IFRS 17: Insurance Contracts or PFRS 17

The objective of IFRS 17 is straightforward: to help the users assess the effect of insurance contracts on profit
and loss in the balance sheet and in cash flow statements. Insurance contracts have other components: the first is
embedded derivatives; the second is an investment component; and the last is distinct goods or services other
than insurance contract services. This is where a group of contracts with similar risks that are managed together
will be treated as one group of contracts under IFRS 17. IFRS 17 also prevents an entity from netting off
onerous contracts from the rest of the portfolio. An entity shall recognize an insurance contract at the earliest of
these. An entity shall recognize a group of contracts at the earliest of the following: at the beginning of the
coverage period, the date on which the first payment is due, or when a group of contracts becomes onerous. We
already saw what onerous contracts are; these are contracts that are expected to make a loss, or, in other words,
expected to have a net cash flow. The core of IFRS 17 is the next step: initial measurement. What should be the
value at which an insurance contract should be measured either as an asset or a liability on initial recognition?
The formula for initial measurement is the sum of fulfillment cash flows (FCF) plus contractual service margin
(CSM). These terms are very essential to understanding IFRS 17. Fulfillment Cash Flows ( FCF) are the net
cash flows expected from a group of insurance contracts, adjusted for the time value of money adjusted for
financial risk and non-financial risk. Contractual Service Margin ( CSM) represents the unearned profits in
other words this is the expected future profit from the group of insurance contract an entity is allowed to
recognize contractual service margin only when the group of contracts are profitable so when there are onerous
contracts an entity cannot recognize contractual service margin and contractual service margin on initial
recognition is simply a negative value of fulfillment cash flows it may come as a surprise that initial
measurement of profitable insurance contracts are zero because fulfillment cash flow shows the expected net
cash inflow and contractual service margin is exactly the opposite of that of both of them offset each other and
initial measurement is zero this is because both fulfillment cash flow and contractual service margin represents
what an entity could earn in the future because this is a future date this is zero initial measurement. If an entity
is expected to make profits, don’t recognize anything in profit and loss or even another comprehensive income.
If an entity is expected to make losses in the future, recognize all of that in profit and loss immediately.
Subsequent measurement is simply the sum of two components: liability for the remaining coverage period and
liability for claims incurred. Liability for the remaining coverage period is very similar to the initial
measurement in that it is simply the sum of fulfillment cash flow and contractual service margin. The standard
does explain how contractual service margin should be calculated for subsequent measurement. Fulfillment cash
flow is expected cash flow from the future period, and contractual service margin is the opposite fulfillment
cash flow plus a few other adjustments to liability for incurred claims that are for the past period, which are
simply fulfillment cash flows related to the past service. How CSM should be measured during subsequent
measurement periods. An entity has to first identify contracts that have direct participant features and those that
don't. When a contract has underlying investments, like a unit-linked insurance plan, then it is a contract with
direct participation. What happens when there are modifications to an insurance contract? When does some
change to the contract qualify as a modification to the insurance contract? IFRS 17 states a few conditions under
which changes to the contract are to be treated as modifications to the insurance contracts. It also says that when
the contract switches from direct participation to without direct participation or vice versa, it is treated as a
modification to the contract. If a contract that follows a premium allocation approach does not qualify for the
same approach after modifications, then that type of change is also treated as a modification to the insurance
contract. What happens when there are modifications? IFRS 17 requires the original contract to be de-
recognized and the new modified contract to be recognized as a new contract as per IFRS 17. When should a
contract be de-recognized? A contract should be de-recognized when it is extinguished, when obligations under
the contract have expired or have been discharged, or when there are more modifications as per IFRS 17.
IAS 12: Income Tax or PAS 12

Deferred tax Liability

PAS 12, paragraph 15, provides that a deferred tax liability shall be recognize for all taxable temporary
differences.

Taxable temporary difference is the temporary difference that will result in future taxable amount in
determining taxable income of future periods.

A deferred tax liability arises when accounting arises when accounting income is higher than taxable income
because of future taxable amount.

Deferred tax asset

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

Operating loss carryforward 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.

In other words, a deferred tax asset is the deferred tax consequence attributable to a future deductible amount
and operating loss carryforward.

A deferred tax asset arises when taxable income is higher than accounting income because of a future
deductible amount.

Taxable income is higher than accounting income.

Temporary differences that will result in taxable income being higher than accounting income because of
temporary deductible differences include the following:

1. Revenue and gains are included in the taxable income of the current period but are not included in the
accounting income of future periods.

For example, rent received in advance is taxable at the time of receipt but deferred to future periods for
accounting purposes.

2. Expenses and losses are deducted from the accounting income of the current period but are deductible for tax
purposes in future periods.

For example, doubtful accounts are deducted from accounting income but are deductible for tax purposes when
proved worthless in a future period.