Insurance Contracts
Project summary
Project contact
The objective of the project is to develop a revised standard that would
replace the existing AASB 4 Insurance Contracts, AASB 1023 General
Insurance Contracts and AASB 1038 Life Insurance Contracts with a view
to enhancing comparability of the accounting between products,
companies and across jurisdictions.
Angus Thomson
Research Director
[email protected]
Project priority: High
Issued documents
Project status



ED 244 Insurance Contracts
(June 2013)
ED 244 closed for comment
Redeliberations began
Q4 2013

Link to IASB project page
AASB outreach
Board deliberations
AASB communications
 Comment letters received on
ED 244
 AASB staff notes from
Roundtables on ED 244
(October 2013)


AASB Action Alert Update and
AASB Board papers

Letter from AASB Acting Chair
to IASB Chairman (July 2014)
AASB comment letter to IASB
on ED/2013/7 Insurance
Contracts (October 2013)
Project news
Date
News
9 July 2015
July 2015 Action Alert
3 September 2014
September 2014 Action Alert
16–17 July 2014
July 2014 Action Alert
28–29 May 2014
May 2014 Action Alert
8–9 April 2014
April 2014 Action Alert
13 February 2014
February 2014 Action Alert
The staff of the AASB have prepared this summary for information purposes only. The Board decisions
described are tentative and do not change current accounting pronouncements unless otherwise indicated.
Official positions of the AASB are determined only after extensive due process and deliberations. While this
summary is regularly updated, it does not provide a comprehensive review or statement of events and
should not be treated as such.
Last updated: 13 July 2015
23–24 October 2013
October 2013 Action Alert
AASB Action Alert Update, Minutes and Board Papers
Meeting Date
Update
July 2015
The Board noted AASB-NZASB staff papers being presented at the July 2015 ASAF meeting
on the pattern of recognition of the contractual service margin (CSM) and the use of
historical discount rates in measuring some components of insurance liabilities. These
issues were identified in recent outreach as the key concerns of Australian and New
Zealand stakeholders.
The Board observed that the CSM, which represents a stand-ready obligation, could have a
different value to a policyholder over the life of some contracts and that the pattern of that
service should drive CSM recognition in those cases. Recognition based on time alone,
although providing consistent accounting requirements for all contracts, would not lead to
comparable outcomes if different contracts are different in substance. In particular, the
Board noted that in the Framework (and IASB ED/2015/3 Conceptual Framework for
Financial Reporting) consistency and comparability are not the same and, for information to
be comparable, like things must look alike and different things must look different.
In relation to the use of discount rates in measuring the components of insurance liabilities,
members expressed support for having a ‘purer’ current value model for measuring
insurance liabilities based on current cash flows and current discount rates, consistent with
the AASB-NZASB staff paper for the ASAF meeting.
The Board also noted that under the IASB’s model, a movement would need to be disclosed
of the impact of a difference between the contract inception-date discount rate and the
current discount rate, which over a multi-year contract can give rise to disclosures in years
when there is no change in the current rate from the beginning and end of the current
period. Insurers would also be required to accrete interest on the CSM at the contract
inception-date discount rate.
7.1
Memorandum from Angus Thomson and David Ji dated 23 June 2015 re Insurance
papers for ASAF;
7.2
AASB-NZASB staff memorandum dated 18 June 2015 to ASAF members and IASB
members;
7.3
AASB-NZASB staff paper: Contractual Service Margin recognition – non-participating
insurance contracts; and
7.4
AASB-NZASB staff paper: Disclosure of discount rate impacts and accretion of
interest on the Contractual Service Margin – non-participating insurance contracts.
September 2014 The Board received an update on recent tentative decisions made by the IASB on its
Insurance Contracts project.
The Board decided the Acting Chair should raise concerns with the IASB at the next ASAF
meeting in relation to the tentative decisions made at the IASB’s July 2014 meeting
regarding use of locked-in discount rates for disclosure and interest rate accretion. The
Board noted that its concerns relate to having an historical cost component (discount rates
at inception) in an otherwise current value measure, and the fact that this would require
entities to track rates from inception. Systems and processes would therefore need to be in
place to capture the amounts relating to both current and historical discount rates. The
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AASB Action Alert Update, Minutes and Board Papers
Meeting Date
Update
Board also noted its concern that the disclosures relating to amounts based on discount
rates at inception would be inconsistent with the recognition and measurement accounting
policy of an entity that chooses to recognise the impact of changing discount rates in profit
or loss.
