Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p12
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 12/101)
Character Range: 63243–66389

Entities in 2017; and

          (e) the NZASB issuing Exposure Draft ED 2018-7 PBE IFRS 17 Insurance Contracts in 2018.

     Both Boards have considered respondents' feedback from all of the above consultations.

     BC15            The main focus of this Basis for Conclusions is on the most recent due process. The AASB project summary contains a summary of the project history, including the earlier due process stages of the project.

     BC16            At the time of preparing this Basis for Conclusions, the IPSASB was not considering the development of an insurance Accounting Standard based on IFRS 17.

Sub-grouping of contracts (modifications to paragraphs 14, 16 and 22)

Requirements under (superseded) AASB 1023/PBE IFRS 4

     BC17            The Boards observed that, under AASB 1023/PBE IFRS 4, the liability for remaining coverage is measured as the amount of premium received and/or receivable for the contract period that remains unearned. An insurer is required to apply a Liability Adequacy Test to the carrying amount of the liability for remaining coverage (represented by 'unearned premium') when there is an indication that the liability may be inadequate [AASB 1023.9.1/PBE IFRS 4 (Appendix D.9.1)]. The Liability Adequacy Test is applied at a portfolio of contracts level. The Boards noted that, in the case of some public sector entities, there is only one portfolio of contracts and, for those entities, the Liability Adequacy Test is effectively conducted at the whole-of-entity level.

     BC18            The Liability Adequacy Test involves comparing:

          (a)                    the amount of the liability for remaining coverage recognised on the statement of financial position; with

          (b)                   current estimates of the present value of the expected future cash flows relating to future claims arising from existing insurance contracts, plus a risk margin that reflects the inherent uncertainty in the central estimate.

     There is a deficiency if (a) is less than (b), in which case an additional 'unexpired risk liability' is recognised for the deficiency,[3] which is also recognised immediately as a loss.[4]

Requirements in AASB 17/PBE IFRS 17: Sub-grouping of onerous versus non-onerous contracts

     BC19            AASB 17/PBE IFRS 17 has a much greater emphasis (than AASB 1023/PBE IFRS 4) on identifying onerous contracts and their identification has fundamental impacts on a wide range of accounting outcomes. In particular, at initial recognition, insurance contracts within each portfolio of contracts must be sub-grouped as:

          (a) contracts that are onerous at initial recognition, if any;

          (b) contracts that have no significant possibility of becoming onerous subsequently, if any; and

          (c) other (non-onerous) contracts [AASB 17/PBE IFRS 17.16].

     BC20            The Boards noted the following:

          (a) In the private for-profit sector,[5] the presumption is that insurers issue insurance contracts that are intended to be profitable. In practice, the profit component should act as a 'buffer' to any liability