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IFRIC 21 — Levies

References

  • IAS 1 Presentation of Financial Statements
  • IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
  • IAS 12 Income Taxes
  • IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
  • IAS 24 Related Party Disclosures
  • IAS 34 Interim Financial Reporting
  • IAS 37 Provisions, Contingent Liabilities and Contingent Assets
  • IFRIC 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment
Date Development Comments
31 May 2012 Draft Interpretation DI/2012/1 Levies Charged by Public Authorities on Entities that Operate in a Specific Market published Comment deadline 5 September 2012
20 May 2013 IFRIC 21 Levies issued Effective for annual periods beginning on or after 1 January 2014

 

Summary of IFRIC 21

IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain.

The Interpretation covers the accounting for outflows imposed on entities by governments (including government agencies and similar bodies) in accordance with laws and/or regulations.  However, it does not include income taxes (see IAS 12 Income Taxes), fines and other penalties, liabilities arising from emissions trading schemes and outflows within the scope of other Standards.

The Interpretation does not supersede IFRIC 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment, which remains in force and is consistent with IFRIC 21.

IFRIC 21 identifies the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. The Interpretation clarifies that 'economic compulsion' and the going concern principle do not create or imply that an obligating event has occurred.

IFRIC 21 provides the following guidance on recognition of a liability to pay levies:

  • The liability is recognised progressively if the obligating event occurs over a period of time
  • If an obligation is triggered on reaching a minimum threshold, the liability is recognised when that minimum threshold is reached.

The same recognition principles are applied in interim financial reports.

IFRIC 21 does not deal with how to account with costs arising from the recognition of a liability to pay a levy, and instead other standards are applied in determining whether the recognition of a liability gives rise to an asset or expense.

The Illustrative Examples accompanying IFRIC 21 provide the following examples of how to account for various types of levies. These are briefly summarised below:

 

Type Obligating event Interim reports
Levy triggered progressively as revenue is generated in current period Generation of revenue (recognise progressively) Recognise progressively based on revenue generated
Levy triggered in full as soon as revenue is generated in one period, based on revenues from a previous period Generation of revenue in the subsequent period (full recognition at that time) Recognise if revenue generated in interim period
Levy triggered in full if entity operates as a bank at the end of the reporting period Operating as a bank at the end of the reporting period (full recognition at that time) Only recognise in an interim period that includes the last day of the annual reporting period
Levy triggered if revenues are above a minimum threshold Reaching the minimum threshold (recognise an amount consistent with the obligation at that time) Only recognise in an interim period where the minimum threshold has been met or exceeded

IFRIC 21 is effective for annual periods beginning on or after 1 January 2014. Initial application is in accordance with the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, i.e. the requirements are applied on a retrospective basis.

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IFRIC Interpretations

IFRIC Interpretations are developed by the IFRS Interpretations Committee (previously the International Financial Reporting Interpretations Committee, IFRIC) and are issued after approval by the International Accounting Standards Board (IASB).

# Name Issued
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 2004
IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments 2004
IFRIC 3 Emission RightsWithdrawn June 2005 2004
IFRIC 4 Determining Whether an Arrangement Contains a Lease 2004
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds 2004
IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment 2005
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies 2005
IFRIC 8 Scope of IFRS 2Withdrawn effective 1 January 2010 2006
IFRIC 9 Reassessment of Embedded Derivatives 2006
IFRIC 10 Interim Financial Reporting and Impairment 2006
IFRIC 11 IFRS 2: Group and Treasury Share TransactionsWithdrawn effective 1 January 2010 2006
IFRIC 12 Service Concession Arrangements 2006
IFRIC 13 Customer Loyalty ProgrammesWill be superseded by IFRS 15 as of 1 January 2018 2007
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction 2007
IFRIC 15 Agreements for the Construction of Real EstateWill be superseded by IFRS 15 as of 1 January 2017 2008
IFRIC 16 Hedges of a Net Investment in a Foreign Operation 2008
IFRIC 17 Distributions of Non-cash Assets to Owners 2008
IFRIC 18 Transfers of Assets from CustomersWill be superseded by IFRS 15 as of 1 January 2017 2009
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 2009
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 2011
IFRIC 21 Levies 2013
IFRIC 22 Foreign Currency Transactions and Advance Consideration 2016
IFRIC 23 Uncertainty over Income Tax Treatments 2017

