Insurance Contracts

1. An Insurance contract can contain both deposit and insurance elements. An example might be a
reinsurance contract where the cedent receives a repayment of the premiums at a future time if there are
no claims under the contract. Effectively this constitutes a loan by the cedent that will be repaid in the
future. PFRS 4 requires that:
•Each payment by the cedent is accounted for as a loan advance and as a payment for insurance cover.

2. Which of the following accounting practices has been outlawed by PFRS NO. 4?
•Catastrophe Accounting

3. Which of the following types of insurance contract would probably not be covered by PFRS 42
• Pension plan

4. PFRS 4-says that insurance contracts should: •Be covered by existing accounting policies during
phase one

5. PFRS 4 was introduced principally for what reason? 

•To ensure that insurance companies could comply with International Financial Reporting Standards by
20x5.

6. Which International Financial Reporting Standard will apply to those contracts that prin cipally transfer
financial risk, such as credit derivative?
•PFRS 9

7. If an entity gives a product warranty that has been issued directly by a manufacturer, dealer, or retailer,
which Philippine Financial Reporting Standards is likely to cover this warranty? PFRS •PFRS 9 and PAS
37

8. PFRS 9 requires an entity to separate embedded derivatives that meet certain conditions from the host
insurance contract that contains them. It also requires the embedded derivative to be measured at fair
value and any changes in fair value to go into profit or loss. An insurer need not separate an embedded
derivative that itself meets the definition of an insurance contract. Which of the following types of
embedded derivative would ned to be fair-valued under PFRS 9 when embedded in an insurance
contract?
•The guarantee of minimum interest rates when determining the surrender or maturity value of a contract.

9. Insurers can recognize an intangible asset that is the difference between the fair value and book value
of insurance liabilities taken on in business combination. This asset should be accounted for using.
•PFRS 4. Insurance Contracts, only.

10. Entity A writes a single policy for a P100,000 premium and expects claims to be made of P60,000 in
20x9. At the time of writing the policy, there are commission costs of P20,000. Assume a discount rate of
3% risk-free. The entity says that if a provision for risk and uncer tainty were to be made, it would amount
to P25,000 and that this risk would expire evenly over years 20x7, 20x8, and 20x9. Under existing
policies, the entity would spread the premiums, the claims expense, and the commissioning costs over
the first two years of the policy. Investment returns in years 20x7 and 20x8 are P2,000 and P4,000
respectively. What is the profit in year 20x7 and 20x8, using the matching and deferral approach in years
20x7 and 20x8?
•20x7 P12.000
•20x8 P14,000