ADVANCED FINANCIAL ACCOUNTING AND REPORTING

INSURANCE CONTRACTS (IFRS 17)

Compiled by: Vhin

MULTIPLE CHOICE QUESTIONS: THEORIES

1. Under IFRS 17, Insurance Contracts the following are the features that the IASB developed to provide useful
information, except:
a. Combines current measurement of the future cash flows with the recognition of profit over the period
services are provided under the contract
b. Presents insurance service results (excluding presentation of insurance revenue) separately from
insurance finance income or expenses
c. Requires an entity to make an accounting policy choice portfolio-by-portfolio of whether to recognize all
insurance finance income or expense for the reporting period in profit or loss or to recognize some of that
income or expense in other comprehensive income.
d. An insurance contract combines features of both a financial instrument and a service contract.

2. The measurement required by IFRS 17 results in:

a. the liability for a group of insurance contracts relating to performance obligations for remaining service
being measured broadly consistent with IFRS 15 – Revenue from Contracts with Customers
b. the liability for a group of insurance contracts relating to incurred claims being measured is broadly
consistent with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, except that the liability
often includes an investment component that is typically not in contracts within the scope of IAS 37.
c. Both A and B
d. Neither nor B

3. Under IFRS 17, an entity may apply a simplified measurement approach to some insurance contracts. This
simplified measurement approach allows an entity to measure the amount relating to remaining service by
allocating the premium over the coverage period. This method refers to:
a. Asset-Liability method
b. Net realizable value approach
c. Premium allocation approach
d. Fulfilment cash flow approach

4. Under IFRS 17, what is a contractual service margin?

a. A component of the carrying amount of the asset or liability for a group of insurance contracts
representing the unearned profit the entity will recognize as it provides services under the
insurance contracts in the group.
b. An explicit, unbiased and probability-weighted estimate of the present value of the future cash outflows
minus the present value of the future cash inflows that will arise as the entity fulfils insurance contracts,
including a risk adjustment for non-financial risk.
c. The amounts that an insurance contract requires the entity to repay to a policyholder even if an insured
event does not occur.
d. The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash
flows that arises from non-financial risk as the entity fulfils insurance contracts

5. An entity should apply IFRS 17 to:

a. insurance contracts, including reinsurance contracts, it issues
b. reinsurance contracts it holds
c. investment contracts with discretionary participation features it issues, provided the entity also issues
insurance contracts.
d. All of the foregoing

6. Which of the following statements is incorrect regarding IFRS 17?

a. The IASB decided to base its approach on the type of activity rather than on the type of the entity
b. contracts that fail to meet the definition of an insurance contract are within the scope of IFRS 9 if they
meet the definition of a financial instrument
c. The assessment of whether a contract is an insurance contract will exclude an assessment of
whether the contract contains significant insurance risk
d. if an entity that issues insurance contracts accounted for a transaction in one way and an entity that does
not issue insurance contracts accounted for the same transaction in a different way, comparability across
entities would be reduced.
AFAR – INSURANCE CONTRACTS (IFRS 17) Compiled by Vhin
7. The following transactions are not within the scope of IFRS 17, except:
a. warranties provided by a manufacturer, dealer or retailer in connection with the sale of its goods or
services to a customer
b. insurance contracts in which the entity is not the policyholder, unless those contracts are
reinsurance contracts
c. financial guarantee contracts, unless the issuer has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting applicable to insurance contracts
d. residual value guarantees provided by a manufacturer, dealer or retailer and a lessee’s residual value
guarantees when they are embedded in a lease

8. Which of these was not a known problem with IFRS 4 - the old standard?
a. IFRS 4 allowed insurers to use different accounting policies to measure similar insurance contracts
written in different countries
b. IFRS 4 did not provide consistent information about the sources of profit recognised from insurance
contracts
c. IFRS 4 allowed companies to measure insurance contracts at current value which therefore
fluctuates over the term
d. Some companies measured insurance contracts using out-of-date information

9. Which of these financial metrics is not expected to change as a result of IFRS 17?
a. Profit or loss
b. Insurance service result
c. Earnings per share
d. Return on equity