Note

The above table lists the most recent version (or versions if a pronouncement has not yet been superseded) of each pronouncement and the date that revisions was originally issued. Where a pronouncement has been reissued with the same or a different name, the date indicated in the above table is the date the revised pronouncement was reissued (these are indicated with an asterisk (*)). The majority of the pronouncements have also been amended through IASB or IFRS Interpretations Committee projects, for consequential amendments arising on the issue of other pronouncements, the annual improvements process, and other factors. Our page for each pronouncement has a full history of the pronouncement, its development, amendments and other information.

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IFRIC 12 — Service Concession Arrangements

  • IFRS 1 First-time Adoption of International Financial Reporting Standards
  • IFRS 7 Financial Instruments: Disclosures
  • Framework for the Preparation and Presentation of Financial Statements (in September 2010, replaced by Conceptual Framework for Financial Reporting)
  • IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
  • IAS 11 Construction Contracts
  • IAS 16 Property, Plant and Equipment
  • IAS 17 Leases
  • IAS 18 Revenue
  • IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
  • IAS 23 Borrowing Costs
  • IAS 32 Financial Instruments: Presentation
  • IAS 36 Impairment of Assets
  • IAS 37 Provisions, Contingent Liabilities and Contingent Assets
  • IAS 38 Intangible Assets
  • IAS 39 Financial Instruments: Recognition and Measurement
  • IFRIC 4 Determining whether an Arrangement contains a Lease
  • SIC 29 Disclosure - Service Concession Arrangements
Date Development Comments
3 March 2005 IFRIC D12 Service Concession Arrangements - Determining the Accounting Model, IFRIC D13 Service Concession Arrangements - the Financial Asset Model and IFRIC D14 Service Concession Arrangements - the Intangible Asset Model published Comment deadline 31 May 2005
30 November 2006 IFRIC 12 Service Concession Arrangements issued Effective for annual periods beginning on or after 1 January 2008

A service concession arrangement is an arrangement whereby a government or other public sector body contracts with a private operator to develop (or upgrade), operate and maintain the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks, prisons or hospitals. The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price, and also controls any significant residual interest in the assets at the end of the term of the arrangement.

The objective of IFRIC 12 is to clarify how certain aspects of existing IASB literature are to be applied to service concession arrangements.

IFRIC 12 draws a distinction between two types of service concession arrangement.

  • In one, the operator receives a financial asset, specifically an unconditional contractual right to receive a specified or determinable amount of cash or another financial asset from the government in return for constructing or upgrading a public sector asset, and then operating and maintaining the asset for a specified period of time. This category includes guarantees by the government to pay for any shortfall between amounts received from users of the public service and specified or determinable amounts.
  • In the other, the operator receives an intangible asset – a right to charge for use of a public sector asset that it constructs or upgrades and then must operate and maintain for a specified period of time. A right to charge users is not an unconditional right to receive cash because the amounts are contingent on the extent to which the public uses the service.

IFRIC 12 allows for the possibility that both types of arrangement may exist within a single contract: to the extent that the government has given an unconditional guarantee of payment for the construction of the public sector asset, the operator has a financial asset; to the extent that the operator has to rely on the public using the service in order to obtain payment, the operator has an intangible asset.

The operator recognises a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator

  • (a) specified or determinable amounts or
  • (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements.
The operator measures the financial asset at fair value.

The operator recognises an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service.

The operator measures the intangible asset at fair value.

