Example presentation of the Statement of Comprehensive Income in compliance with the Exposure Draft on Insurance Contracts issued in July 2010
Example presentation of the Statement of Comprehensive Income in compliance with the Exposure Draft on Insurance Contracts issued in July 2010 Executive summary
The International Accounting Standards Board (IASB) issuedan Exposure Draft (ED) on 30 July 2010 which, if adopted, will replace IFRS 4 Insurance Contracts (IFRS 4). The ED seeks to establish a single consistent recognition and measurement model, with complementary presentation and disclosure requirements aimed at enhancing transparency, for all insurance contracts issued by entities reporting under International Financial Reporting Standards. Thispublication provides an overview of the presentation model and speciﬁc disclosures required by the ED. It highlights the main differences with the previous presentation requirements under IFRS 4, and considers some possible implementation issues. It does not attempt to highlight the differences between the current and the proposed measurement model. The analysis is based on a ﬁctitious composite insurer(Insurance Group Ltd.) and seeks to illustrate how the current presentation of the Statement of Comprehensive Income under IFRS can be transformed into the presentation model that the ED proposes. The analysis also seeks to show how the presentation within the Statement of Comprehensive Income interacts with the reconciliation of insurance contract balances – a new disclosure requirement proposedin the ED. The proposed presentation model under the ED (the summarised margin presentation) intends to present the drivers of underwriting performance as a means to provide insight into the accuracy and reliability of the estimated cash ﬂows for the insurance contracts. The traditional ﬁnancial performance indicators such as premium volume, insurance beneﬁts and claims, may now be presented inthe ﬁnancial statement footnote, Reconciliation of Contract Balances. Should this model be adopted in the new standard, users of ﬁnancial reporting, including analysts and regulators who are more familiar with the concepts of premiums, claims and beneﬁts, might need additional guidance to understand the key ﬁnancial indicators, especially the underwriting performance. As stated in our commentletter to the IASB on the ED, we believe that a summarised margin presentation will not provide more useful information to all users of ﬁnancial statements because it will not convey adequate information about an insurer’s operations. Please see our comment letter, submitted to the IASB on 30 November 2010.
The ED proposes that an insurer measures insurance liabilities using amodel based on the ‘present value of the fulﬁlment cash ﬂows’ plus a residual margin. Building on the proposed measurement model, the presentation model seeks to reﬂect the key ﬁnancial indicators of an insurance entity: underwriting margin, experience adjustments, changes in estimates and interest on insurance contract liabilities. This differs signiﬁcantly from the presentation format currentlyapplied by insurers. IFRS 4 and IAS 1 Presentation of Financial Statements are largely silent on the format of the Statement of Comprehensive Income for insurers. However, most insurers currently apply a revenue-based model in which premium volume and changes in insurance liabilities take centre stage. The ED presentation model is based on the summarised margin approach. Premiums, claims and expenses(including acquisition costs) that relate to the fulﬁlment of insurance contracts are no longer shown on the face of the Statement of Comprehensive Income. A modiﬁed model is proposed in the ED for short-duration contracts that meet certain criteria. The illustration below reﬂects the presentation requirements of this modiﬁed model as well.
The illustration begins with a...