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Ind AS - 104 - Rules - B. Indian Accounting Standards (Ind AS) - Companies (Indian Accounting Standards) Rules, 2015 - 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 (d .....

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es with a discretionary participation feature (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). .....

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r 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 lessee s residual value guarantee embedded in a finance lease (see Ind AS 17, Leases, Ind AS 115, Revenue from Contracts with Customers and Ind AS 38, Intangible Assets).] (d) financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts a .....

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er, a cedant shall apply this Standard to re that it holds. 5 For ease of reference, this Ind AS describes 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 .....

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rom the carrying amount of the host insurance liability. However, the requirements in Ind AS 109 do 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 opti .....

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lowing conditions are met: (i) the insurer can measure the deposit component (including any embedded 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 .....

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he compensation in future years. That obligation arises from a deposit component. If the cedant s 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, .....

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urer from some implications of the criteria in paragraphs 10-12 of Ind AS 8. Specifically, an insurer: (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 i .....

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ecognised insurance liabilities are adequate, using current estimates of future cash flows under its . 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 m .....

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that meets the minimum requirements of paragraph 16, the insurer shall: (a) determine the carrying 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 whethe .....

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raph 16, the test is applied at the level of aggregation specified in that test. If its liability 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 .....

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f the contract; and (b) that event has a reliably measurable impact on the amounts that the cedant 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 .....

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existing practices (paragraph 25); (c) prudence (paragraph 26); (d) future investment margins (paragraphs 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 othe .....

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ll these liabilities until they are extinguished. Continuation of existing practices 25 An insurer 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 .....

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more diverse and also satisfies the other requirements in this Ind AS. Prudence 26 An insurer need 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 beco .....

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n the measurement of the liability. 28 An insurer may overcome the rebuttable presumption described 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 ince .....

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the intrinsic value and time value of embedded options and guarantees; and (d) a current market discount 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, .....

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or losses on an insurer s assets have a direct effect on the measurement of some or all of (a) its 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 insuranc .....

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ombination. However, an insurer is permitted, but not required, to use an expanded presentation that 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 shal .....

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ontractual insurance obligations that existed at the date of a business combination or portfolio transfer. 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 contrac .....

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ent accounting policy for that split. The issuer shall not classify that feature as an intermediate 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 .....

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Ind AS 109, apply Ind AS 109 to that embedded derivative. (e) shall, in all respects not described 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 i .....

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not be less than the amount that would result from applying Ind AS 109 to the guaranteed element. 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 t .....

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t or loss, but need not calculate such interest expense using the effective interest method. Disclosure 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 .....

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of the recognised amounts described in (b). When practicable, an insurer shall also give quantified 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 .....

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isk (see paragraph 39A). (ii) concentrations of insurance risk, including a description of how management 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 abou .....

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39(a) and (b) of Ind AS 107 if it discloses information about the estimated timing of the net cash 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 a .....

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in the relevant risk variable that were reasonably possible at the end of the reporting period had 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 .....

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AS 115.] 1This Indian Accounting Standard shall come into effect for insurance companies from the date to be separately announced. 2The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition costs and related intangible assets) for which the insurer s accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16. 3In this paragraph, insurance liabilities include related deferred acquisition costs and re .....

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A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: (a) that are likely to be a significant portion of the total contractual benefits; (b) whose amount or timing is contractually at the discretion of the issuer; and (c) that are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profi .....

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nal or modified terms of a debt instrument. financial The risk of a possible future change in one or more of a specified risk interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. guaranteed benefits Payments or other benefits to which a particular policyholder or investor has an unco .....

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rtain future event (the insured event) adversely affects the policyholder. (See Appendix B for guidance on this definition.) insurance liability An insurer s net contractual obligations under an insurance contract. insurance risk Risk, other than financial risk, transferred from the holder of a contract to the issuer. insured event An uncertain future event that is covered by an insurance contract and creates insurance risk. insurer The party that has an obligation under an insurance contract to .....

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ntract. reinsurance contract An insurance contract issued by one insurer (the reinsurer) to compensate another insurer (the cedant) for losses on one or more contracts issued by the cedant. reinsurer The party that has an obligation under a reinsurance contract to compensate a cedant if an insured event occurs. unbundle Account for the components of a contract as if they were separate contracts. Appendix B Definition of an insurance contract This appendix is an integral part of the Ind AS. B1 Th .....

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of an insurance contract. Accordingly, at least one of the following is uncertain at the inception of an insurance contract: (a) whether an insured event will occur; (b) when it will occur; or (c) how much the insurer will need to pay if it occurs. B3 In some , the insured event is the discovery of a loss during the term of the contract, even if the loss arises from an event that occurred before the inception of the contract. In other , the insured event is an event that occurs during the term o .....

