Indian Accounting Standard (Ind AS) 104 : Insurance Contracts
Objective
The objective of this Indian Accounting Standard is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this Indian Accounting Standard as an insurer). In particular, this Indian Accounting Standard requires:
limited improvements to accounting by insurers for insurance contracts.
disclosure that identifies and explains the amounts in an insurers financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.
Footnote:
1 This Indian Accounting Standard shall come into effect for insurance companies from the date to be separately announced.
Scope
An entity shall apply this Indian Accounting Standard to:
insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
financial instruments that it issues with a discretionary participation feature (see paragraph 35). Ind AS 107 Financial Instruments: Disclosures requires disclosure about financial instruments, including financial instruments that contain such features.
This Indian Accounting Standard does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see Ind AS 32 Financial Instruments: Presentation,Ind AS 39 Financial Instruments: Recognition and Measurement and Ind AS 107).
An entity shall not apply this Indian Accounting Standard to:
product warranties issued directly by a manufacturer, dealer or retailer (see Ind AS 18 Revenue and Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets).
employers assets and liabilities under employee benefit plans (see Ind AS 19 Employee Benefits and Ind AS 102 Share-based Payment) and retirement benefit obligations reported by defined benefit retirement plans.
contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessees residual value guarantee embedded in a finance lease (see Ind AS 17 Leases, Ind AS 18 Revenue and Ind AS 38 Intangible Assets).
financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either Ind AS 39, Ind AS 32 and Ind AS 107 or this Standard to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.
contingent consideration payable or receivable in a business combination (see Ind AS 103 Business Combinations).
direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policyholder). However, a cedant shall apply this Standard to reinsurance contracts that it holds.
For ease of reference, this Indian Accounting Standard describes any entity that issues an insurance contract as an insurer, whether or not the issuer is regarded as an insurer for legal or supervisory purposes.
A reinsurance contract is a type of insurance contract. Accordingly, all references in this Indian Accounting Standard to insurance contracts also apply to reinsurance contracts.
Embedded derivatives
Ind AS 39 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. Ind AS 39 applies to derivatives embedded in an insurance contract unless the embedded derivative is itself an insurance contract.
As an exception to the requirement in Ind AS 39, an insurer need not separate, and measure at fair value, a policyholders option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirement in Ind AS 39 does apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract. Furthermore, that requirement also applies if the holders ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).
Paragraph 8 applies equally to options to surrender a financial instrument containing a discretionary participation feature.
Unbundling of deposit components
Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:
unbundling is required if both the following conditions are met
the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).
the insurers accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.
unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.
unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).
The following is an example of a case when an insurers accounting policies do not require it to recognise all obligations arising from a deposit component. A cedant receives compensation for losses from a reinsurer, but the contract obliges the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedants accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required.
To unbundle a contract, an insurer shall:
apply this Indian Accounting Standard to the insurance component.
apply Ind AS 39 to the deposit component.
Recognition and measurement Temporary exemption from some other Indian Accounting Standards
Paragraphs 1012 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors specify criteria for an entity to use in developing an accounting policy if no Indian Accounting Standard applies specifically to an item. However, this Indian Accounting Standard exempts an insurer from applying those criteria to its accounting policies for:
insurance contracts that it issues (including related acquisition costs and related intangible assets, such as those described in paragraphs 31 and 32); and reinsurance contracts that it holds.
Nevertheless, this Indian Accounting Standard does not exempt an insurer from some implications of the criteria in paragraphs 1012 of Ind AS 8. Specifically, an insurer;
shall not recognise as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the end of the reporting period (such as catastrophe provisions and equalisation provisions).
shall carry out the liability adequacy test described in paragraphs 1519.
shall remove an insurance liability (or a part of an insurance liability) from its balance sheet when, and only when, it is extinguishedie when the obligation specified in the contract is discharged or cancelled or expires.
shall not offset:
reinsurance assets against the related insurance liabilities; or
income or expense from reinsurance contracts against the expense or income from the related insurance contracts.
shall consider whether its reinsurance assets are impaired (see paragraph 20).
Liability adequacy test
An insurer shall assess at the end of each reporting period whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss.
If an insurer applies a liability adequacy test that meets specified minimum requirements, this Indian Accounting Standard imposes no further requirements. The minimum requirements are the following:
The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees.
If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.
If an insurers accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16, the insurer shall:
determine the carrying amount of the relevant insurance liabilities2 less the carrying amount of:
any related deferred acquisition costs; andany related intangible assets, such as those acquired in a business combination or portfolio transfer (see paragraphs 31 and 32). However, related reinsurance assets are not considered because an insurer accounts for them separately (see paragraph 20).
determine whether the amount described in (a) is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of Ind AS 37. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying...
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