The International Accounting Standards Board has published a proposed set of changes to insurance contract accounting in an effort to impose a single standard upon all insurers in all jurisdictions that would apply to all types of insurance contracts on a consistent basis.

When the IASB was established in 2001 there were no international financial reporting requirements for insurance contracts.  In 2004 the IASB introduced IFRS 4, Insurance Contracts, as an interim standard that permitted many existing international accounting practices to be retained, whilst beginning a more comprehensive review of insurance accounting as a second phase of the project. The proposals published Friday are the result of that review.

“A fundamental review of insurance accounting was long overdue, with current practice resulting in financial information that is impenetrable to all but the most expert of users,” said IASB chairman Sir David Tweedie in a statement. “The publication of this exposure draft marks an important milestone in this review process. The proposed standard better reflects the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to investors.”

The IASB launched its public consultation when it published a discussion paper, “Preliminary Views on Insurance Contracts,” in 2007. In developing the proposals released Friday, the IASB considered more than 160 comment letters received on the discussion paper, as well as feedback from interested parties through an extensive outreach programme, including interaction with the IASB’s Insurance Working Group and a targeted field test with preparers.

The IASB developed the proposals jointly with the U.S. Financial Accounting Standards Board. The boards reached the same conclusions in many areas, but reached different conclusions in several other areas.

For example, in terms of the measurement model, FASB unlike the IASB, concluded that the model should not include a separate risk adjustment and residual margin, but should instead combine these in a single composite margin. The composite margin is released over both the coverage period and the claims handling period on the basis of the insurer’s exposure from the provision of insurance coverage, and the insurer’s exposure from uncertainties associated with future cash flows.

FASB plans to publish a discussion paper to seek additional input. That discussion paper would present the IASB’s proposals, FASB’s tentative decisions, and a comparison of each of those models with existing U.S. GAAP.

The IASB plans to undertake further outreach during the exposure draft’s comment period, including a second round of field tests, to ensure that the IASB considers the views of all interested parties before it issues the final International Financial Reporting Standard. 

The exposure draft, "Insurance Contracts," is open for comment until 30 November 2010 and can be accessed via the "Comment on a Proposal" section of

To find out more, visit the Insurance Contracts section of the IASB website via Materials available on the website include a podcast introduction to the proposals by IASB member Warren McGregor, as well as a high-level executive summary of the proposals.

An interactive webcast introducing the proposed standard will occur on August 6. To register, visit

Arriving at common requirements is likely to have a significant impact on the insurance industry, considering the current diversity under IFRS in accounting practices in different geographies. Insurers will need to get to grips with these proposals as they represent some far-reaching changes, according to KPMG. They come at a time when there are already significant proposed changes on how financial organizations of all kinds measure their financial instruments. The IASB has essentially proposed a fulfillment-based measurement model for insurance contracts.

“The IASB is proposing to base measurement of rights and obligations under an insurance contract on an amount an insurer is obliged to pay through the life of the contract rather than a model based on an 'exit value' as if transferring the contract to a market participant," said KPMG’s global IFRS insurance standards leader Joachim Kölschbach. "This reflects the difficulty in developing market-based assumptions in measurement when there is not an active market for insurance contracts. Furthermore, in the proposed insurance model, gains would not be recognized when an insurance contract is secured but rather as the services are provided. Both of these elements are likely to be viewed as increasing the relevance of financial statements over the ‘exit value’ model in an earlier discussion paper since they are aligned with the business model of insurers, which include long-term servicing of insurance contracts as opposed to contract trading for short-term gain.”

Aspects of the proposed insurance model that are likely to attract debate include determining a discount rate for obligations based on their characteristics as opposed to the return on invested assets, and the treatment of changes in assumptions driving the measurement of the insurance obligation, according to Kölschbach. The effects of changes in assumptions, whether financial such as interest rates or non-financial such as mortality and morbidity rates, would be required to be recognized in the statement of financial position and the statement of comprehensive income each reporting period.

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