12.1
a memorandum from Sue Lightfoot dated 19 August 2014 re: Insurance Contracts
(agenda paper 12.1);
12.2
Appendix to Agenda Paper 12.1 (agenda paper 12.2); and
12.3
A letter from the IASB Chairman to the AASB Acting Chair dated 24 July 2014 re:
Recognition of Contractual Service Margin (agenda paper 12.3).
Other than these concerns, the Board decided there were no further issues that need to be
raised again with the IASB at this stage.
July 2014
The Board received an update on recent tentative decisions made by the IASB on its
Insurance Contracts project.
The Board noted its July 2014 letter on IASB tentative decisions about allocating the
contractual service margin based on the passage of time and the Board’s concern about the
impact for contracts exposing an insurer to risk on a non-linear basis.
The Board noted the following topics discussed by the IASB at its June 2014 meeting:
(a)
contracts with participating contracts;
(b)
discount rates when there is no observable market;
(c)
asymmetric treatment of reinsurance gains; and
(d)
level of aggregation.
13.1
a memorandum from Sue Lightfoot dated 1 July 2014 re: Insurance Contracts
(agenda paper 13.1); and
13.2
a letter from AASB Acting Chair to the IASB Chairman dated 14 July re IASB
Tentative Decision – Insurance Contracts Recognition of Contractual Service Margin
(agenda paper 13.2).
The Board decided there were no further issues that need to be raised with the IASB at this
stage.
May 2014
The Board received an update on recent tentative decisions made by the IASB on its
Insurance Contracts project.
The Board had written to the IASB in late April expressing concern about the IASB’s
tentative decision to require, for all portfolios of insurance contracts, disclosure of the
difference between the present value of changes in expected cash flows that adjust the
contractual service margin (CSM) in a reporting period:
(a)
when measured using discount rates that applied on initial recognition of insurance
contracts; and
(b)
when measured at current rates.
The Board noted the response from the IASB Chairman indicated that the IASB intends to
reconsider the use of discount rates that applied on initial recognition of insurance
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AASB Action Alert Update, Minutes and Board Papers
Meeting Date
Update
contracts, which may lead to a change in the disclosure requirements. The Board will
continue to monitor the IASB deliberations on this issue.
The Board decided to raise concerns with the IASB in relation to three tentative decisions
made at the IASB’s April and May 2014 meetings regarding non-participating contracts.
Those tentative decisions are:
(a)
not to re-consider disclosures in future meetings;
(b)
not to consider the unbundling-lapse together ‘rule’ in future meetings; and
(c)
to clarify that the service represented by the CSM is insurance coverage that is
provided on the basis of the passage of time and reflects the number of contracts in
force.
In relation to the third concern above, the Board expressed the view that the IASB's
decision to use coverage period for allocating CSM (for non-participating businesses) has
three flaws or weaknesses:
(a)
the allocation would not reflect a pattern of meeting a stand-ready obligation (for
example, for Lenders Mortgage Insurance where the service is typically non-linear);
(b)
the allocation would be inconsistent with the outcome under the simplified
premium allocation approach; and
(c)
insurers do not currently perform this calculation.
The Board considered that using value of expected claims would address all of the above
flaws or weaknesses and this approach should be raised with the IASB.
The Board also noted that accounting for participating contracts is on the IASB agenda for
the June 2014 Accounting Standards Advisory Forum (ASAF) meeting.
April 2014
The Board received an update on recent tentative decisions made by the IASB on its
Insurance Contracts project.
The Board noted the tentative decisions the IASB made at its March 2014 meeting. Other
than its concern noted below, the Board strongly supports the tentative decisions made by
the IASB concerning unlocking the contractual service margin and recognising the effects of
changes in the discount rates in other comprehensive income.
The Board decided to write to the IASB concerning the IASB’s tentative decision to require
disclosure of the difference between the present value of changes in expected cash flows
that adjust the contractual service margin in a reporting period when measured using
discount rates that applied on initial recognition of insurance contracts, and the present
value of changes in expected cash flows that adjust the contractual service margin when
measured at current rates, for all portfolios of insurance contracts.
