IFRS 4 - Insurance Contracts (detailed review)

Wednesday, May 7, 2014 Print Email


This standard prescribes the guide lines for the accounting treatment of insurance contracts which are issued by entity as insurer along with related disclosure requirements:

  • Which reflects amounts recognized in the financial statements of insurer relating to such insurance contracts, and
  • To enable the users of financial statements to assess the timing, amount and any uncertainties relating to the cash flows of such insurance contracts


The requirements of this standard are applicable to the insurance contracts issued by insurer; however this standard does not deal with:

  • The accounting requirements of policy holder
  • Financial assets and liabilities held by insurer which are covered under IFRS 9
  • Direct insurance contract held by the insurer i.e. the insurance contract in which the entity is a policy holder
  • To the financial guarantee contracts unless the entity has elected that it treats such contracts as insurance contracts


Insurance Contracts

A contract under which one party (insurer) takes on substantial insurance risk from another party (policy holder) and agrees to compensate the policy holder if a specified future event takes place which adversely affects the policy holder


The party which agrees under an insurance contract, to compensate the other party (policyholder) if a specified insured event occurs is termed as insurer

Policy Holder

The party which has the right to compensation by another party (insurer) under an insurance contract, if a specified insured event occurs is termed as policy holder

Reinsurance Contract

It is a insurance contract under which one insurer (the reinsurer) agrees to compensate another insurer for losses on one or more insurance contracts issued by that insurer

Reinsurance Assets

It is the net contractual right of the party (insurer) under a reinsurance contract.

Recognition and Measurement

This standard requires the insurer to account for the issued insurance contracts as follows:

  • The insurer should not recognize any provision for the possible claims relating to the insurance contracts which are not in existence at the end of accounting period
  • The insurer should measure its recognized liabilities relating to the estimated future cash flows in respect of insurance contracts using the ‘minimum liability adequacy test’ at each reporting date to ensure the reasonableness of the liability recognized for such insurance contracts
  • The insurer is required to consider all the estimated future cash flows under the insurance contract when applying the minimum liability adequacy test, any deficiency in the recognized liability compared to the liability as per minimum liability adequacy test will be reported to statement of profit or loss
  • The insurer will derecognize the liability relating to insurance contracts when it is settled, expired or cancelled
  • The insurer should assess whether its reinsurance assets are subject to any impairment
  • This standard allows that the insurer can change its accounting policy in respect of insurance contracts, if it will result in more reliable and relevant information being reflected in financial statements


The standard is requires the insurer to disclose the following:

  • The details about the nature and extent of risk from the insurance contracts issue bu insurer
  • The policies used by the insurer to manage those risks from insurance contract
  • The information about the reinsurance contracts
  • The details about the amounts recognized in financial statements relating to the insurance contract issued by insurer
  • Accounting policy to account for the liability under insurance contract and relating reinsurance assets
  • Any gain or loss relating to the reinsurance asset
  • The assumptions used by the insurer in determination of liability under the insurance contract which are recognized in the financial statements of the insurer

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