The operator of a service concession arrangement recognises and measures revenue in accordance with IASs 11 and 18 for the services it performs.

IFRIC 12 does not address accounting for the government side of service concession arrangements. IFRSs are not designed to apply to not-for-profit activities in the private sector or the public sector. However, the International Public Sector Accounting Standards Board (IPSASB) has started its own project on service concession arrangements, which will give serious consideration to accounting by grantors. The principles applied in IFRIC 12 will be considered as part of the project.

IFRIC 12 is effective for annual periods beginning on or after 1 January 2008. Earlier application is permitted.

On 31 October 2011, the International Public Sector Accounting Standards Board (IPSASB) released IPSAS 32 Service Concession Arrangements: Grantor, which seeks to address a lack of international guidance on how governments and other public sector entities should report their involvement in service concession arrangements, often used to build the infrastructure necessary to maintain and improve critical public services.

IPSAS 32 provides for the recognition, measurement, and disclosure of service concession assets and related liabilities, revenues, and expenses by the grantor. The criteria in IFRIC 12 Service Concession Arrangements for determining whether the operator controlled the asset used in a service concession arrangement are also used in IPSAS 32 to assess whether the grantor controlled the asset. This approach minimises the possibility that neither the operator nor the grantor would recognise the service concession asset.

IPSAS 32 also creates symmetry with IFRIC 12 on relevant accounting issues (i.e. liabilities, revenues, and expenses) from the grantor's point of view. In addition, IPSAS 32 is consistent with SIC-29 Service Concession Arrangements: Disclosures.

Click for IPSASB press release (link to IFAC website).

Guide to IFRIC 12 Service Concession Arrangements In February 2011, Deloitte's IFRS Global Office published IFRIC 12 Service concession arrangements – A pocket practical guide.

The Guide is intended to serve as an illustrative tool for the reader in the application of IFRIC 12 Service Concession Arrangements, providing analysis of the requirements of IFRIC 12 and practical guidance with examples that address some of the more complex issues around service concession arrangements. The Guide provides guidance on scope, the determination of the accounting model, specific characteristics of concessions that are common (take-or-pay arrangements, capacity availability, etc.) and much more.

Click for IFRIC 12 Service concession arrangements – A pocket practical guide (PDF 241k, February 2011, 59 pages).

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IFRS

IFRS Foundation funding

The IFRS Foundation (Foundation) has an annual income of £27 million to £30 million. The income comes from three main sources: voluntary contributions from jurisdictions around the world, voluntary contributions from international accounting firms and self-generated income from the sale of subscription services, publications and licensing of our intellectual property.

Voluntary contributions

The majority of the Foundation's funding is voluntary contributions from jurisdictions that have put in place national financing regimes. While funding mechanisms differ, most jurisdictions have established either a levy on companies or a system of publicly supported financing.

The contribution requested from a jurisdiction is normally a percentage of the total gross domestic product of all contributing jurisdictions using the most recent International Monetary Fund data.

The Trustees of the Foundation are responsible for the organisation's funding. They are grateful for the commitments made by the many jurisdictions, entities and organisations around the world in support of the Foundation's work.

The Foundation's Annual Report provides an overview of the past financial year's funding.

Self-generated income

The Foundation’s licensing policy is independent of contributions. When using the Foundation’s materials, different jurisdictions require different amounts of the material and for different use (adoption, convergence, education).

Jurisdictions who pay a voluntary contribution also need to sign a license and pay the licensing fee if they want to publish IFRS Standards or base their local standards on IFRS Standards.

The annual fees for licenses, where IFRS Standards are used for adoption or convergence, were set low so as not to create a barrier to adoption. These fees are normally set in bands based on the jurisdictions’ GDP. For more information on adoption and copyright please visit here.

Other self-generated income comes from licensing our intellectual property for commercial use and from selling publications generated by the Foundation and the International Accounting Standards Board as well as our subscription services. For more information on our publications and subscriptions, please visit here. For more information on licensing our intellectual property, please visit here.

