Module 10

Accounting for Insurance Contracts; Deferred Tax; and Earnings per Share
1. Define the Accounting for Insurance Contracts and Deferred Tax

The Insurance Contracts is a “contract under which one party (the insurer) accepts
significant insurance risk from another party (the policyholder) by agreeing to compensate
the policyholder if a specified uncertain future event (the insured event) adversely affects
the policyholder.”

Deferred tax is divided into two which is deferred tax liability and deferred tax asset.
Deferred tax liability is the amount of income tax payable in future periods with respect to a
taxable temporary difference. It also the deferred tax consequences attributable to taxable
temporary difference or future taxable amount. Deferred tax asset is the amount of income
tax recoverable in the future periods with respect to deductible temporary difference and
operating loss carry forward. In other words, a deferred tax asset is the deferred tax
consequence attributable to a future deductible amount and operating loss carry forward.

2. Explain the concept of earnings per share.

Earning per share is the amount attributable to every share of ordinary share outstanding
during the period. Thus, the earnings per share information pertain only to ordinary share.
Earnings per share is not computed for preference share because there is a fixed rate return for
such share.

3. Discuss the measurement and recognition for Insurance Contracts and Deferred Tax.

Recognition of Insurance Contracts

An entity shall recognize a group of insurance contracts issued from the earliest of the
following:

a. The beginning of the coverage period of the group of contracts

b. The date when the first payment from a policyholder in the group becomes due

c. For a group of onerous contracts when the group becomes onerous.

Measurement of Insurance Contracts

On initial recognition, an entity shall measure a group of insurance contracts at the total of
the fulfilment of cash flows and contractual margin. Subsequently, the carrying amount of a
group insurance contract at the end of each reporting period shall be the sum of the liability for
remaining coverage and the liability for incurred claims.

Recognition of Deferred tax liability

PAS 12, paragraph 15, provides that deferred tax liability shall be recognized for all taxable
temporary differences. However, a deferred tax liability is not recognized when the taxable
temporary difference arises from:

A. Goodwill resulting from a business combination and which is non-deductible for tax purposes.
B. Initial recognition of an asset or liability in a transaction that is not a business combination
and affects neither accounting income nor taxable income.
C. Undistributed profit of subsidiary, associate, or joint venture when the parent, investor or
venturer is able to control the timing of the reversal of the temporary difference.

Recognition of Deferred tax asset

PAS 12, paragraph 24, provides that a deferred tax asset shall be recognized for all
deductible temporary differences and operating loss carry forward when it is probable that
taxable income will be available against which the deferred tax asset can be used.

Operating loss carry forward is an excess of tax deductions over gross income in a year that
may be carried forward to reduce taxable income in a future year.

Certain entities registered with the Board of Investments are permitted to carry over net
operating loss for tax purposes subject to limitations of the relevant law and implementing
regulations of the Board of Investments.