IFRS is easy

Sunday, August 13, 2023

IFRS 9 Masterclass - Understanding Financial Instruments

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This IFRS 9 Masterclass on understanding the basics of financial instruments introduces you to IFRS 9 in an uncommon way, through the use of several practical examples, free IFRS 9 documents and thought leadership files, excel file computation, use of related video documentaries and the fact that I am virtually taking you through each learning step from the perspective of a Big 4 Consultant that has worked in 3 of the Big 4 Audit firms.

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Thursday, December 22, 2022

Recognition date under IFRS 17 Insurance Contracts

Welcome to IFRS is easy!

IFRS 17 Insurance contracts - Part 4

I raised a poll on IFRS is easy's LinkedIn page and here is the result.

Note that the results here are not necessarily correct. Please continue reading for the correct answer.

Say today is 18 December and you approach an airline (whose accounting year end is 31 December) to book a flight that you intend to take on 2 January. The flight takes approximately 24 hours, so you get to your destination on 3 January. What date do you think the airline will recognize revenue?

The above explains why recognition date is an important concept in all accounting standards.

Under IFRS 9, on the day you become a party to the contractual provisions of a financial instrument, you are required to start recognizing the instrument in your books. So what does IFRS 17 say about recognition?

Now let's go back to our poll.

IFRS 17 extends its requirements because of the peculiarity that comes with transacting with policyholders.

The standard requires companies to recognise a group of insurance contracts issued from the EARLIEST of the following:

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

The coverage period starting from 1 Jan is the earliest date in the poll options.

Yes! You made it to the end.

I will be happy to receive any questions you may have about the topic discussed in this blog post.

Share in the comment section about the misconceptions you once had about IFRS 17.

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Written by:

Adedamola Otun

For: IFRS IS EASY

Measurement components of IFRS 17 Insurance contracts

Welcome to IFRS is easy!

IFRS 17 Insurance contracts - Part 3

I raised a poll on IFRS is easy's LinkedIn page and here is the result.

Note that the results here are not necessarily correct. Please continue reading for the correct answer.

If you are familair with IFRS 9, you most likely still remember the components that we consider in testing for impairment on financial assets.

To jug your memory, they are Exposure at Default (EAD), Loss Given Default (LGD) and Probability of Default (PD). I will discuss these and the required computations in later posts after completing the IFRS 17 introduction series.

There are 3 major components in measuring insurance contracts:

1. Present value of future cash flows

2. Risk adjustment

3. Contractual service margin

Now let's talk briefly through them.

Present value of future cash flows

When an insurance company receives premiums from the policyholder, many times, the premiums are not one-off. They are often annual payments made by the policyholder over the insurance coverage period. And as you already know, the time value of money always kicks in when cash flows are over a period of time. This is the reason why we are talking about present value.

Simply, the present value of future cash flows is the financial risk of the insurance contract. It represents the discounted inflows (premiums) and outflows (expected claims to be paid to the policyholder, acquisition cost incurred in winning over the policyholder and other direct expenses).

Risk adjustment

This is the compensation to the insurer for bearing the non-financial risk of insuring the policyholder.

Contractual service margin

This is the unearned profit of the insurer that is amortised over the insurance coverage period.

There's a fourth guy in the wheel called the "Fulfillment cash flows". This is simply the addition of the present value of future cash flows and the risk adjustment.