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mple is when the insurer replaces a stolen article directly, instead of reimbursing the policyholder. Another example is when an insurer uses its own hospitals and medical staff to provide medical services covered by the contracts. B6 Some fixed-fee service contracts in which the level of service depends on an uncertain event meet the definition of an insurance contract in this Ind AS but are not regulated as in some countries. One example is a maintenance contract in which the service provider .....

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The latter contract could meet the definition of an insurance contract even if the provider does not agree to carry out repairs or replace parts. B7 Applying this Standard to the contracts described in paragraph B6 is likely to be no more burdensome than applying the Ind ASs that would be applicable if such contracts were outside the scope of this Ind AS: (a) There are unlikely to be material liabilities for malfunctions and breakdowns that have already occurred. 9[(b) If Ind AS 115 applied, th .....

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ractual obligation to provide services exceeds the revenue received in advance. To do this, it applies the liability adequacy test described in paragraphs 15-19 of this Ind AS. If this Accounting Standard did not apply to these contracts, the service provider would apply Ind AS 37 to determine whether the contracts are onerous. (d) For these contracts, the disclosure requirements in this Ind AS are unlikely to add significantly to disclosures required by other Ind ASs. Distinction between insura .....

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fic to a party to the contract, such as an index of earthquake losses in a particular region or an index of temperatures in a particular city. It excludes non-financial variables that are specific to a party to the contract, such as the occurrence or non-occurrence of a fire that damages or destroys an asset of that party. Furthermore, the risk of changes in the fair value of a non-financial asset is not a financial risk if the fair value reflects not only changes in market prices for such asset .....

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policyholders (creating financial risk) and promise death benefits that at some times significantly exceed the policyholder s account balance (creating insurance risk in the form of mortality risk). Such contracts are . B11 Under some contracts, an insured event triggers the payment of an amount linked to a price index. Such contracts are , provided the payment that is contingent on the insured event can be significant. For example, a life-contingent annuity linked to a cost-of-living index tran .....

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pts from the policyholder. In other words, insurance risk is a pre-existing risk transferred from the policyholder to the insurer. Thus, a new risk created by the contract is not insurance risk. B13 The definition of an insurance contract refers to an adverse effect on the policyholder. The definition does not limit the payment by the insurer to an amount equal to the financial impact of the adverse event. For example, the definition does not exclude new-for-old coverage that pays the policyhold .....

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h a contract is not an insurance contract even if the holder uses the contract to mitigate an underlying risk exposure. For example, if the holder uses a derivative to hedge an underlying non-financial variable that is correlated with cash flows from an asset of the entity, the derivative is not an insurance contract because payment is not conditional on whether the holder is adversely affected by a reduction in the cash flows from the asset. Conversely, the definition of an insurance contract r .....

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contract) is not insurance risk because the payment to the counterparty is not contingent on an uncertain future event that adversely affects the counterparty. Similarly, expense risk (ie the risk of unexpected increases in the administrative costs associated with the servicing of a contract, rather than in costs associated with insured events) is not insurance risk because an unexpected increase in expenses does not adversely affect the counterparty. B16 Therefore, a contract that exposes the .....

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insurer, the mutual accepts risk from each policyholder and pools that risk. Although policyholders bear that pooled risk collectively in their capacity as owners, the mutual has still accepted the risk that is the essence of an insurance contract. Examples of B18 The following are examples of contracts that are , if the transfer of insurance risk is significant: (a) insurance against theft or damage to property. (b) insurance against product liability, professional liability, civil liability or .....

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versely affected by his or her survival). (e) disability and medical cover. (f) surety bonds, fidelity bonds, performance bonds and bid bonds (ie contracts that provide compensation if another party fails to perform a contractual obligation, for example an obligation to construct a building). (g) credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified ter .....

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ntracts has previously asserted explicitly that it regards such contracts as and has used accounting applicable to , the issuer may elect to apply either Ind AS 107 and Ind AS 109 or this Ind AS to such financial guarantee contracts. 10[(h) product warranties. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of this Ind AS. However, product warranties issued directly by a manufacturer, dealer or retailer are outside its scope, b .....

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trophe bonds that provide for reduced payments of principal, interest or both if a specified event adversely affects the issuer of the bond (unless the specified event does not create significant insurance risk, for example if the event is a change in an interest rate or foreign exchange rate). (l) insurance swaps and other contracts that require a payment based on changes in climatic, geological or other physical variables that are specific to a party to the contract. (m) re. B19 The following .....

