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Insurance Contracts

Ind AS - 104 - Rule - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 104 - Indian Accounting Standard (Ind AS) 104 1 (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.) Objective 1 The objective of this Indian Accounting Standard (Ind AS) is to specify the financial reporting for by any entity that issues such contracts (described in this Ind AS as an insurer). .....

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eature (see paragraph 35). Ind AS 107, Financial Instruments: Disclosures, requires disclosure about financial instruments, including financial instruments that contain such features. 3 This Ind AS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see Ind AS 32, Financial Instruments: Presentation, Ind AS 107 and Ind AS 109, Financial Instruments). 4 An entity shall not apply this Ind A .....

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r right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee s residual value guarantee embedded in a finance lease (see Ind AS 17, Leases, Ind AS 18, Revenue, and Ind AS 38, Intangible Assets). ] (d) financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as and has used accounting applicable to , in which case the issuer may elect to apply either Ind A .....

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escribes any entity that issues an insurance contract as an insurer, whether or not the issuer is regarded as an insurer for legal or supervisory purposes. 6 A reinsurance contract is a type of insurance contract. Accordingly, all references in this Ind AS to also apply to re. Embedded derivatives 7 Ind AS 109 requires an entity to separate some embedded derivatives from their host contract, measure them at fair value and include changes in their fair value in profit or loss. Ind AS 109 applies .....

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o apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a nonfinancial variable that is not specific to a party to the contract. Furthermore, those requirements also apply if the holder s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if .....

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ed surrender options) separately (ie without considering the insurance component). (ii) the insurer s accounting policies do not otherwise require it to recognise 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 recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure .....

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accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required. 12 To unbundle a contract, an insurer shall: (a) apply this Ind AS to the insurance component. (b) apply Ind AS 109 to the deposit component. Recognition and measurement Temporary exemption from some other Ind ASs 13 Paragraphs 10-12 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, specify criteria for an entity t .....

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rer: (a) shall not recognise as a liability any provisions for possible future claims, if those claims arise under that are not in existence at the end of the reporting period (such as catastrophe provisions and equalisation provisions). (b) shall carry out the liability adequacy test described in paragraphs 15- 19. (c) shall remove an insurance liability (or a part of an insurance liability) from its balance sheet when, and only when, it is extinguished- ie when the obligation specified in the .....

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ts . 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 recognised in profit or loss. 16 If an insurer applies a liability adequacy test that meets specified minimum requirements, this Ind AS imposes no further requirements. The minimum requirements are the .....

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amount of the relevant insurance liabilities2 less the carrying amount of: (i) any related deferred acquisition costs; and (ii) any related intangible assets, such as those acquired in a business combination or portfolio transfer (see paragraphs 31 and 32). However, related reinsurance assets are not considered because an insurer accounts for them separately (see paragraph 20). (b) determine whether the amount described in (a) is less than the carrying amount that would be required if the relev .....

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adequacy test does not meet those minimum requirements, the comparison described in paragraph 17 shall be made at the level of a portfolio of contracts that are subject to broadly similar risks and managed together as a single portfolio. 19 The amount described in paragraph 17(b) (ie the result of applying Ind AS 37) shall reflect future investment margins (see paragraphs 27-29) if, and only if, the amount described in paragraph 17(a) also reflects those margins. Impairment of reinsurance assets .....

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will receive from the reinsurer. Changes in accounting policies 21 Paragraphs 22-30 apply both to changes made by an insurer that already applies Ind ASs and to changes made by an insurer adopting Ind ASs for the first time. 22 An insurer may change its accounting policies for if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge re .....

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ragraphs 27-29); and (e) shadow accounting (paragraph 30). Current market interest rates 24 An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities3 to reflect current market interest rates and recognises changes in those liabilities in profit or loss. At that time, it may also introduce accounting policies that require other current estimates and assumptions for the designated liabilities. The election in this paragraph .....

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may continue the following practices, but the introduction of any of them does not satisfy paragraph 22: (a) measuring insurance liabilities on an undiscounted basis. (b) measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless .....

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not change its accounting policies for to eliminate excessive prudence. However, if an insurer already measures its with sufficient prudence, it shall not introduce additional prudence. Future investment margins 27 An insurer need not change its accounting policies for to eliminate future investment margins. However, there is a rebuttable presumption that an insurer s financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investmen .....

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d in paragraph 27 if, and only if, the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins. For example, suppose that an insurer s existing accounting policies for involve excessively prudent assumptions set at inception and a discount rate prescribed by a regulator without direct reference to market conditions, .....

