An insurance contract is a contract under which one party (the insurer) accepts signicant
insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specied uncertain future event (the insured event) adversely affects the policyholder. Insurance risk does not include nancial risk (eg risk of changes in market prices or interest rates).
IFRS 4 has been issued as a short-term measure to ll a gap in IFRSs. In the absence of IFRS 4, entities would be required to account for insurance contracts following precedents in other standards, and the denitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework for the Preparation and Presentation of Financial Statements. For most entities, applying those precedents and the Framework could have resulted in substantial changes in accounting.
In most respects, IFRS 4 allows an entity to continue to account for insurance contracts under its previous accounting policies.
However, the standard makes some limited improvements to accounting for insurance contracts :
Catastrophe provisions and equalisation provisions are not permitted.They are not liabilities.
The adequacy of insurance liabilities must be tested at the end of each reporting period. The liability adequacy test is based on current estimates of future cash ows.Any deciency is recognised in prot or loss. Furthermore, reinsurance assets are tested for impairment.
Insurance liabilities are presented without offsetting them against related reinsurance assets.
Discretionary participation features (as found in with-prots and participating contracts) must be reported as liabilities or as equity (or split into liability and equity components).They may not be reported separately from liabilities and equity.
Some insurance contracts contain both an insurance component and a deposit component. In some cases the entity must unbundle the components and account for them separately. This requirement is particularly relevant for nancial reinsurance.
The IFRS restricts accounting policy changes. Any changes in accounting for insurance contracts must result in information that is more relevant and no less reliable or more reliable and no less relevant.