10. Under IFRS 17, Contractual Service Margin (CSM) represents:

a. Risk exposure
b. Expected cash
c. Liability for coverage
d. Profit

11. Which of the following is not a building block for the Contractual Service Margin (CSM) calculation?
a. Profit
b. Risk adjustment
c. Future Cash Flows
d. Discount for time value of money

12. What rate is used for interest on the Contractual Service Margin?
a. Locked-in discount rate
b. Market rates
c. Effective interest rate
d. Current Risk Free Rate plus Risk Premium

13. Under IFRS 17, when can the simplified Premium Allocation Approach (PAA) model be used?
a. Only for general insurance
b. Any contract if result materially similar to General Measurement Model (GMM)
c. Only for contracts less than 1 year
d. For any contract regardless

14. In accordance with IFRS 17, how is the liability for remaining coverage calculated under Premium Allocation
Approach (PAA)?
a. Premium earned less acquisition costs
b. Premium received
c. Premium due less option to deduct acquisition costs
d. Premium received less option to deduct acquisition costs

15. Under IFRS 17, what is the trigger element in identifying a contract is an insurance contract?
a. Insurance premium risk
b. Profitability index
c. Significant insurance risk
d. Market risk
AFAR – INSURANCE CONTRACTS (IFRS 17) Compiled by Vhin
16. Under IFRS 17, Insurance risk is significant if, and only if:
a. An insured event could cause an insurer to pay significant additional amounts in any scenario, including
scenarios that lack commercial substance
b. A scenario that has commercial substance in which the issuer has a possibility of a loss on a net realizable
value basis.
c. An insured event could cause an insurer to pay significant additional amounts in any scenario,
excluding scenarios that lack commercial substance
d. An insurance contract requires payment when an event with uncertain timing occurs and if the payment is
adjusted for the time value of money

17. What is the quantity of insurance risk under IFRS 17?

a. Average of the present values of the adverse outcomes as a proportion of the expected present value of all
outcomes, or as a proportion of the premium.
b. Must be greater than 101% of the benefits payable if the insured event did not occur for there to be
insurance risk in an insurance contract.
c. Apply a guideline that a reasonable possibility of a significant loss is a 10% probability of a 10% loss
d. No quantitative guidance supports the determination of significant in IFRS 17

18. The term “significant additional amounts” as used in IFRS 17 refers to:
a. Present value of premium received less option to deduct acquisition costs
b. The present value of amounts that exceed those that would be payable if no insured event occurred
(excluding scenarios that lack commercial substance).
c. The present value of amounts that exceed those that would be payable if no insured event occurred
(including scenarios that lack commercial substance).
d. The future value of amounts that exceed those that would be payable if no insured event occurred
(excluding scenarios that lack commercial substance).

19. Under IFRS 17, Significant additional amounts excludes the following, except:
a. claims handling and claims assessment costs
b. the loss of the ability to charge the policyholder for future service
c. the waiver, on death, of charges that would be made on cancellation or surrender of the contract
d. a payment conditional on an event that does not cause a significant loss to the holder of the contract

20. Uncertainty (or risk) is the essence of an insurance contract. Accordingly, IFRS 17 requires at least one of the
following to be uncertain at the inception of an insurance contract, except:
a. the probability of an insured event occurring
b. when the insured event will occur
c. how much the entity will need to pay if the insured event occurs
d. the quantity of insurance risk can be measured reliably

21. Entity A issues a contract to Entity B that provides a guarantee of the fair value at a future date of an aircraft (a
non-financial asset) held by Entity B. Entity A is not the lessee of the aircraft. What standard shall govern the
residual value guarantees given by a lessee under the said scenario?
a. IFRS 9
b. IFRS 16
c. IFRS 17
d. IFRS 15

22. Using the information in number 21, However, if the contract compensated Entity B only for changes in market
prices and not for changes in the condition of Entity B’s asset, the contract would be a (an)
a. Equity instrument
b. Financial Asset at FVOCI
c. Derivative
d. Share-based payment