Funding in the future 

An appropriate financing regime for the Foundation is vital to ensure the independence of its standard-setting process. Such a regime must enable the Board members and Foundation staff to engage interested parties throughout the world in the shaping of financial reporting standards and to undertake all other related activities necessary to achieve the organisation's objectives.

The Trustees are continuing their work towards a global funding system with the following features:

  • a long-term commitment by jurisdictions;
  • public sponsorship (either direct or implicit governmental or regulatory support);
  • flexibility;
  • proportionally allocated contributions; and
  • public accountability in the budget process.

These commitments ensure the independence of the Board, which enables the Foundation to:

  • create and maintain high-quality IFRS Standards;
  • consult inclusively and comprehensively with stakeholders globally; and
  • support the worldwide adoption of IFRS Standards in other ways.

That independence enables the creation and maintenance of high-quality IFRS Standards through an inclusive, international consultation process, as well as all other activities undertaken by the organisation to advance the worldwide adoption of IFRS Standards.

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IFRS 2: Share-based payment | Accounting standards | Library

The accounting standard IFRS 2 requires reporting entities to recognise share-based payment transactions in their financial statements. Find articles, books and online resources providing quick links to the standard, summaries, guidance and news of recent developments.

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IFRS 2 – Share-based PaymentTimeline and summary from Deloitte IAS Plus, with information on related interpretations and amendments under consideration.

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IFRS 2017: Interpretation and application of IFRS standardsErwin Bakker (2017)This Wiley guide has been fully updated to help practitioners apply and comply with the latest international financial reporting standards. It provides detailed guidance along with illustrative examples. The chapters on shareholders' equity and share-based payment cover:

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IFRS

POA is a public legal entity with administrative autonomy. The main function of POA is to set accounting, auditing and ethics standards, approve and register auditors and audit firms and perform oversight and inspections of them. POA has a strategic objective of setting standards in full compliance with the International Standards. In order to achieve its function, POA has signed a copyright agreement with IFAC and IASB.

As a public authority, POA determines both the scope of the implementation of TFRS (issuers, capital market institutions, banks, finance leasing companies, factoring companies, finance companies, insurance companies and some of the large-scale companies) and the other entities that have to implement Turkish Local GAAP.

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Organisation

Capital Markets Board of Turkey (CMB)

Role of the organisation

The Capital Markets Board of Turkey (CMB) is the regulatory and supervisory authority for the securities markets and institutions in Turkey. The CMB determines the operational principles of the capital markets and is responsible for the protection of the rights and interests of investors. CMB regulates and supervises public companies, listed companies, investment companies, exchanges, mutual, closed-end funds and pension funds, leveraged transactions on foreign exchange and precious metals, Settlement and Custody Bank (Takasbank), Turkish Capital Markets Association (TCMA), Central Securities Depository (CSD), Investor Compensation Center (ICC) and other related institutions operating in the capital markets, such as independent audit firms, rating agencies, appraisal firms, asset leasing companies, market operators and trade repositories.

CMB is empowered by Capital Market Law to regulate the disclosure requirements of all publicly held (listed) companies and capital markets institutions. According to CMB regulation, all listed companies and capital markets institutions prepare their financial statements according to TFRSs (the Turkish version of IFRSs) and file them electronically on the Public Disclosure Platform.

Website

www.cmb.gov.tr

 

Organisation

Central Registry Agency Inc. (MKK)

Role of the organisation

(MKK) is the legally authorised central securities depository for Turkish capital markets. MKK is also responsible for the operation of the Public Disclosure Platform (PDP), which is an electronic disclosure system for issuers and other institutions of capital markets. Listed companies and ETFs, investment firms, mutual funds, pension funds, portfolio management companies and foreign funds have to submit their notifications to PDP. These notifications include financial statements, corporate actions, material events and other notifications.

