of the statement of financial position when such presentation is relevant to an understanding of the entity’s financial position [IAS 1 55].

Considerations

  • IFRS 17 nets all future cash flows within the contract boundary of insurance contracts to form part of a single carrying amount for each group of contracts. Many existing accounting frameworks for insurance contracts require separate presentation of premiums due, estimated claims payments and claims handling costs, policy loans, and separate amounts for deferred acquisition costs and other intangible assets. IFRS 17’s presentation is very different. We expect that some insurers will continue the industry practice of breaking down balances as supplementary information.
  • Some insurers (e.g., those applying the premium allocation approach) may wish to continue to hold disaggregated cash flow information in their accounting systems and combine them for the purposes of calculating the CSM for each group. Keeping records at the level of groups of contracts, to identify those that are net assets and net liabilities, could be challenging.
  • The fulfillment cash flows of an insurer that is a mutual entity generally include the rights of policyholders to the whole of any surplus of assets over liabilities. This means that, for an insurer that is a mutual entity, there should, in principle, be no remaining equity and no net comprehensive income reported in any accounting period. Mutual insurers may choose to present additional line items and subtotals on the face of their statement of financial position. This would distinguish amounts due to or from policyholders, in their capacity as policyholders, from amounts due to, or from, qualifying mutual policyholders (including future policyholders) in their capacity as holders of the most residual interest in the entity.

2. Statement of financial performance

An entity is required to disaggregate the amounts recognized in the statement of profit and loss and the statement of other comprehensive income (collectively, referred to in the standard as the statement of financial performance) into [IFRS 17 80]:

  • Insurance service result comprised of:
    • Insurance revenue; and insurance service expenses
      And
    • Insurance finance income or expenses

Income or expenses from reinsurance contracts held should be presented separately from the expenses or income from insurance contracts issued [IFRS 17 82]. An entity may present the income or expense from a group of reinsurance contracts held, other than finance income and expense, as either [IFRS 17 86]:

  • A single amount (net presentation)
    Or
  • Separately (gross presentation):
    • The amounts recovered from the reinsurer
    • An allocation of the premium paid

An entity that applies a gross presentation for insurance service expense arising from reinsurance contracts held should:

  • Provide a subtotal equal to the single amount
  • Treat reinsurance cash flows contingent on claims on the underlying insurance contracts as part of claims that are expected to be reimbursed (i.e., as part of reinsurance recoveries), for example, some types of profit commission
  • Treat amounts it expects to receive that are not contingent on claims on the underlying contracts as a reduction in premium to be paid to the reinsurer, for example, some forms of ceding commission
  • Not present the allocation of premium paid as a reduction in revenue.

IAS 1 requires a split of insurance finance income and expense between contracts issued within the scope of IFRS 17 and reinsurance contracts held on the face of the statement of profit or loss [IAS 1 82(bb), (bc)].

The change in risk adjustment for non-financial risk is not required to be disaggregated between the insurance service result and the insurance finance income or expense. When an entity decides not to disaggregate the change in risk adjustment for non-financial risk, the entire change should be included as part of the insurance service result [IFRS 17 81].

The overview from the IASB’s IFRS 17 Effects Analysis illustrates a summary statement of financial performance under IFRS 17.

Example – Illustrative statement of financial performance

Statement of profit or loss and other comprehensive income

2021

2020

CU’m

CU’m

Insurance revenue

10,304

8,894

Insurance service expenses

-9,069

-8,489

– Incurred claims and insurance contract expenses

-7,362

-7,012

– Insurance contract acquisition cash flows

-1,259

-1,150

Insurance service results before reinsurance contracts held

1,235

405

Income (expenses) from reinsurance contracts held

-448

-327

Insurance service result

787

78

Finance income/expenses from contracts issued within the scope of IFRS 17

394

353

Finance income and expense from reinsurance contracts held

200

300

Net financial result

594

653

Profit before tax

1,381

731

Other comprehensive income

Items that may be reclassified subsequently to profit or loss

Finance income and expense from contracts issued within the scope of IFRS 17

50

-25

Finance income and expense from reinsurance contracts held

-25

50

Other comprehensive income for the year net of tax

25

25

Total comprehensive income for the year

1,406

746

There is nothing to prevent an entity from providing further sub-analysis of the components of the insurance service result (which may make the relationship of the reconciliations discussed in ‘Disclosure of Insurance contracts’ to the face of the statement of financial performance more understandable). Indeed, IAS 1 states that an entity should present additional line items (including by disaggregating line items specified by the standard), headings and subtotals in the statement(s) presenting profit or loss and other comprehensive income when such presentation is relevant to an understanding of the entity’s financial performance [IAS 1 85].