23. Entity A issues an investment contract in which payments are contractually linked (with no discretion) to returns
on a pool of assets held by the issuer (Entity A). What standard shall govern the given scenario?
a. IFRS 7
b. IFRS 17
c. IFRS 9
d. IAS 32
AFAR – INSURANCE CONTRACTS (IFRS 17) Compiled by Vhin
24. Entity A issues an insurance contract which gives it an enforceable and non-cancellable contractual right to
recover all claims paid out of future premiums, with appropriate compensation for the time value of money. What
is the treatment of such contract?
a. Financial Instrument
b. Insurance contract
c. Derivative
d. Investment in bonds

25. After identifying and separating the distinct components of an insurance contract, what standard should an entity
apply to all remaining components of the host insurance contract?
a. IFRS 9
b. IFRS 15
c. IFRS 17
d. IFRS 7

26. IFRS 17 defines the level of aggregation to be used for measuring insurance contracts and their related
profitability. The starting point for aggregation is a:
a. Portfolio of insurance contracts
b. Identification of onerous contract
c. Recognition of insurance risk
d. Assessment of grouping of insurance contracts

27. Under IFRS 17, an entity should recognize a group of insurance contracts (and reinsurance contracts) it issues
from the earliest of the following, except:
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 is due
c. for a group of onerous contracts, when the group becomes onerous
d. None of the foregoing

28. What is the basic revenue recognition principle under IFRS 17?
a. no profit is recognized on initial recognition of a group of insurance contracts but that a loss must
be recognized if the group of contracts is onerous
b. profit is recognized on initial recognition of a group of insurance contracts but that a loss must not
recognized if the group of contracts is onerous
c. profit is recognized on initial recognition of a group of insurance contracts but that a loss must not
recognized if the group of contracts is gratuitous
d. no profit is recognized on initial recognition of a group of insurance contracts but that a loss must be
recognized if the group of contracts is gratuitous

29. IFRS 17 provides three measurement approaches for the accounting of insurance contracts. Which of the
following is NOT among the measurement approach provided under IFRS 17?
a. Premium Allocation Approach
b. Building Block Approach
c. Intrinsic Value Approach
d. Variable Fee Approach

30. IFRS 17 has a default approach to measuring groups of insurance contracts known as:
a. Premium Allocation Approach
b. General model
c. Fair value model
d. Contract residual approach

31. The contractual service margin is a component of the asset or liability for the group of insurance contracts that
represents the unearned profit the entity will recognise as it provides services in the future. Hence, the contractual
service margin would usually be calculated at the
a. level of a group of insurance contracts
b. individual insurance contract level
c. Both A and B
d. Neither A nor B

32. Under IFRS 17, what shall an entity recognize for the reduction in the liability for remaining coverage because of
services provided in the period, measured?
a. Insurance revenue
b. Insurance service expense
c. Insurance finance income or expenses
d. Prepaid insurance
AFAR – INSURANCE CONTRACTS (IFRS 17) Compiled by Vhin
33. Under IFRS 17, what shall an entity recognize for the reduction in the liability for the effect of time value of
money and the effect of financial risk?
a. Insurance revenue
b. Insurance service expense
c. Insurance finance income or expenses
d. Prepaid insurance

34. Under IFRS 17, what shall an entity recognize for the reduction in the liability for losses on groups of onerous
contracts, and reversals of such losses?
a. Insurance revenue
b. Insurance service expense
c. Insurance finance income or expenses
d. Prepaid insurance

35. The premium allocation approach is permitted if, and only if, at the inception of the group of contracts:
a. the entity reasonably expects that such simplification would produce a measurement of the liability for
remaining coverage for the group that would not differ materially from the one that would be produced
applying the requirements for the general model
b. the coverage period of each contract in the group (including coverage arising from all premiums within
the contract boundary determined at that date)
c. Either A or B
d. Neither A nor B

36. IFRS 17 defines it as an insurance contract issued by one entity (the reinsurer) to compensate another entity for
claims arising from one or more insurance contracts issued by that other entity (underlying contracts).
a. Derivative contract
b. Reinsurance contract
c. Service contract
d. Onerous contract