Website

www.mkk.com.tr

Email Contact

[email protected]

 

Organisation

Turkish Tax Inspection Board (TTIB)

Role of the organisation

The Turkish Tax Inspection Board's (TTIB) main functions can be summarised as planning and executing tax audits, carrying out official investigations, inspecting fiscal bodies and combatting with underground economy, corruption and money laundering. It is also the main body responsible to examine the consistency and correctness of the fiscal statements for tax related purposes.

Website

www.vdk.gov.tr

 

Organisation

Turkish Revenue Administration

Role of the organisation

The role of Revenue Administration is to collect taxes, to prevent the existence of an underground economy and to increase voluntary compliance. There are several electronic projects in progress. In particular, an e-bookkeeping project and similar projects are being implemented to facilitate the filling of financial statements.

Website

www.gib.gov.tr

www.ifrs.org

IFRS 17 — Insurance Contracts

Overview

IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows.

IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on or after 1 January 2021.

History of IFRS 17

 

Date Development Comments
September 2001 Added to the IASB's agenda
September 2004 Insurance Working Group appointed Fresh start on the project
3 May 2007 Discussion Paper Preliminary Views on Insurance Contracts published Comment deadline 16 November 2007
30 July 2010 Exposure Draft ED/2010/8 Insurance Contracts published Comment deadline 30 November 2010
Fourth quarter 2010 Roundtables
20 June 2013 ED/2013/7 Insurance Contracts published Comment deadline 25 October 2013
18 May 2017 IFRS 17 Insurance Contracts published Effective for annual periods beginning on or after 1 January 2021

 

Related In­ter­pre­ta­tions

 

Amendments under consideration by the IASB

 

Su­per­seded Standards

IFRS 17 replaces the following standard:

 

Summary of IFRS 17

Objective

IFRS 17 Insurance Contracts establishes the principles for the recognition, measurement, presentation and disclosure of Insurance contracts within the scope of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows. [IFRS 17:1]

Scope

An entity shall apply IFRS 17 Insurance Contracts to: [IFRS 17:3]

  • Insurance contracts, including reinsurance contracts, it issues;
  • Reinsurance contracts it holds; and
  • Investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.

Some contracts meet the definition of an insurance contract but have as their primary purpose the provision of services for a fixed fee. Such issued contracts are in the scope of the standard, unless an entity chooses to apply to them IFRS 15 Revenue from Contracts with Customers and provided the following conditions are met: [IFRS 17:8]

  • (a) the entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the contract with that customer;
  • (b) the contract compensates the customer by providing a service, rather than by making cash payments to the customer; and
  • (c) the insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from uncertainty over the cost of those services.

Key definitions

[IFRS 17: Appendix A]

Insurance contract

A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Portfolio of insurance contracts

Insurance contracts subject to similar risks and managed together.

Contractual service margin

A component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit the entity will recognise as it provides services under the insurance contracts in the group.

Insurance risk

Risk, other than financial risk, transferred from the holders of a contract to the issuer.

Fulfilment cash flows

An explicit, unbiased and probability-weighted estimate (i.e. expected value) of the present value of the future cash outflows less the present value of the future cash inflows that will arise as the entity fulfils insurance contracts, including a risk adjustment for non-financial risk.

Risk adjustment for non-financial risk

The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows arising from non-financial risk as the entity fulfils insurance contracts.

Separating components from an insurance contract

An insurance contract may contain one or more components that would be within the scope of another standard if they were separate contracts. For example, an insurance contract may include an investment component or a service component (or both). [IFRS 17:10]

The standard provides the criteria to determine when a non-insurance component is distinct from the host insurance contract.

An entity shall: [IFRS 17:11-12]

  • (a) Apply IFRS 9 Financial Instruments to determine whether there is an embedded derivative to be separated and, if there is, how to account for such a derivative.
  • (b) Separate from a host insurance contract an investment component if, and only if, that investment component is distinct. The entity shall apply IFRS 9 to account for the separated investment component.
  • (c) After performing the above steps, separate any promises to transfer distinct non-insurance goods or services. Such promises are accounted under IFRS 15 Revenue from Contracts with Customers.