3. Insurance revenue

Insurance revenue depicts the provision of coverage and other services arising from a group of insurance contracts at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services [IFRS 17 83].

Insurance revenue from a group of insurance contracts is, therefore, the consideration for the contracts, i.e., the amount of premiums paid to the entity adjusted for financing effect (the time value of money) and excluding any investment components [IFRS 17 B120].

Investment components are accounted for separately and are not part of the insurance service result.

The amount of insurance revenue recognized in a period depicts the transfer of promised services at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services. The total consideration for a group of contracts covers the following [IFRS 17 B121]:

  • Amounts related to the provision of services, comprising:
    • Insurance service expenses, excluding any amounts allocated to the loss component of the liability for remaining coverage
    • The risk adjustment for non-financial risk, excluding any amounts allocated to the loss component of the liability for remaining coverage
    • The CSM
  • Amounts related to insurance acquisition cash flows

When an entity provides services in a period, it reduces the liability for remaining coverage for the services provided and recognizes revenue. This is consistent with revenue recognition under IFRS 15 in which an entity recognizes revenue and derecognizes the performance obligation for services that it provides [IFRS 17 B123].

The reduction in the liability for remaining coverage that gives rise to insurance revenue excludes changes in the liability that do not relate to services expected to be covered by the consideration received by the entity. These are changes that [IFRS 17 B123]:

  • Do not relate to services provided in the period, for example:
    • Changes resulting from cash inflows from premiums received
    • Changes that relate to investment components in that period
    • Changes that relate to transaction-based taxes collected on behalf of third parties (such as premium taxes, value-added taxes, and goods and services taxes)
    • Insurance finance income or expenses
    • Insurance acquisition cash flows
    • Derecognition of liabilities transferred to a third party
  • Relate to services, but for which the entity does not expect consideration, i.e., increases and decreases in the loss component of the liability for remaining coverage

Changes in the liability for remaining coverage in the period that relate to services for which the entity expects to receive compensation include [IFRS 17 B124]:

  • Insurance service expenses incurred in the period (measured at the amounts expected at the beginning of the period), excluding:
    • Amounts allocated to the loss component of the liability for remaining coverage
    • Repayments of investment components
    • Amounts related to transaction-based taxes collected on behalf of third parties (such as premium taxes, value-added taxes, and goods and services taxes)
    • Insurance acquisition expenses
  • The change in risk adjustment for non-financial risk, excluding:
    • Changes included in insurance finance income or expenses
    • Changes that adjust the CSM because they relate to future service
    • Amounts allocated to the loss component of the liability for remaining coverage
  • The amount of the CSM recognized in profit or loss in the period

Considerations

Revenue recognition will be different from current practice under IFRS 4, particularly for life contracts. Existing accounting practices for life insurance in many jurisdictions recognizes premiums due in a period as equivalent to revenue. Revenue in IFRS 17 excludes investment components and recognizes revenue as service is provided, instead of when premiums are due to be received. Maintaining records of the liability for remaining coverage for each group of insurance contracts, including any loss component, over the course of the coverage period, and adjusting the amount recognized in profit or loss in each period as revenue for investment components will call for new systems and processes.

The new measurement of revenue is also likely to change reported metrics and even impact on the perceived size of organizations where this is based on the amount of revenue reported.

An entity includes in revenue in each period under the General Model an amount relating to insurance acquisition cash flows by allocating the portion of the premiums that relate to recovering those cash flows. An entity recognizes the same amount as an insurance service expense. The net effect of these adjustments on profit or loss in a period is nil. This ‘gross up’ of an allocation of acquisition cash flows between revenue and expenses allows the users of the financial statements to assess the significance of acquisition costs and is needed to allow revenue to equal total premiums received adjusted for the time value of money [IFRS 17 B125].

