Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p37
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 37/101)
Character Range: 132771–135882

user may enjoy from having an entity apply the general measurement model instead of the premium allocation approach would justify the additional costs; and

          (c)                    the possible extent of costs associated with testing for eligibility for the premium allocation approach even when the general measurement model is not eventually applied.

     BC104        The Boards reflected on the factors relevant to determining whether the general measurement model is suitable for application by public sector entities, including the following.

          (a)                    The modifications relating to sub-grouping, which mean a portfolio of contracts is expected to be the main unit of account for public sector entities.

          (b)                   The key difference between the general measurement model and premium allocation approach is the contractual service margin that represents unearned profit at contract inception – yet most public sector insurance arrangements are break even or loss making. The contractual service margin accretes interest over time based on the initial recognition date discount rate, whereas, other cash flows are discounted at current rates.

          (c)                    For public sector arrangements, there would typically be a loss component under the general measurement model, not a contractual service margin. A loss component would need to be tracked so that changes in cash flows can be allocated systematically between the loss component and the liability for remaining coverage excluding the loss component. However, this would be done on a portfolio basis and, unless, the whole portfolio became profitable, all cash flows would be discounted at current rates.

          (d)                   Similar losses would typically still be recognised using the premium allocation approach because the deferred premiums received would need to be compared with an up-to-date assessment of expected cash flows, which is essentially the same as the existing accounting under the AASB 1023/PBE IFRS 4 Liability Adequacy Test. There would typically be only a small likelihood of a whole portfolio being profitable and, therefore, a different pattern of profit and loss recognition emerging under the general measurement model compared with the premium allocation approach.

          (e)                    In the atypical case that contracts issued by public sector entities would generate a contractual service margin under the general measurement model, the entity would need to determine a pattern of coverage to allocate the margin, which may be different from the pattern of release from risk and two components of revenue (coverage and release of risk) that need to be tracked. It seems unlikely that the users of the public sector entities' financial statements would place much value on having two separate patterns for revenue recognition. That is, it seems likely that users would be satisfied with all revenue being recognised based on the passage of time or, if significantly different from the passage of time, based on the pattern