Level of aggregation

IFRS 17 requires entities to identify portfolios of insurance contracts, which comprises contracts that are subject to similar risks and managed together. Contracts within a product line would be expected to have similar risks and hence would be expected to be in the same portfolio if they are managed together. [IFRS 17:14]

Each portfolio of insurance contracts issues shall be divided into a minimum of: [IFRS 17:16]

  • A group of contracts that are onerous at initial recognition, if any;
  • A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any; and
  • A group of the remaining contracts in the portfolio, if any.

An entity is not permitted to include contracts issued more than one year apart in the same group. [IFRS 17:22]

If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity's practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity may include those contracts in the same group. [IFRS 17:20]

Recognition

An entity shall recognise a group of insurance contracts it issues from the earliest of the following: [IFRS 17:25]

  • (a) the beginning of the coverage period of the group of contracts;
  • (b) the date when the first payment from a policyholder in the group becomes due; and
  • (c) for a group of onerous contracts, when the group becomes onerous.

Measurement

On initial recognition, an entity shall measure a group of insurance contracts at the total of: [IFRS 17:32]

  • (a) the fulfilment cash flows (“FCF”), which comprise:
    • (i) estimates of future cash flows;
    • (ii) an adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the future cash flows; and
    • (iii) a risk adjustment for non-financial risk
  • (b) the contractual service margin (“CSM”).

An entity shall include all the future cash flows within the boundary of each contract in the group. The entity may estimate the future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual groups of contracts. [IFRS 17:33]

The estimates of future cash flows shall be current, explicit, unbiased, and reflect all the information available to the entity without undue cost and effort about the amount, timing and uncertainty of those future cash flows. They should reflect the perspective of the entity, provided that the estimates of any relevant market variables are consistent with observable market prices. [IFRS 17:33]

Discount rates

The discount rates applied to the estimate of cash flows shall: [IFRS 17:36]

  • (a) reflect the time value of money (TVM), the characteristics of the cash flows and the liquidity characteristics of the insurance contracts;
  • (b) be consistent with observable current market prices (if any) of those financial instruments whose cash flow characteristics are consistent with those of the insurance contracts; and
  • (c) exclude the effect of factors that influence such observable market prices but do not affect the future cash flows of the insurance contracts.

Risk adjustment for non-financial risk

The estimate of the present value of the future cash flows is adjusted to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk. [IFRS 17:37]

Contractual service margin

The CSM represents the unearned profit of the group of insurance contracts that the entity will recognise as it provides services in the future. This is measured on initial recognition of a group of insurance contracts at an amount that, unless the group of contracts is onerous, results in no income or expenses arising from: [IFRS 17:38]

  • (a) the initial recognition of an amount for the FCF;
  • (b) the derecognition at that date of any asset or liability recognised for insurance acquisition cash flows; and
  • (c) any cash flows arising from the contracts in the group at that date.

Subsequent measurement

On subsequent measurement, the carrying amount of a group of insurance contracts at the end of each reporting period shall be the sum of: [IFRS 17:40]

  • (a) the liability for remaining coverage comprising:
    • (i) the FCF related to future services and;
    • (ii) the CSM of the group at that date;
  • (b) the liability for incurred claims, comprising the FCF related to past service allocated to the group at that date.

Onerous contracts

An insurance contract is onerous at initial recognition if the total of the FCF, any previously recognised acquisition cash flows and any cash flows arising from the contract at that date is a net outflow. An entity shall recognise a loss in profit or loss for the net outflow, resulting in the carrying amount of the liability for the group being equal to the FCF and the CSM of the group being zero. [IFRS 17:47]

On subsequent measurement, if a group of insurance contracts becomes onerous (or more onerous), that excess shall be recognised in profit or loss. Additionally, the CSM cannot increase and no revenue can be recognised, until the onerous amount previously recognised has been reversed in profit or loss as part of a service expense. [IFRS 17:48-49]

Premium allocation approach

An entity may simplify the measurement of the liability for remaining coverage of a group of insurance contracts using the Premium Allocation Approach (PAA) on the condition that, at the inception of the group: [IFRS 17:53]

  • (a) the entity reasonably expects that this will be a reasonable approximation of the general model, or
  • (b) the coverage period of each contract in the group is one year or less.