The Board expressed concern that although, based on the IASB’s tentative decisions,
entities would be able to choose to present changes in the measurement of insurance
contract liabilities in profit or loss, the disclosure requirements would still require the
discount rate at inception of insurance contracts to be tracked for disclosure purposes.
Systems and processes would therefore need to be in place to capture the amount. The
AASB also expressed concern that such disclosure is inconsistent with the recognition and
measurement accounting policy of an entity that chooses to recognise the amount in profit
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AASB Action Alert Update, Minutes and Board Papers
Meeting Date
February 2014
Update
or loss.
9.1
a memorandum from Sue Lightfoot dated 24 March re: Insurance Contracts Project
Update (tabled agenda paper 9.1); and
9.2
Insurance – Project Update (agenda paper 9.2).
The Board received an update on the IASB’s Insurance Contracts project. The Board noted
that in the January IASB meeting, the IASB staff provided feedback on ED/2013/7 from
comment letters, outreach and fieldwork.
The Board noted that, although many respondents supported much of the revised
proposals, there remain a number of areas of concern, including the complexity of the
proposals (whether specific proposals or the proposals as a whole) and concerns about
accounting mismatches.
8.1
October 2013
The Board had before it a memorandum from Sue Lightfoot dated 28 January 2014
re Insurance Contracts - Project Update (agenda paper 8.1);
The Board considered the feedback received on AASB ED 244 (which incorporates IASB
ED/2013/7) from:
(a)
Australian constituents through targeted liaison;
(b)
a Roundtable conducted on 3 September 2013 via video-conference in Sydney and
London involving some IASB members and staff; and
(c)
a Roundtable on 12 September 2013 via video-conference in Melbourne and
Auckland in association with the New Zealand Accounting Standards Board.
In respect of its submission to the IASB on ED/2013/7, the Board decided to express strong
support for the IASB to move to complete the project, and overall support for the exposure
draft proposals and on those matters on which comment is not formally being sought by
the IASB.
In particular, the Board strongly supports the revised proposals concerning:
(a)
‘unlocking’ the contractual service margin (CSM) by remeasuring fulfilment cash
flows using current information;
(b)
the principle that there is one measurement model for insurance contract liabilities
and that the simplified approach for measuring insurance contract liabilities (i.e. the
premium allocation approach or PAA) is a reasonable approximation of the ‘full’
approach for measuring insurance contract liabilities (i.e. the building block
approach or BBA) and alignment of the related disclosures;
(c)
the way in which the boundary of an insurance contract is determined; and
(d)
transition.
However, the Board has significant concerns about some of the specific proposals, in
particular:
(a)
the proposal to use historical discount rates to segregate the result between profit
or loss and other comprehensive income (OCI). The Board supports retaining a
current value measurement approach with an option for entities to elect to present
amounts due to changes in discount rates in OCI. The Board believes that such an
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AASB Action Alert Update, Minutes and Board Papers
Meeting Date
Update
option should be available for entities with insurance activities on transition to the
revised insurance contracts standard;
(b)
the proposal to require ‘mirror’ accounting for particular types of contracts. The
Board supports permitting mirroring as a non-mandatory accounting treatment for
contracts that involve complexities such as guarantees, delayed profit share
allocations and where benefits can be provided to policyholders in a variety of
forms. The Board noted that, although the proposals in relation to mirroring seem
sound in principle, it expects that the accounting would be overly complex to apply
and for users to understand; and
(c)
the proposed disclosures, which the Board regards as too detailed and too onerous,
in particular concerning the requirements for reconciliations. The Board supports
disclosure of the key amounts underlying the changes in insurance liabilities for the
period and asked staff to consider whether this type of disclosure might mitigate
the need for many of the proposed disclosures.
The Board had before it:
10.1
a memorandum from Sue Lightfoot dated 9 October 2013 re Insurance Contracts
(agenda paper 10.1);
10.2
notes from Roundtables on ED 244 Insurance Contracts (agenda paper 10.2);
10.3
Draft AASB comment letter to IASB re IASB ED/2013/7 Insurance Contracts (agenda
paper 10.3);
10.4
Submissions on ED 244 [subs 1-6] (agenda paper 10.4); and
10.4
Submissions on ED 244 [sub 7] (tabled agenda paper 10.4).
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