AASB Standard

1 AASB Standard AASB 17 July 2017 Insurance Contracts Authorised Version F2017L01184 registered 14/09/2017 AASB 17 2 COPYRIGHT Obtaining a copy of this Accounting Standard This Standard is available on the AASB website: Australian Accounting Standards Board PO Box 204 Collins Street West Victoria 8007 AUSTRALIA Phone: (03) 9617 7637 E-mail: Website: Other enquiries Phone: (03) 9617 7600 E-mail: COPYRIGHT Commonwealth of Australia 2017 This AASB Standard contains IFRS Foundation copyright material. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The National Director, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007. All existing rights in this material are reserved outside Australia.

2 Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Australia should be addressed to the IFRS Foundation at ISSN 1036-4803 Authorised Version F2017L01184 registered 14/09/2017 AASB 17 3 CONTENTS Contents PREFACE COMPARISON WITH IFRS 17 ACCOUNTING Standard AASB 17 INSURANCE CONTRACTS from paragraph OBJECTIVE 1 SCOPE 3 Combination of insurance contracts 9 Separating components from an insurance contract 10 LEVEL OF AGGREGATION OF INSURANCE CONTRACTS 14 RECOGNITION 25 MEASUREMENT 29 Measurement on initial recognition 32 Estimates of future cash flows 33 Discount rates 36 Risk adjustment for non-financial risk 37 Contractual service margin 38 Subsequent measurement 40 Contractual service margin 43 Onerous contracts 47 Premium allocation approach 53 Reinsurance contracts held 60 Recognition 62 Measurement 63 Premium allocation approach for reinsurance contracts held 69 Investment contracts with

3 Discretionary participation features 71 MODIFICATION AND DERECOGNITION Modification of an insurance contract 72 Derecognition 74 PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION 78 RECOGNITION AND PRESENTATION IN THE STATEMENT(S) OF FINANCIAL PERFORMANCE 80 Insurance service result 83 Insurance finance income or expenses 87 DISCLOSURE 93 Explanation of recognised amounts 97 Insurance finance income or expenses 110 Transition amounts 114 Significant judgements in applying AASB 17 117 Nature and extent of risks that arise from contracts within the scope of AASB 17 121 All types of risk concentrations of risk 127 Insurance and market risks sensitivity analysis 128 Insurance risk claims development 130 Credit risk other information 131 Liquidity risk other information 132 Authorised Version F2017L01184 registered 14/09/2017 AASB 17 4 CONTENTS COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT APPENDICES A Defined terms B Application guidance C effective date and transition D Amendments to other Standards DELETED IFRS 17 TEXT AASB BASIS FOR CONCLUSIONS AVAILABLE ON THE AASB WEBSITE Illustrative examples Basis for Conclusions on IFRS 17 Australian Accounting Standard AASB 17

4 Insurance Contracts is set out in paragraphs 1 and Appendices A D. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the Standard . AASB 17 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations, and AASB 1057 Application of Australian Accounting Standards. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies. Authorised Version F2017L01184 registered 14/09/2017 AASB 17 5 PREFACE Preface Introduction The Australian Accounting Standards Board (AASB) develops, issues and maintains Australian Accounting Standards, including Interpretations.

5 The AASB is an Australian Government agency under the Australian Securities and Investments Commission Act 2001. AASB 1057 Application of Australian Accounting Standards identifies the application of Standards to entities and financial statements. AASB 1053 Application of Tiers of Australian Accounting Standards establishes a differential reporting framework consisting of two tiers of reporting requirements for preparing general purpose financial statements. What this Standard requires AASB 17 Insurance Contracts establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It also requires similar principles to be applied to reinsurance contracts held and investment contracts with discretionary participation features issued. The objective is to ensure that entities provide relevant information in a way that faithfully represents those contracts.

6 This information gives a basis for users of financial statements to assess the effect that contracts within the scope of AASB 17 have on the financial position, financial performance and cash flows of the entity. AASB 17 reflects the view that an insurance contract combines features of both a financial instrument and a service contract. In addition, many insurance contracts generate cash flows with substantial variability over a long period. To provide useful information about these features, the approach adopted in AASB 17: (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 (including presentation of insurance revenue) separately from insurance finance income or expenses; and (c) requires an entity to make an accounting policy choice portfolio-by-portfolio of whether to recognise all insurance finance income or expenses for the reporting period in profit or loss or to recognise some of that income or expenses in other comprehensive income.

7 The key principles in AASB 17 are that an entity: (a) identifies as insurance contracts those contracts under which the entity 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. (b) separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts. (c) divides the contracts into groups it will recognise and measure. (d) recognises and measures groups of insurance contracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contractual service margin).

8 (e) recognises the profit from a group of insurance contracts over the period the entity provides insurance coverage, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognises the loss immediately. (f) presents separately insurance revenue, insurance service expenses and insurance finance income or expenses. (g) discloses information to enable users of financial statements to assess the effect that contracts within the scope of AASB 17 have on the financial position, financial performance and cash flows of an entity. To do this, an entity discloses qualitative and quantitative information about: (i) the amounts recognised in its financial statements from insurance contracts; Authorised Version F2017L01184 registered 14/09/2017 AASB 17 6 PREFACE (ii) the significant judgements, and changes in those judgements, made when applying the Standard ; and (iii) the nature and extent of the risks from contracts within the scope of this Standard .

9 Application date This Standard is applicable to annual reporting periods beginning on or after 1 January 2021 (see paragraph C1). Earlier application is permitted for entities that apply AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers on or before the date of initial application of this Standard . Who this Standard applies to This Standard does not apply to: (a) superannuation entities applying AASB 1056 Superannuation Entities; and (b) not-for-profit public sector entities. The AASB is undertaking further outreach to determine the applicability of this Standard to those entities. The AASB s views in that regard will be subject to its usual due process. Why we have issued this Standard When Australia adopted IFRS, the IASB had a project considering insurance accounting on its agenda with the intention to replace IFRS 4 Insurance Contracts (incorporated into AASB 4) with a more comprehensive set of requirements.

10 Given that position, as permitted by AASB 4, the AASB decided to retain AASB 1023 and AASB 1038 pending the outcome of the IASB s project to replace IFRS 4. At the time, the AASB noted that compliance with AASB 1023 and AASB 1038 would result in simultaneous compliance with AASB 4. At the international level, the IASB was aware that the approach in IFRS 4 Insurance Contracts allowed entities in other jurisdictions to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations of those requirements. The differences in accounting treatment across jurisdictions and products made it difficult for investors and analysts to understand and compare insurers results across various jurisdictions. Most stakeholders, including insurers, agreed on the need for a common global insurance accounting Standard even though opinions varied as to what it should be.