• contingent consideration payable or receivable in a business combination
(see 2.3.1.F below); and
• insurance contracts in which the entity is the policyholder, unless those contracts
are reinsurance contracts (see 2.3.1.G below).
2.3.1.A Product
warranties
Warranties provided by a manufacturer, dealer or retailer in connection with the sale of
its goods or services to a customer are outside the scope of IFRS 17. [IFRS 17.7(a)]. Such
warranties might provide a customer with assurance that the related product will
function as the parties intended because it complies with agreed-upon specifications,
or they might provide the customer with a service in addition to the assurance that the
product complies with agreed-upon specifications. [IFRS 17.BC89].
Without this exception, many product warranties would have been covered by IFRS 17 as
they would normally meet the definition of an insurance contract. The Basis for
Conclusions observes that the IASB has excluded them from the scope of IFRS 17 because
if the standard were to apply, entities would generally apply the premium allocation
approach to such contracts, which would result in accounting similar to that which would
result from applying IFRS 15. Further, in the Board’s view, accounting for such contracts
in the same way as other contracts with customers would provide comparable
information for the users of financial statements for the entities that issue such contracts.
Hence, the Board concluded that changing the existing accounting for these contracts
would impose costs and disruption for no significant benefit. [IFRS 17.BC90].
4436 Chapter 52
Conversely, a product warranty is within the scope of IFRS 17 if it is not issued by a
manufacturer, dealer or retailer in connection with the sale of its goods or services to a
customer. See 3.7.1 below.
Other types of warranty are not specifically excluded from the scope of IFRS 17. For
example, a warranty given by a vendor to the purchaser of a business, such as in respect
of contingent liabilities related to unagreed tax computations of the acquired entity, is
an example of a transaction that may also fall within the scope of this standard.
2.3.1.B
Assets and liabilities arising from employment benefit plans
Employers’ assets and liabilities under employee benefit plans and retirement benefit
obligations reported by defined benefit retirement plans are excluded from the scope of
IFRS 17. These are accounted for under IAS 19 – Employee Benefits, IFRS 2 – Share-based
Payment – and IAS 26 – Accounting and Reporting by Retirement Benefit Plans. [IFRS 17.7(b)].
Many defined benefit pension plans and similar post-employment benefits meet the
definition of an insurance contract because the payments to pensioners are contingent
on uncertain future events such as the continuing survival of current or retired
employees. Without this exception they would have been within the scope of IFRS 17.
2.3.1.C
Contingent contractual rights and obligations related to non-financial items
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, variable and
other lease payments and similar items) are excluded from the scope of IFRS 17. These
are accounted for under IFRS 15, IFRS 16 – Leases – and IAS 38. [IFRS 17.7(c)].
2.3.1.D
Residual value guarantees
Residual value guarantees provided by a manufacturer, dealer or retailer and a lessee’s
residual value guarantees when they are embedded in a lease are excluded from the
scope of IFRS 17. They are accounted for under IFRS 15 and IFRS 16. [IFRS 17.7(d)].
However, stand-alone residual value guarantees that transfer insurance risk are not
addressed by other IFRSs and are within the scope of IFRS 17. [IFRS 17.BC87(d)].
2.3.1.E
Financial guarantee contracts
A financial guarantee contract is defined as a contract that requires the issuer to make
specified payments to reimburse the holder for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the original or modified
terms of a debt instrument. [IFRS 9 Appendix A]. These contracts transfer credit risk and may
have various legal forms, such as a guarantee, some types of letter of credit, a credit
default contract or an insurance contract. [IFRS 17.BC91].
Financial guarantee contracts are excluded from the scope of IFRS 17 unless the issuer
has previously asserted explicitly that it regards such contracts as insurance contracts
and has used accounting applicable to insurance contracts. If so, the issuer may elect to
apply either IFRS 17 or IAS 32, IFRS 7 and IFRS 9 to the financial guarantee contracts.
The issuer may make that choice contract by contract, but the choice for each contract
is irrevocable. [IFRS 17.7(e)].
Insurance contracts (IFRS 17) 4437
This accounting policy election is the same as that previously in IFRS 4. The Board
decided to carry forward to IFRS 17 the option to account for a financial guarantee
contract as if it were an insurance contract, without any substantive changes, because
the option has worked in practice and results in consistent accounting for economically
similar contracts issued by the same entity. The Board did not view it as a high priority
to address the inconsistency that results from accounting for financial guarantee
contracts differently depending on the issuer. [IFRS 17.BC93].
IFRS 17 does not elaborate on the phrase ‘previously asserted explicitly’. However, the
application guidance to IFRS 9 states that assertions that an issuer regards contracts as
insurance contracts are typically found throughout the issuer’s communications with
customers and regulators, contracts, business documentation and financial statements.
Furthermore, insurance contracts are often subject to accounting requirements that are
distinct from the requirements for other types of transaction, such as contracts issued
by banks or commercial companies. In such cases, an issuer’s financial statements
typically include a statement that the issuer has used those accounting requirements.
[IFRS 9.B2.6]. Therefore, it is likely that insurers that have previously issued financial
guarantee contracts and accounted for them under an insurance accounting and
regulatory framework will meet these criteria. It is unlikely that an entity not subject to
an insurance accounting and regulatory framework and existing insurers that had not
previously issued financial guarantee contracts would meet this criteria because they
would not have previously made the necessary assertions.