Example – An allocation of a portion of premiums to the recovery of insurance acquisition cash flows

An entity issues a group of insurance contracts with a coverage period of four years. The entity pays initial acquisition expenses of CU200 and expects to pay trail commission of CU50 at the end of year 4. The group of contracts is not determined to be onerous. The entity estimates, at the time of initial recognition of the group of contracts, that the discount rate that applies to nominal cash flows that do not vary based on the returns on any underlying items is 3% per year.

Applying paragraph B125 of IFRS 17, the entity determines the insurance revenue related to insurance acquisition cash flows by allocating the portion of the premiums that relate to recovering those cash flows to each accounting period in a systematic way on the basis of the passage of time. The entity recognizes the same amount as insurance service expenses. The entity chooses to reflect financing effects in determining the expense and offsetting amount in revenue in each year.

The present value of expected insurance acquisition cash flows at initial recognition is CU244 [CU200 + (CU50 ÷ 1.03^4)]. The entity estimates the portion of premiums that relates to the recovery of insurance acquisition cash flows in each of the four years of coverage to be CU63, CU65, CU67, and CU68. The entity recognizes the same amounts as insurance service expenses in each year.

Year 1

Year 2

Year 3

Year 4

A. Memorandum balance at the beginning of the year of coverage

244

188

129

66

B. Accretion of interest at 3% per year

7

6

4

2

C. Amount allocated for the year (A+B)/the number of remaining years of coverage

-63

-65

-67

-68

D. Memorandum balance at the end of the year

188

129

66

3.2. Revenue under the premium allocation approach

When an entity applies the premium allocation approach, insurance revenue for the period is the amount of expected premium receipts (excluding any investment component and adjusted to reflect the time value of money and the effect of financial risk, if applicable) allocated to the period. The entity should allocate the expected premium receipts to each period of coverage [IFRS 17 B126]:

  • On the basis of the passage of time, but
  • If the expected pattern of release of risk during the coverage period differs significantly from the passage of time, then on the basis of the expected timing of incurred insurance service expenses.

An entity should change the basis of allocation between the two methods above, as necessary if facts and circumstances change [IFRS 17 B127]. Any change must be reflected in the basis of allocation as a change in accounting estimate and applied prospectively (see section 2. Recognition in ‘Reinsurance contracts held’).

Consideration

The premium allocation approach has many similarities with current practice for non-life insurance based on the unearned premium reserve (UPR ) method. However, entities should determine whether the allocation guidance in IFRS 17 requires a change in the revenue recognition pattern. This would be the case if, for example, the expected pattern of release of risk during the coverage period differs significantly from the passage of time, but the entity currently recognizes revenue on the basis of passage of time.

4. Insurance service expense Presentation Insurance contracts

Insurance service expenses comprise [IFRS 17 84]: Presentation Insurance contracts

  • Incurred claims (excluding repayments of investment components) and other incurred service expenses
  • Amortisation of insurance acquisition cash flows Presentation Insurance contracts
  • Changes in fulfillment cash flows that relate to past services, i.e., relating to the liability for incurred claims
  • Changes in fulfillment cash flows that relate to future service, but which do not adjust the CSM, i.e., losses on onerous groups of contracts and reversals of such losses

An entity needs to disaggregate this information (for example, to show insurance acquisition cash flows separately from other insurance service expenses) when it is relevant to understanding the entity’s financial performance (see 2 above).

An entity may present the income or expenses from a group of reinsurance contracts held, other than insurance finance income or expenses, as a single amount or separately as [IFRS 17 86]:

  • Amounts recovered from the reinsurer Presentation Insurance contracts
  • An allocation of the premiums paid that together result in a net amount equal to that single amount

If an entity presents separately the amounts recovered from the reinsurer and an allocation of the premiums paid, it should:

  • Treat reinsurance cash flows that are contingent on claims on the underlying contracts as part of the claims that are expected to be reimbursed under the reinsurance contract held
  • Treat amounts from the reinsurer that it expects to receive that are not contingent on claims of the underlying contracts (for example, some types of ceding commissions) as a reduction in premiums to be paid to the reinsurer Presentation Insurance contracts
  • Not present the allocation of premiums paid as a reduction in revenue