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scount rate, even if that discount rate reflects the estimated return on the insurer s assets. 29 In some measurement approaches, the discount rate is used to determine the present value of a future profit margin. That profit margin is then attributed to different periods using a formula. In those approaches, the discount rate affects the measurement of the liability only indirectly. In particular, the use of a less appropriate discount rate has a limited or no effect on the measurement of the l .....

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s insurance liabilities, (b) related deferred acquisition costs and (c) related intangible assets, such as those described in paragraphs 31 and 32. An insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. The related adjustment to the insurance liability (or deferred acquisition costs or intangible assets) shall be recognised in other comp .....

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at splits the fair value of acquired into two components: (a) a liability measured in accordance with the insurer s accounting policies for that it issues; and (b) an intangible asset, representing the difference between (i) the fair value of the contractual insurance rights acquired and insurance obligations assumed and (ii) the amount described in (a). The subsequent measurement of this asset shall be consistent with the measurement of the related insurance liability. 32 An insurer acquiring a .....

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ransfer. Discretionary participation features Discretionary participation features in 34 Some contain a discretionary participation feature as well as a guaranteed element. The issuer of such a contract: (a) may, but need not, recognise the guaranteed element separately from the discretionary participation feature. If the issuer does not recognise them separately, it shall classify the whole contract as a liability. If the issuer classifies them separately, it shall classify the guaranteed eleme .....

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e category that is neither liability nor equity. (c) may recognise all premiums received as revenue without separating any portion that relates to the equity component. The resulting changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability shall be recognised in profit or loss. If part or all of the discretionary participation feature is classified in equity, a portion of profit or loss may be attributable to that feature (in the s .....

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d in paragraphs 14-20 and 34(a)-(d), continue its existing accounting policies for such contracts, unless it changes those accounting policies in a way that complies with paragraphs 21-30. Discretionary participation features in financial instruments 35 The requirements in paragraph 34 also apply to a financial instrument that contains a discretionary participation feature. In addition: (a) if the issuer classifies the entire discretionary participation feature as a liability, it shall apply the .....

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That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 9 exempts that option from measurement at fair value. The issuer need not disclose the amount that would result from applying Ind AS 109 to the guaranteed element, nor need it present that amount separately. Furthermore, the issuer need not determine that amount if the total liability recognised is clearly higher. (c) although these contracts are financial instru .....

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osure Explanation of recognised amounts 36 An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from . 37 To comply with paragraph 36, an insurer shall disclose: (a) its accounting policies for and related assets, liabilities, income and expense. (b) the recognised assets, liabilities, income and expense (and, if it presents its statement of cash flows using the direct method, cash flows) arising from . Furthermore, if the insurer is .....

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ed disclosure of those assumptions. (d) the effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements. (e) reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs. Nature and extent of risks arising from 38 An insurer shall disclose information that enables users of its financial statements to evalua .....

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agement determines concentrations and a description of the shared characteristic that identifies each concentration (eg type of insured event, geographical area, or currency). (iii) actual claims compared with previous estimates (ie claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insur .....

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outflows resulting from recognised insurance liabilities instead. This may take the form of an analysis, by estimated timing, of the amounts recognised in the balance sheet. (ii) if an insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may use that sensitivity analysis to meet the requirement in paragraph 40(a) of Ind AS 107. Such an insurer shall also provide the disclosures required by paragraph 41 of Ind AS 107. (e) informati .....

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d occurred; the methods and assumptions used in preparing the sensitivity analysis; and any changes from the previous period in the methods and assumptions used. However, if an insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may meet this requirement by disclosing that alternative sensitivity analysis and the disclosures required by paragraph 41 of Ind AS 107. (b) qualitative information about sensitivity, and information abou .....

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um requirements of paragraph 16. 3In this paragraph, insurance liabilities include related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32. Appendix A Defined terms This appendix is an integral part of the Ind AS. Cedant The policyholder under a reinsurance contract. deposit component A contractual component that is not accounted for as a derivative under Ind AS 109 and would be within the scope of Ind AS 109 if it were a separate instrum .....

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act; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profit or loss of the company, fund or other entity that issues the contract. fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113.) financial guarantee contract A contract that requires the issuer to make specified payments to reim .....

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y to the contract. guaranteed benefits Payments or other benefits to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the issuer. guaranteed element An obligation to pay guaranteed benefits, included in a contract that contains a discretionary participation feature. insurance asset An insurer s net contractual rights under an insurance contract. insurance contract A contract under which one party (the insurer) accepts sig .....