Where, at the inception of the group, an entity expects significant variances in the FCF during the period before a claim is incurred, such contracts are not eligible to apply the PAA. [IFRS 17:54]

Using the PAA, the liability for remaining coverage shall be initially recognised as the premiums, if any, received at initial recognition, minus any insurance acquisition cash flows. Subsequently the carrying amount of the liability is the carrying amount at the start of the reporting period plus the premiums received in the period, minus insurance acquisition cash flows, plus amortisation of acquisition cash flows, minus the amount recognised as insurance revenue for coverage provided in that period, and minus any investment component paid or transferred to the liability for incurred claims. [IFRS 17:55]

Practical expedients available under the PAA:

If insurance contracts in the group have a significant financing component, the liability for remaining coverage needs to be discounted, however, this is not required if, at initial recognition, the entity expects that the time between providing each part of the coverage and the due date of the related premium is no more than a year. [IFRS 17:56]

In applying PAA, an entity may choose to recognise any insurance acquisition cash flows as an expense when it incurs those costs, provided that the coverage period at initial recognition is no more than a year. [IFRS 17:59a]

The simplifications arising from the PAA do not apply to the measurement of the group’s liability for incurred claims, measured under the general model. However, there is no need to discount those cash flows if the balance is expected to be paid or received in one year or less from the date the claims are incurred. [IFRS 17: 59b]

Investment contracts with a DPF

An investment contract with a DPF is a financial instrument and it does not include a transfer of significant insurance risk. It is in the scope of the standard only if the issuer also issues insurance contracts. The requirements of the Standard are modified for such investment contracts. [IFRS 17:71]

Reinsurance contracts held

The requirements of the standard are modified for reinsurance contracts held.

In estimating the present value of future expected cash flows for reinsurance contracts, entities use assumptions consistent with those used for related direct insurance contracts. Additionally, estimates include the risk of reinsurer’s non-performance. [IFRS 17:63]

The risk adjustment for non-financial risk is estimated to represent the transfer of risk from the holder of the reinsurance contract to the reinsurer. [IFRS 17:64]

On initial recognition, the CSM is determined similarly to that of direct insurance contracts issued, except that the CSM represents net gain or loss on purchasing reinsurance. On initial recognition, this net gain or loss is deferred, unless the net loss relates to events that occurred before purchasing a reinsurance contract (in which case it is expensed immediately). [IFRS 17:65]

Subsequently, reinsurance contracts held are accounted similarly to insurance contracts under the general model. Changes in reinsurer’s risk of non-performance are reflected in profit or loss, and do not adjust the CSM. [IFRS 17:66-67]

Modification and derecognition

Modification of an insurance contract

If the terms of an insurance contract are modified, an entity shall derecognise the original contract and recognise the modified contract as a new contract if there is a substantive modification, based on meeting any of the specified criteria. [IFRS 17:72]

The modification is substantive if any of the following conditions are satisfied:

  • (a) if, had the modified terms been included at contract’s inception, this would have led to:
    • (i) exclusion from the Standard’s scope;
    • (ii) unbundling of different embedded derivatives;
    • (iii) redefinition of the contract boundary; or
    • (iv) the reallocation to a different group of contracts; or
  • (b) if the original contract met the definition of a direct par insurance contracts, but the modified contract no longer meets that definition, or vice versa; or
  • (c) the entity originally applied the PAA, but the contract’s modifications made it no longer eligible for it.
Derecognition

An entity shall derecognise an insurance contract when it is extinguished, or if any of the conditions of a substantive modification of an insurance contract are met. [IFRS 17:74]

Presentation in the statement of financial position

An entity shall present separately in the statement of financial position the carrying amount of groups of: [IFRS 17:78]

  • (a) insurance contracts issued that are assets;
  • (b) insurance contracts issued that are liabilities;
  • (c) reinsurance contracts held that are assets; and
  • (d) reinsurance contracts held that are liabilities.