5 Insurance finance income or expenses

Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from [IFRS 17 87]:

  • The effect of the time value of money and changes in the time value of money; and Presentation Insurance contracts
  • The effect of financial risk and changes in financial risk; but Presentation Insurance contracts
  • Exclude any such changes for groups of insurance contracts with direct participation features that would adjust the CSM, but do not do so because the groups of contracts are onerous and consequently there is no contractual service margin. These are included in insurance service expenses

Assumptions about inflation based on an index of prices or rates or on prices of assets with inflation-linked returns are assumptions that relate to financial risk. However, assumptions about inflation based on an entity’s expectation of specific price changes are not assumptions that relate to financial risk [IFRS 17 B128].

Insurance finance income or expenses comprise changes in the carrying amount of groups of insurance contracts due to the accretion of interest, changes in discount rates and financial risk. Changes in financial risk include changes in the time value of options and guarantees for contracts that are not in the scope of the Variable Fee Approach. Entities are required to make an accounting policy choice between presenting insurance finance income or expenses in profit or loss or disaggregated between profit or loss and other comprehensive income [IFRS 17 88-89].

An entity applies its choice of accounting policy to portfolios of insurance contracts. In assessing the appropriate accounting policy for each portfolio (see section 4XXX), applying paragraph 13 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an entity should consider what assets it holds and how it accounts for them [IFRS 17 B129].

The amount included in other comprehensive income in a period is the difference between total insurance finance income or expenses and the amount included in profit or loss [IFRS 17 90].

Considerations

  • Allowing entities to choose between recognizing insurance finance income or expenses wholly in profit or loss, or disaggregated between profit or loss and other comprehensive income significantly reduces the comparability of profits between entities that apply IFRS 17. There is a trade-off between ensuring comparability between entities and allowing entities to choose how to present how they manage financial risk.
  • An entity should consider, for each portfolio, the assets that it holds and how it accounts for them. Entities will seek to minimize accounting mismatches between assets and liabilities. We expect that entities with a tradition of recording the effect of market fluctuations in other comprehensive income will choose the same approach for insurance contract liabilities if unavoidable mismatches in profit or loss are at a level that is acceptable to them. Entities that have classified equities as available-for-sale under IAS 39 may be reluctant to classify equities at fair value through other comprehensive income. This is because under IFRS 9 fair value gains and losses on FVOCI equities are not recycled to income on disposal. An entity might choose a fair value through profit or loss (FVPL) approach to assets and liabilities for portfolios of insurance contracts where assets backing liabilities include substantial amounts of equity instruments.
  • Entities that have traditionally measured assets at FVPL and used current discount rates to measure insurance contract liabilities might elect not to disaggregate insurance finance expense and to invoke the fair value option for financial assets that otherwise would be measured in accordance with IFRS 9 at amortized cost or fair value through other comprehensive income (FVOCI).

6. Disaggregating insurance finance result Presentation Insurance contracts

Disaggregating insurance finance income or expenses between profit or loss and other comprehensive income. Presentation Insurance contracts

When an entity chooses to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income, the methods for determining the amount presented in profit or loss depend on whether the insurance contracts have direct participation features and the entity holds the underlying items. If not, it depends on whether changes in assumptions that relate to financial risk have a substantial effect on the amounts paid to the policyholders. Presentation Insurance contracts

For insurance contracts with direct participation features for which the entity holds the underlying items, an entity that makes the disaggregation choice includes in profit or loss an amount that eliminates accounting mismatches with income or expenses included in profit or loss on the underlying items held (sometimes referred to as the “current period book yield approach”) [IFRS 17 B134-B136]. Presentation Insurance contracts

In all other circumstances, where an entity decides to disaggregate between profit or loss and OCI, IFRS 17 requires that entities must determine amounts presented in profit or loss in a period determined by a systematic allocation of the expected total insurance finance income or expenses over the duration of the group of contracts. IFRS 17 specifies that such systematic approaches must [IFRS 17 B130]: Presentation Insurance contracts

  • Be based on the characteristics of the contracts without reference to factors that do not affect the cash flows expected to arise under the contracts; e.g., the allocation must not be based on expected recognized returns on assets if those returns do not affect the cash flows of the contracts in the group
  • Result in the amounts recognized in other comprehensive income over the duration of the group of contracts totaling to zero. The cumulative amount recognized in other comprehensive income at any date is the difference between the carrying amount of the group of contracts and the amount that the group would be measured at when applying the systematic allocation.