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by an insurance contract and creates insurance risk. insurer The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs. liability adequacy test An assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows. policyholder A party that has a right to compensation under a .....

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re separate contracts. Appendix B Definition of an insurance contract This appendix is an integral part of the Ind AS. B1 This appendix gives guidance on the definition of an insurance contract in Appendix A. It addresses the following issues: (a) the term uncertain future event (paragraphs B2-B4); (b) payments in kind (paragraphs B5-B7); (c) insurance risk and other risks (paragraphs B8-B17); (d) examples of (paragraphs B18-B21); (e) significant insurance risk (paragraphs B22-B28); and (f) chan .....

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t that occurred before the inception of the contract. In other , the insured event is an event that occurs during the term of the contract, even if the resulting loss is discovered after the end of the contract term. B4 Some cover events that have already occurred, but whose financial effect is still uncertain. An example is a reinsurance contract that covers the direct insurer against adverse development of claims already reported by policyholders. In such contracts, the insured event is the di .....

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this Ind AS but are not regulated as in some countries. One example is a maintenance contract in which the service provider agrees to repair specified equipment after a malfunction. The fixed service fee is based on the expected number of malfunctions, but it is uncertain whether a particular machine will break down. The malfunction of the equipment adversely affects its owner and the contract compensates the owner (in kind, rather than cash). Another example is a contract for car breakdown serv .....

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ikely to be material liabilities for malfunctions and breakdowns that have already occurred. 3[(b) If Ind AS 18, Revenue applied, the service provider would recognise revenue by reference to the stage of completion (and subject to other specified criteria). That approach is also acceptable under this Ind AS, which permits the service provider (i) to continue its existing accounting policies for these contracts unless they involve practices prohibited by paragraph 14 and (ii) to improve its accou .....

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ements in this Ind AS are unlikely to add significantly to disclosures required by other Ind ASs. Distinction between insurance risk and other risks B8 The definition of an insurance contract refers to insurance risk, which this Ind AS defines as risk, other than financial risk, transferred from the holder of a contract to the issuer. A contract that exposes the issuer to financial risk without significant insurance risk is not an insurance contract. B9 The definition of financial risk in Append .....

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of a non-financial asset is not a financial risk if the fair value reflects not only changes in market prices for such assets (a financial variable) but also the condition of a specific non-financial asset held by a party to a contract (a non-financial variable). For example, if a guarantee of the residual value of a specific car exposes the guarantor to the risk of changes in the car s physical condition, that risk is insurance risk, not financial risk. B10 Some contracts expose the issuer to f .....

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ingent on the insured event can be significant. For example, a life-contingent annuity linked to a cost-of-living index transfers insurance risk because payment is triggered by an uncertain event-the survival of the annuitant. The link to the price index is an embedded derivative, but it also transfers insurance risk. If the resulting transfer of insurance risk is significant, the embedded derivative meets the definition of an insurance contract, in which case it need not be separated and measur .....

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cial impact of the adverse event. For example, the definition does not exclude new-for-old coverage that pays the policyholder sufficient to permit replacement of a damaged old asset by a new asset. Similarly, the definition does not limit payment under a term life insurance contract to the financial loss suffered by the deceased s dependants, nor does it preclude the payment of predetermined amounts to quantify the loss caused by death or an accident. B14 Some contracts require a payment if a s .....

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is adversely affected by a reduction in the cash flows from the asset. Conversely, the definition of an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment. This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse effect, but permits the insurer to deny payment if it is not satisfied that the event caused an adverse effect. B15 Lapse or persistency r .....

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e an unexpected increase in expenses does not adversely affect the counterparty. B16 Therefore, a contract that exposes the issuer to lapse risk, persistency risk or expense risk is not an insurance contract unless it also exposes the issuer to insurance risk. However, if the issuer of that contract mitigates that risk by using a second contract to transfer part of that risk to another party, the second contract exposes that other party to insurance risk. B17 An insurer can accept significant in .....

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nce against theft or damage to property. (b) insurance against product liability, professional liability, civil liability or legal expenses. (c) life insurance and prepaid funeral plans (although death is certain, it is uncertain when death will occur or, for some types of life insurance, whether death will occur within the period covered by the insurance). (d) life-contingent annuities and pensions (ie contracts that provide compensation for the uncertain future event-the survival of the annuit .....

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the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. These contracts could have various legal forms, such as that of a guarantee, some types of letter of credit, a credit derivative default contract or an insurance contract. However, although these contracts meet the definition of an insurance contract, they also meet the definition of a financial guarantee contract in Ind AS 109 and are within the sc .....