Recognition and presentation in the statement(s) of financial performance

An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into: [IFRS 17:80]

  • (a) an insurance service result, comprising insurance revenue and insurance service expenses; and
  • (b) insurance finance income or expenses.

Income or expenses from reinsurance contracts held shall be presented separately from the expenses or income from insurance contracts issued. [IFRS 17:82]

Insurance service result

An entity shall present in profit or loss revenue arising from the groups of insurance contracts issued, and insurance service expenses arising from a group of insurance contracts it issues, comprising incurred claims and other incurred insurance service expenses. Revenue and insurance service expenses shall exclude any investment components. An entity shall not present premiums in the profit or loss, if that information is inconsistent with revenue presented. [IFRS 17:83-85]

Insurance finance income or expenses

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

  • (a) the effect of the time value of money and changes in the time value of money; and
  • (b) the effect of changes in assumptions that relate to financial risk; but
  • (c) excluding any such changes for groups of insurance contracts with direct participating insurance contracts that would instead adjust the CSM.

An entity has an accounting policy choice between including all of insurance finance income or expense for the period in profit or loss, or disaggregating it between an amount presented in profit or loss and an amount presented in other comprehensive income (“OCI”). [IFRS 17:88-90]

Under the general model, disaggregating means presenting in profit or loss an amount determined by a systematic allocation of the expected total insurance finance income or expenses over the duration of the group of contracts. On derecognition of the groups amounts remaining in OCI are reclassified to profit or loss. [IFRS 17:88, 91a]

Under the VFA, for direct par insurance contracts, only where the entity holds the underlying items, disaggregating means presenting in profit or loss as insurance finance income or expenses an amount that eliminates the accounting mismatches with the finance income or expenses arising on the underlying items. On derecognition of the groups, the amounts previously recognised in OCI remain there. [IFRS 17:89, 91b]

Disclosures

An entity shall disclose qualitative and quantitative information about: [IFRS 17:93]

  • (a) the amounts recognised in its financial statements that arise from insurance contracts;
  • (b) the significant judgements, and changes in those judgements, made when applying IFRS 17; and
  • (c) the nature and extent of the risks that arise from insurance contracts.

Effective date

IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021. Earlier application is permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have also been applied. [IFRS 17:C1]

Transition

An entity shall apply the standard retrospectively unless impracticable, in which case entities have the option of using either the modified retrospective approach or the fair value approach. [IFRS 17:C3, C5]

Under the modified retrospective approach, an entity shall utilise reasonable and supportable information and maximise the use of information that would have been used to apply a full retrospective approach, but need only use information available without undue cost or effort. Under this approach the use of hindsight is permitted, if that is the only practical source of information for the restatement of prior periods. [IFRS 17: C6-C7]

Under the fair value approach, an entity determines the CSM at the transition date as the difference between the fair value of a group of insurance contracts at that date and the FCF measured at that date. Using this approach, on transition there is no need for annual groups. [IFRS 17:C21, C24]

At the date of initial application of the Standard, those entities already applying IFRS 9 may retrospectively re-designate and reclassify financial assets held in respect of activities connected with contracts within the scope of the Standard. [IFRS 17:C30-C31]

Entities can choose not to restate IFRS 9 comparatives with any difference between the previous carrying amount of those financial assets and the carrying amount at the date of initial application recognised in the opening equity at the date of initial application. Any restatements of prior periods must reflect all the requirements of IFRS 9. [IFRS 17:C31]  

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