IFRS 4

IFRS 4 is an International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) providing guidance for the accounting of insurance contracts. The standard was issued in March 2004, and was amended in 2005 to clarify that the standard covers most financial guarantee contracts. ^[1] Paragraph 35 of IFRS also applies the standard to financial instruments with discretionary participation features. ^{[1] [2]}

IFRS 4 was intended to provide limited improvements to accounting for insurance contracts until the IASB completed the second, more comprehensive phase of its insurance accounting project. ^{[1] [3]} The replacement standard, IFRS 17 was issued in May 2017 and will become effective on January 1, 2023, supplanting IFRS 4 at that time. ^[4]

Provisions

Generally, IFRS 4 permitted companies to continue previous accounting practices for insurance contracts, but did enhance the disclosure requirements. ^[3] IFRS 4 defines an insurance contract as a "contract under which one party (the insurer) 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." ^{[2] [5]} The standard provides definitions to distinguish "insurance risk" from "financial risk." ^[2] IFRS 4 exempts insurance companies from certain other IFRS standards, including IAS 8 on changes in accounting policies, until phase II is complete, but IFRS 4 does introduce its own requirements for changes in accounting policies. ^[5]

Among the accounting requirements IFRS 4 introduced are a requirement to test that insurance liabilities are adequate and that reinsurance assets are not impaired. ^{[2] [5]} It also prohibits setting up a liability for insurance claims that have not been incurred. ^[5] Although insurance contracts are subject to the requirements of IFRS 9 that embedded derivatives within other contracts be measured separately at fair value, IFRS 4 makes a limited exception for embedded derivatives that meet the definition of an insurance contract. ^{[2] [5]} Such embedded derivatives within insurance contracts do not need to be measured separately. ^{[2] [5]}

Criticism

6 of the 14 IASB board members dissented from issuing IFRS 4. ^[6] Board members James J. Leisenring, Mary E. Barth, Robert P. Garnett, Gilbert Gélard and John T. Smith dissented because they disagreed with the temporary exemption from the accounting policy changes of IAS 8. ^[6] Leisenring, Barth, Garnett and Smith further objected to the certain practices permitted by IFRS 4 related to the accounting for assets backing insurance companies, including "shadow accounting." ^[6] Leisenring, Barth and Smith also objected to the inclusion of financial instruments with discretionary participation features within IFRS 4 rather than within the accounting guidance for financial instruments (which at the time was IAS 39), and Smith raised other objections as well, including the exception to separately measure embedded derivatives that meet the definition of insurance. ^[6] Board member Tatsumi Yamada dissented separately because he did not believe that IFRS 4 appropriately addressed mismatches between the accounting for insurance contracts and the assets backing the insurance contracts. ^[6]

Leisenring continued to criticize IFRS 4 after its issue, including a statement that "IFRS 4 is a gift of the IASB to the insurance community that keeps on giving." ^[7]

Disclosure Requirements (IFRS 4)

IFRS 4 requires an entity to disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts and enables users to understand the amount, timing, and uncertainty of future cash flows. ^[8]

Paragraph	Category	Disclosure Requirement	Description / Examples
IFRS 4.37(a)	Accounting Policies	Recognition and Measurement	The accounting policies for insurance contracts and related assets, liabilities, income, and expense.
IFRS 4.37(b)	Recognized Amounts	Assets and Liabilities	The recognized assets, liabilities, income, and expense (and, if the insurer presents its cash flow statement using the direct method, cash flows) arising from insurance contracts.
IFRS 4.38	Risk Management	Nature and Extent of Risks	Information that helps users understand the nature and extent of risks arising from insurance contracts.
IFRS 4.39(a)		Risk Sensitivity	A sensitivity analysis showing how profit or loss and equity would have been affected by changes in relevant risk variables (e.g., interest rates, mortality).
IFRS 4.39(c)		Credit & Liquidity Risk	Information about credit risk, liquidity risk, and market risk that would be required if the insurance contracts were within the scope of IFRS 7.
IFRS 4.39(e)	Claims Development	Historical Accuracy	Actual claims compared with previous estimates (claims development table) to show the insurer's ability to estimate future costs.
IFRS 4.37(c)	Key Assumptions	Valuation Inputs	The process used to determine the assumptions that have the greatest effect on the measurement of recognized amounts.

References

1. "IFRS 4" (PDF). IASB . Retrieved 2014-09-13.
2. Frasca, R.; et al. (March 2011). "Actuarial Practices Relating to Accounting for Insurance Pursuant to International Financial Reporting Standards" (PDF). American Academy of Actuaries . Retrieved 2014-09-13.
3. Arthur, P. (May 2005). "Accounting challenges faced by the insurance industry" (PDF). Ernst & Young. Archived from the original on April 26, 2006. Retrieved 2014-09-13.
4. Cohn, Michael (May 17, 2017). "IASB releases insurance contracts standard". Accounting Today. Retrieved 2017-05-17.
5. "IFRS 4 — Insurance Contracts". Deloitte . Retrieved 2014-09-13.
6. "Dissenting opinions on IFRS 4" (PDF). IFRS 4 Basis for Conclusions. pp. B462 –B466. Retrieved 2014-09-13.
7. "Swiss Insurance Club IFRS 4 Phase II" (PDF). PwC. June 2008. p. 6. Retrieved 2014-09-13.
8. IASB. IFRS 4, Paragraph 36-39.