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of this Ind AS. However, product warranties issued directly by a manufacturer, dealer or retailer are outside its scope, because they are within the scope of Ind AS 18 and Ind AS 37.] (i) title insurance (ie insurance against the discovery of defects in title to land that were not apparent when the insurance contract was written). In this case, the insured event is the discovery of a defect in the title, not the defect itself. (j) travel assistance (ie compensation in cash or in kind to policyh .....

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climatic, geological or other physical variables that are specific to a party to the contract. (m) re. B19 The following are examples of items that are not : (a) investment contracts that have the legal form of an insurance contract but do not expose the insurer to significant insurance risk, for example life in which the insurer bears no significant mortality risk (such contracts are non-insurance financial instruments or service contracts, see paragraphs B20 and B21). (b) contracts that have .....

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e is no insurance contract because there is no agreement with another party). (d) contracts (such as gambling contracts) that require a payment if a specified uncertain future event occurs, but do not require, as a contractual precondition for payment, that the event adversely affects the policyholder. However, this does not preclude the specification of a predetermined payout to quantify the loss caused by a specified event such as death or an accident (see also paragraph B13). (e) derivatives .....

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dit, credit derivative default contract or credit insurance contract) that requires payments even if the holder has not incurred a loss on the failure of the debtor to make payments when due (see Ind AS 109). (g) contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract (commonly described as weather derivatives). (h) catastrophe bonds that provide for reduced payments of principal, interest or both, based on a cli .....

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cognises the consideration paid as a financial asset, rather than as an expense 5[B21 If the contracts described in paragraph B19 do not create financial assets or financial liabilities, Ind AS 18 applies. Under Ind AS 18, revenue associated with a transaction involving the rendering of services is recognised by reference to the stage of completion of the transaction if the outcome of the transaction can be estimated reliably.] Significant insurance risk B22 A contract is an insurance contract o .....

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n scenarios that have commercial substance, the condition in the previous sentence may be met even if the insured event is extremely unlikely or even if the expected (ie probability-weighted) present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows. B24 The additional benefits described in paragraph B23 refer to amounts that exceed those that would be payable if no insured event occurred (excluding scenarios that lack .....

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s not take on insurance risk in relation to the possible death of the client. Therefore, the potential loss of future investment management fees is not relevant in assessing how much insurance risk is transferred by a contract. (b) waiver on death of charges that would be made on cancellation or surrender. Because the contract brought those charges into existence, the waiver of these charges does not compensate the policyholder for a pre-existing risk. Hence, they are not relevant in assessing h .....

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isk that the issuer will need to pay 999,999 rupees if the specified event occurs. Because the issuer does not accept significant insurance risk from the holder, this contract is not an insurance contract. (d) possible reinsurance recoveries. The insurer accounts for these separately. B25 An insurer shall assess the significance of insurance risk contract by contract, rather than by reference to materiality to the financial statements.4 Thus, insurance risk may be significant even if there is a .....

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act pays a death benefit exceeding the amount payable on survival, the contract is an insurance contract unless the additional death benefit is insignificant (judged by reference to the contract rather than to an entire book of contracts). As noted in paragraph B24(b), the waiver on death of cancellation or surrender charges is not included in this assessment if this waiver does not compensate the policyholder for a pre-existing risk. Similarly, an annuity contract that pays out regular sums for .....

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ith no expiry date for the cover). It is certain that the policyholder will die, but the date of death is uncertain. The insurer will suffer a loss on those individual contracts for which policyholders die early, even if there is no overall loss on the whole book of contracts. B28 If an insurance contract is unbundled into a deposit component and an insurance component, the significance of insurance risk transfer is assessed by reference to the insurance component. The significance of insurance .....

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y rates charged by the insurer to other new annuitants when the policyholder exercises the option. The contract transfers no insurance risk to the issuer until the option is exercised, because the insurer remains free to price the annuity on a basis that reflects the insurance risk transferred to the insurer at that time. However, if the contract specifies the annuity rates (or a basis for setting the annuity rates), the contract transfers insurance risk to the issuer at inception. B30 A contrac .....

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nding International Financial Reporting Standard (IFRS) 4, , issued by the International Accounting Standards Board. Comparison with IFRS 4, 1 Different terminology is used, to make it consistent with existing laws eg, term balance sheet is used instead of Statement of financial position and Statement of profit and loss is used instead of Statement of comprehensive income . 2 The transitional provisions given in IFRS 4 have not been given in Ind AS 104, since all transitional provisions related .....

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directly by a manufacturer, dealer or retailer (see Ind AS 115, Revenue from Contracts with Customers, and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets). 2. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a .....

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