The disaggregation approaches and the rates used to determine insurance finance expense recognized in profit or loss in each reporting period, as prescribed in IFRS 17 are summarised below:

Note: (1) These approaches apply to fulfillment cash flows. The systematic allocation for the finance income or expenses arising from the CSM depends on if the contracts have direct participation features — see ‘Measurement of contracts with participation features‘. Presentation Insurance contracts

Considerations

In presenting insurance finance income or expense, an entity is permitted, but not required, to disaggregate the change in risk adjustment for non-financial risk between the insurance service result and insurance finance income or expenses. The risk adjustment reflects the uncertainty of the present value of cash flows. Consequently, its measurement implicitly reflects the time value of money. Permitting entities to disaggregate a financing element of changes in the risk adjustment for non-financial risks gives them the opportunity to select their preferred way of reporting the effects of changes in the risk adjustment. However, given the fact that IFRS 17 does not prescribe any specific methods for estimating the adjustment, many may choose not to disaggregate the time value element of changes in the carrying amount of the risk adjustment for non-financial risk. In that case, the entity should include the entire change in the risk adjustment for non-financial risk as part of the insurance service result.

6.1. Financial risks not affecting insurance payments Presentation Insurance contracts

Contracts for which changes in financial assumptions do not have a substantial effect on amounts paid to the policyholder

For groups of insurance contracts for which changes in assumptions that relate to financial risk do not have a substantial effect on the amounts paid to the policyholder, the systematic allocation is determined using the discount rates at the date of initial recognition of the group of contracts [IFRS 17 B131].

When the premium allocation approach is applied (see ‘Premium allocation approach‘), an entity may be required or may choose, to discount the liability for incurred claims (see ‘Measurement remaining coverage‘). In such cases, the entity may also choose to disaggregate the insurance finance income or expenses between profit or loss and other comprehensive income. If the entity makes this choice, it must determine the insurance finance income or expenses in profit or loss using the discount rate determined at the date of the incurred claim [IFRS 17 B133].

Example – Disaggregating insurance finance income or expense Presentation Insurance contracts

An entity issues a group of insurance contracts with coverage of a period of three years. The entity receives a premium of CU900 at the start of the coverage period and estimates it will incur and pay claims of CU1,000 at the end of the coverage period. The contracts do not have participation features. The discount that reflects the nature of the cash flows of the contract at inception is 10% a year. The discount rate falls to 4% at the end of year 1 and stays at 4% to the end of year 3. The entity elects to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income. Presentation Insurance contracts

As expected, the entity incurs and pays claims of CU1,000 at the end of year 3. For simplicity, we assume that the risk adjustment for non-financial risks is negligible.

(Amounts in CU’000)

Start of Year 1

End of Year 1

End of Year 2

End of Year 3

Present value of expected cash outflows at current rates

751

925

962

1,000

Present value of expected cash outflows at locked rate of 10%

751

826

909

1,000

Year 1

Year 2

Year 3

Change in the present value of expected cash flows at current rates (A)

174

37

38

Change in the present value of expected cash flows at locked-in rates (B)

75

83

91

Disaggregation of insurance finance expense Presentation Insurance contracts

Year 1

Year 2

Year 3

Profit or loss (B) Presentation Insurance contracts

75

83

91

Other comprehensive income (=A-B)

99

-46

-52

Total comprehensive income (A) Presentation Insurance contracts

174

37

39

Contractual service margin Presentation Insurance contracts
At inception (=900-751)/Opening balance at the start of the year (C)

149

109

60

Insurance finance expense (=10% of C) (D) Presentation Insurance contracts

15

11

6

Allocation to profit or loss (=(C+D)/(number of years coverage remaining +1) (E)