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enforceable mechanisms that adjust future payments by the policyholder as a direct result of insured losses, for example some financial re or some group contracts (such contracts are normally non-insurance financial instruments or service contracts, see paragraphs B20 and B21). (c) self-insurance, in other words retaining a risk that could have been covered by insurance (there is no insurance contract because there is no agreement with another party). (d) contracts (such as gambling contracts) t .....

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ly on changes in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (see Ind AS 109). (f) a credit-related guarantee (or letter of credit, credit derivative default contract or credit insurance contract) that requires payments even if the holder has not in .....

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ed in paragraph B19 create financial assets or financial liabilities, they are within the scope of Ind AS 109. Among other things, this means that the parties to the contract use what is sometimes called deposit accounting, which involves the following: (a) one party recognises the consideration received as a financial liability, rather than as revenue. (b) the other party recognises the consideration paid as a financial asset, rather than as an expense 11[B21 If the contracts described in parag .....

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ng paragraphs discuss the assessment of whether insurance risk is significant. B23 Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (ie have no discernible effect on the economics of the transaction). If significant additional benefits would be payable in scenarios that have commercial substance, the condition in the previous sentence may be met even if .....

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but exclude: (a) the loss of the ability to charge the policyholder for future services. For example, in an investment-linked life insurance contract, the death of the policyholder means that the insurer can no longer perform investment management services and collect a fee for doing so. However, this economic loss for the insurer does not reflect insurance risk, just as a mutual fund manager does not take on insurance risk in relation to the possible death of the client. Therefore, the potentia .....

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not cause a significant loss to the holder of the contract. For example, consider a contract that requires the issuer to pay one million rupees if an asset suffers physical damage causing an insignificant economic loss of one rupee to the holder. In this contract, the holder transfers to the insurer the insignificant risk of losing one rupee. At the same time, the contract creates non-insurance risk that the issuer will need to pay 999,999 rupees if the specified event occurs. Because the issuer .....

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sment makes it easier to classify a contract as an insurance contract. However, if a relatively homogeneous book of small contracts is known to consist of contracts that all transfer insurance risk, an insurer need not examine each contract within that book to identify a few non-derivative contracts that transfer insignificant insurance risk. B26 It follows from paragraphs B23-B25 that if a contract pays a death benefit exceeding the amount payable on survival, the contract is an insurance contr .....

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ments are insignificant. B27 Paragraph B23 refers to additional benefits. These additional benefits could include a requirement to pay benefits earlier if the insured event occurs earlier and the payment is not adjusted for the time value of money. An example is whole life insurance for a fixed amount (in other words, insurance that provides a fixed death benefit whenever the policyholder dies, with no expiry date for the cover). It is certain that the policyholder will die, but the date of deat .....

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es in the level of insurance risk B29 Some contracts do not transfer any insurance risk to the issuer at inception, although they do transfer insurance risk at a later time. For example, consider a contract that provides a specified investment return and includes an option for the policyholder to use the proceeds of the investment on maturity to buy a life-contingent annuity at the current annuity rates charged by the insurer to other new annuitants when the policyholder exercises the option. Th .....

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ons are extinguished or expire. 4For this purpose, contracts entered into simultaneously with a single counterparty (or contracts that are otherwise interdependent) form a single contract. Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences between Indian Accounting Standard (Ind AS) 104 and the corresponding International Financial Reporting Standard (IFRS) 4, , issued by the International Accounting S .....

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Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards. 3 Paragraph 39(b) has been deleted in IFRS 4 by IASB. However, paragraph number has been retained in Ind AS 104 to maintain consistency with IFRS 4. 12[4. Paragraphs 40 to 41F related to effective date have not been included in Ind AS 104 as these are not relevant in Indian context. However, in order to maintain consistency with paragraph numbers of IFRS 4, these paragraph num .....

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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 lessee s residual value guarantee embedded in a finance lease (see Ind AS 17, Leases, Ind AS 115, Revenue from Contracts with Customers, and Ind AS 38, Intangible Assets). 3. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (b) If Ind AS 115 applied, the service provider would r .....

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uct warranties. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope 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 115 and Ind AS 37. 5. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, B21 If the contracts described in paragraph B19 do not create financial assets or financial l .....

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8, Revenue, and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets).]" 7. Substituted vide F. No. 01/01/2009-CL-V(Part VI) - Dated 28-03-2018, w.e.f. 1st day of April, 2018, before it was read as, "2[(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 lessee s residual value guarantee embedd .....

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