Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p48
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 48/101)
Character Range: 163297–166458

entities would be aiming to break even over the long term, rather than earn profits or incur losses. In contrast, private sector entities would typically aim to profit from bearing risk. However, the Boards also acknowledged that any tendency of risk adjustments to create short term losses and longer-term gains would generally be a 'once-off' impact and would not usually affect ongoing reported financial performance unless the volumes of transactions are volatile year-on-year.

          (g)                   A risk adjustment could be used to introduce bias into the measurement of insurance contracts [IFRS 17.BC210(g)]. This criticism is no more relevant in the public sector than it is for private sector insurers.

Risk adjustment measurement proposal in AASB ED 319

     BC135        The AASB observed that:

          (a) most public sector entities do not seek to profit from bearing insurance risk;

          (b) under AASB 17, public sector entities might determine a zero risk adjustment on the basis that they are monopolies and can adjust future prices to make up for higher-than-expected past claims;

          (c) under AASB 17, public sector entities might determine a risk adjustment based on a particular level of adequacy based on their facts and circumstances; and

          (d) providing a benchmark confidence level, even as a rebuttable presumption, is not consistent with principle-based standard setting.

     BC136        Accordingly, the AASB decided on Approach 1 and to propose not making public-sector-specific modifications to the requirement to include a risk adjustment in measuring liabilities for incurred claims.

Risk adjustment measurement proposal in NZASB ED 2022-3

     BC137        A primary concern for the NZASB was that entities, their advisors and auditors might expend considerable effort to identify and measure a relevant compensation-based risk adjustment for little benefit to users.

     BC138        The NZASB observed that existing practice under AASB 1023/PBE IFRS 4 has developed over many years and most public sector entities applying these standards benchmark to a 75% confidence level. The benchmark seems to have become widely accepted (including outside Australia and New Zealand) because it is:

          (a)                    relatively easy (and low cost) to measure;[19]

          (b)                   relatively easy to understand; and

          (c)                    financial statement users and entity managements have found it informative.

     BC139        The NZASB considered that the 75% benchmark has been an effective and low-cost way for public sector entities to measure risk margins under AASB 1023/PBE IFRS 4. Nevertheless, the NZASB also acknowledged that there may be circumstances in which a benchmark other than a 75% confidence level is more relevant and that entities should be able to rebut the 75% benchmark.

     BC140        Accordingly, the NZASB decided on Approach 3 and to propose a public-sector-specific modification of a rebuttable presumption that risk adjustments are measured at an amount that achieves a 75% confidence level in respect of