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Insurance contract liability under NFRS 4

Recognition and measurement of Insurance contract liability under NFRS 4,  For investment insurance companies in Nepal When we go b...

Tuesday, April 10, 2018

Recognition and measurement of Insurance contract liability under NFRS 4, 
For investment insurance companies in Nepal


When we go by the definition
Insurance contract means – 
“A contract under which one party (the insurer) 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.

Now, The major judgement required in insurance contract arrangement is recognition and measurement of insurance contract liabilities based on NFRS 4.

Here are two basic area to be covered for recognition and measurement of the insurance contract liabilities while going forward for the adaptation of NFRS 4:

Liability Adequacy Test:
Para 15 of NFRS 4 says that:
An insurer shall assess at the end of each reporting period whether its recognized insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognized in profit or loss.”

So, as said in above para, insurance companies are required to assess the liabilities recognized by making in-depth assessment of the assumptions and estimate of future cash flows used by actuarial.

Para 16 of NFRS 4 says that:
If an insurer applies a liability adequacy test that meets specified minimum requirements, this NFRS imposes no further requirements. The minimum requirements are the following:
a.     A.  The test considers current estimates of all contractual cash flows, and of related cash flows such         as claims handling costs, as well as cash flows resulting from embedded options and guarantees.
b.     B.   If the test shows that the liability is inadequate, the entire deficiency is recognized in profit or loss.

Hence after testing all of the above requirements, it should be closely considered that, is there any error or changes in factors used for estimation of future cash flows including cash flows resulting from embedded options and guarantees, the entire resulting figure due to such inadequacy shall be immediate recognized in statement of profit or loss.

Besides it, the standard itself states that, NFRS 4 do not imposes any mandatory provision and guidelines regarding test of adequacy of insurance contact liabilities to reflect the fairness.


Unbundling of Deposit Component:
Another big hurdle for the adaptation of NFRS 4 is the “Unbundling of deposit component”. Let’s have brief view;

Para 10 of NFRS 4 States that:
Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:
A.      unbundling is required if both the following conditions are met:
I)                   the insurer can measure the deposit component (including any embedded surrender options) separately (I. e. without considering the insurance component).
II)                 the insurer's accounting policies do not otherwise require it to recognize all obligations and rights arising from the deposit component.
B.      unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognize all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.
C.      unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).

 Hence, when an insurer assesses separate components (Viz Insurance liability and deposit liability component) in any insurance contracts, and unbundling is done, its accounting policies require it to recognize all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.

It’s not an easy task to unbundle the deposit component even though we have reliable basis for its measurement, it shall be deliberately supported by the IT system and data analytics.

Thereafter, once unbundling is done, an insurer shall apply NFRS 9 for classification, recognition and measurement of deposit component and NFRS 4 for insurance component separately.

The standard also has given privilege on unbundling stating that “Unbundling is permitted, not required” , Hence, it’s a judgment from the insurer’s side whether to unbundle the deposit component fulfilling 2 conditions as stated in para 10 by  assessing the reliability of assumptions, observable inputs and other estimations to be used for the measurement.


Article by: 
Rohit Dhital, rohit.dhital@gmail.com

Saturday, April 7, 2018


After massive complains and opinions regarding gyanendra's form, he again proved his talent and figured it out that "Form is temporary, Class is Permanent"

Sunday, January 21, 2018

The basic challenge to the Nepalese market for the Adoptation of IFRS is the hurdle which comes up with the new impairment models under IFRS 9, mainly to the financial institutions due to huge amount of data and lack of in-built models for the reliable projection and forecast of financial covenants. whatever may be the difficulties, It could not be used as an excuse for the reasonable and consistent application of impairment model as outlined by IFRS 9, Hence the initiation from market leaders is vital for the the timely adoptation of global standard. Here is the basic introductory coverage for the impairment model outlined under IFRS 9:





The standard outlines a ‘three-stage’ model (‘general model’) for impairment based on changes in credit quality since initial recognition:

Stage 1 It includes financial instruments that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date. For these assets, 12-month expected credit losses (‘ECL’) are recognised and interest revenue is calculated on the gross carrying amount of the asset (that is, without deduction for credit allowance). 12-month ECL are the expected credit losses that result from default events that are possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months.. 

Stage 2 It includes financial instruments that have had a significant increase in credit risk since initial recognition (unless they have low credit risk at the reporting date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest revenue is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Expected credit losses are the weighted average credit losses with the probability of default (‘PD’) as the weight. 

Stage 3 It includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised and interest revenue is calculated on the net carrying amount (that is, net of credit allowance). The standard requires management, when determining whether the credit risk on a financial instrument has increased significantly, to consider reasonable and supportable information available, in order to compare the risk of a default occurring at the reporting date with the risk of a default occurring at initial recognition of the financial instrument. 


And, the definition of default should be identified, that is consistent with the definition used for internal risk management purposes for the relevant financial instrument, and it should consider qualitative factors such as financial covenants and forecasts, wherever appropriate. 



Source: IFRS/NFRS 9,PWC Resources etc.

Sunday, November 26, 2017

As per the Notice published by ICAN:

The entities to which NFRSs shall be applicable and the financial year in which fully NFRSs complied Financial Statements to be prepared shall be as follows. However NFRS-9, Financial Instrument shall be applicable with effect from 16 July, 2015 onwards.


Type
Entities Requiring adoption of NFRS
NFRS Complied Financial Statements
A
1.  Listed Multinational Manufacturing Companies
2. Listed State Owned Enterprises (SOEs) with minimum paid up capital of Rs. 5 billions (except Banks and Financial Institutions under BAFIA  Act, 2006)

2014-15
B
 1. Commercial Banks, including State Owned Commercial Banks;
 2. All other Listed State Owned Enterprises (SOEs)
2015-16
C
  1.   All other Financial Institutions not covered under A & B above
  2.   All other SOEs
  3.   Insurance Companies
  4.   All other Listed Companies
  5.   All other Corporate Bodies/Entities not defined as SMEs or entities having borrowing with minimum of Rs. 500 million.

2016-17
D
 NFRS for SMEs  (SMEs as defined and classified by ASB)


While looking into present scenario NFRS for SMEs are postponed till 2074 Asadh for mandatory compliance.......
NFRS 9 is not yet not implemented by any corporates due to practical difficulties over data collection, analysis, estimation, and support from IT system......till further notice NFRS 9 not yet implemented..........!!!!!

You can download NFRS 1-NFRS 13 from link below:

2016-17


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