-55

-60

-66

End of year (=C+D+E) Presentation Insurance contracts

109

60

0

The entity uses the premium to purchase zero coupon bonds with an effective interest rate of 10% a year that mature at the end of year 3. It measures the bonds at fair value through other comprehensive income. The statement of profit or loss and other comprehensive income for the period could include the following:

Year 1

Year 2

Year 3

Insurance revenue (allocation of CSM) (=E) (F)

55

60

66

Investment income (G)

90

99

109

Insurance finance expense (includes accretion of interest on CSM) (=B+D) (H)

-90

-94

-97

Profit (=F+G+H)

55

65

78

Other comprehensive income

Unrealised gains from bonds Presentation Insurance contracts

118

-55

-63

Insurance finance income or expenses (=A-B) Presentation Insurance contracts

-99

46

53

Presentation Insurance contracts

Total comprehensive income Presentation Insurance contracts

74

56

68

6.2. Financial risks affecting insurance payments

Contracts for which changes in financial assumptions have a substantial effect on amounts paid to the policyholder

For groups of insurance contracts for which changes in assumptions relating to financial risk have a substantial effect on the amounts paid to the policyholders [IFRS 17 B132]:

  • A systematic allocation for the finance income or expenses arising from the estimates of future cash flows can be determined in one of the following ways:
    • Using a rate that allocates the remaining revised expected finance income or expenses over the remaining duration of the group of contracts at a constant rate (effective yield approach)
    • For contracts that use a crediting rate to determine amounts due to the policyholders, using an allocation that is based on the amounts credited in the period and expected to be credited in future periods (projected crediting approach)
  • A systematic allocation for the insurance finance income or expenses arising from the risk adjustment for non-financial risk (if separately disaggregated from other changes in the risk adjustment for non-financial risk) is determined using an allocation consistent with that used for the allocation of the finance income or expenses arising from the future cash flows.
  • A systematic allocation for the finance income or expenses arising from the CSM is determined:
    • For insurance contracts without direct participation features, using the discount rates determined at the date of initial recognition of the group of contracts
    • For insurance contracts with direct participation features where the entity does not hold the underlying items, using an allocation consistent with that used for the allocation for the interest income or expenses arising from future cash flows Presentation Insurance contracts

6.3. Contracts with direct participation features where the entity holds the underlying items Presentation Insurance contracts

For insurance contracts with direct participation features, for which the entity holds the underlying items, an entity should make an accounting policy choice between [IFRS 17 88]:

  • Including insurance finance income or expenses for the period in profit or loss Presentation Insurance contracts
    Or Presentation Insurance contracts
  • Disaggregating insurance finance income or expenses for the period to include in profit or loss an amount that eliminates accounting mismatches, with income or expenses included in profit or loss on the underlying items held (current period book yield approach) Presentation Insurance contracts

This means that, when disaggregation is applied, the amount included in profit or loss for finance income or expenses for insurance contracts with direct participation features exactly matches the finance income or expenses included in profit or loss for the underlying items, resulting in the net of the two separately presented items being nil [IFRS 17 B134].

An entity may qualify for the current period book-yield approach in some periods but not in others, because of a change in whether it holds the underlying items. If such a change occurs, the accounting policy choice available to the entity changes from applying the current period book yield approach to an effective yield or projected crediting rate approach1 and potentially the opposite approach if the entity subsequently holds the underlying items [IFRS 17 B135].

In making such a change, an entity must: Presentation Insurance contracts

  • Include the accumulated amount previously included in other comprehensive income at the date of the change as a reclassification adjustment in profit or loss in the period of change and in future periods, as follows [IFRS 17 B135]:
  • If the entity previously applied, for example, an effective yield approach, it must include in profit or loss the accumulated amount in other comprehensive income before the change, as if the entity were continuing the effective yield approach based on the assumptions that applied immediately before the change
  • If the entity previously applied the current period book yield approach, it must include in profit or loss the accumulated amount included in other comprehensive income before the change as if the entity were continuing that approach based on the assumptions that applied immediately before the change
  • Not restate prior period comparatives information Presentation Insurance contracts

An entity must not recalculate the accumulated amount previously included in other comprehensive income as if the new disaggregation had always applied; nor update the assumptions used for the reclassification in future periods after the date of the change [IFRS 17 B136].

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