IFRS 4 Insurance Contracts
This standard will be superseded by IFRS 17.
IFRS 4 sets rules for reporting insurance contracts for companies that issue them and haven't adopted IFRS 17 yet.
An insurance contract is an agreement between two parties. The insurer agrees to pay the policyholder if something bad happens in the future. This payment is made only if the event is covered by the insurance.
IFRS 4 applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other Standards. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IFRS 9. Furthermore, it does not address accounting by policyholders.
IFRS 4 exempts an insurer temporarily (ie until it adopts IFRS 17) from some requirements of other Standards, including the requirement to consider the Conceptual Framework in selecting accounting policies for insurance contracts. However, IFRS 4:
- prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions);
- requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets; and
- requires an insurer to keep insurance liabilities in its statement of financial position until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against related reinsurance assets.
A 2016 amendment to IFRS 4 addresses some consequences of applying IFRS 9 before an entity adopts IFRS 17.
Frequently asked questions
What is IFRS 4 in simple terms
IFRS 4 introduced accounting rules to ensure insurance liabilities are enough and reinsurance assets are not damaged and sufficiently covered. It also prohibits setting up a liability for insurance claims that have not been incurred.
Is IFRS 4 still applicable
IFRS 4 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005. IFRS 4 will be replaced by IFRS 17 as of 1 January 2023.
Why replace IFRS 4 with IFRS 17
With IFRS 4 everything is implicitly included under change in reserves. Under IFRS 17 there is an option to show financial impacts either in the Profit and Loss Account or Other Comprehensive Income. The rationale behind this is to limit the volatile effect on Profit and Loss Accounts.
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