In our view, on transition to IFRS 17, an entity that has previously asserted explicitly that
it regards such contracts as insurance contracts and has used accounting applicable to
insurance contracts may reconsider its previous election regarding accounting for
financial guarantee contracts made under IFRS 4 and decide whether it would prefer to
account for those contracts under IFRS 17 or IFRS 9. This is because there are no specific
transition provisions either within IFRS 17 or IFRS 9 as to whether previous elections
made under a different Standard, i.e. IFRS 4, should be continued. Hence, IFRS 17 would
not prevent an entity from making new elections on application of IFRS 17. An entity
which had not previously asserted explicitly that it regards such contracts as insurance
contracts or which had not previously used accounting applicable to insurance contracts
(i.e. IAS 39 – Financial Instruments: Recognition and Measurement – or IFRS 9
accounting was applied under IFRS 4) may not reconsider its previous election.
It is observed in the Basis for Conclusions that some credit-related contracts lack the
precondition for payment that the holder has suffered a loss. One example of such a
contract is one that requires payments in response to changes in a specified credit rating
or credit index. The Board concluded that those contracts are derivatives and do not meet
the definition of an insurance contract. Therefore, such contracts will continue to be
accounted for as derivatives under IFRS 9. The Board noted that these contracts were
outside the scope of the policy choice in IFRS 4 carried forward into IFRS 17, so continuing
to account for them as derivatives would not create further diversity. [IFRS 17.BC94].
Accounting for financial guarantee contracts by issuers that have not elected to use
IFRS 17 is discussed in Chapter 41 at 3.4.2.
4438 Chapter 52
2.3.1.F Contingent
consideration payable or receivable in a business
combination
Contingent consideration payable or receivable in a business combination is outside the
scope of IFRS 17. [IFRS 17.7(f)]. Contingent consideration in a business combination is required
to be recognised at fair value at the acquisition date with subsequent remeasurements of
non-equity consideration included in profit or loss (see Chapter 9 at 7.1.3). [IFRS 3.58].
2.3.1.G
Direct insurance contracts in which the entity is the policyholder
Accounting by policyholders of direct insurance contracts (i.e. those that are not
reinsurance contracts) is excluded from the scope of IFRS 17. However, holders of
reinsurance contracts (cedants) are required to apply IFRS 17. [IFRS 17.7(g)].
The IASB originally intended to address accounting by policyholders of direct insurance
contracts in IFRS 17 but changed its mind. The Basis for Conclusions observes that other
IFRSs include requirements that may apply to some aspects of contracts in which the
entity is the policyholder. For example, IAS 37 sets requirements for reimbursements
from insurance contracts held that provide cover for expenditure required to settle a
provision and IAS 16 – Property, Plant and Equipment – sets requirements for some
aspects of reimbursement under an insurance contract held that provides coverage for
the impairment or loss of property, plant and equipment. Furthermore, IAS 8 –
Accounting Policies, Changes in Accounting Estimates and Errors – specifies a
hierarchy that an entity should use when developing an accounting policy if no IFRS
standard applies specifically to an item. Accordingly, the Board did not view work on
policyholder accounting as a high priority. [IFRS 17.BC66].
The consequential amendments made to IFRS 7, IFRS 9 and IAS 32 by IFRS 17 do not
exclude insurance contracts held from the scope of those standards. Consequently, to
achieve the intended interaction between the scope of these financial instrument
standards and IFRS 17 the IASB has tentatively decided to propose narrow-scope
amendments to IFRS 7, IFRS 9 and IAS 32 in order to exclude insurance contracts held
from the scope of those standards. See 18 below.
2.3.2
Fixed fee service contracts
A fixed-fee service contract is a contract in which the level of service depends on an
uncertain event but the fee does not. Examples include roadside assistance programmes
and maintenance contracts in which the service provider agrees to repair specified
equipment after a malfunction. It is stated in the Basis for Conclusions that such
contracts meet the definition of an insurance contract because: [IFRS 17.BC95]
• it is uncertain whether, or when, assistance or a repair will be needed;
• the owner is adversely affected by the occurrence; and
• the service provider compensates the owner if assistance or repair is needed.
Insurance contracts (IFRS 17) 4439
Although these are insurance contracts their primary purpose is the provision of
services for a fixed fee. Consequently, IFRS 17 permits entities a choice of applying
IFRS 15 instead of IFRS 17 to such contracts that it issues if, and only if, specified
conditions are met. The entity may make that choice contract by contract, but the
choice for each contract is irrevocable. The conditions are: [IFRS 17.8]
• the entity does not reflect an assessment of the risk associated with an individual
customer in setting the price of the contract with that customer;
• the contract compensates the customer by providing services, rather than by
making cash payments to the customer; and
• the insurance risk transferred by the contract arises primarily from the customer’s
use of services rather than from uncertainty over the cost of those services.
The Board had proposed originally to exclude fixed fee service contracts whose primary
purpose is the provision of services from the scope of IFRS 17. However, some
stakeholders noted that some entities issue both fixed-fee service contracts and other
insurance contracts. For example, some entities issue both roadside assistance contracts
and insurance contracts for damage arising from accidents. Therefore, the Board
decided to allow entities a choice of whether to apply IFRS 15 or IFRS 17 to fixed-fee
service contracts to enable such entities to account for both types of contract in the
same way. In the view of the Board, if IFRS 17 is applied to fixed-fee service contracts,
entities would generally apply the premium allocation approach (see 9 below) to such
contracts which would result in accounting similar to that which would result from
applying IFRS 15. [IFRS 17.BC96-97].
In many cases service agreements are priced using some form of risk assessment and
therefore the conditions above which require that IFRS 17 must be applied (and the
entity would not have a choice between IFRS 17 and IFRS 15) to fixed fee service
contracts may require the exercise of judgement. Despite the comment in the Basis
for Conclusions that the choice of whether to apply IFRS 15 or IFRS 17 was
introduced to assist entities that issue both roadside assistance contract and
insurance contracts, it is possible that other types of service contracts are within the
scope of IFRS 17.
The election described above is in respect of fixed fee service contracts (i.e. contracts
where the fee is fixed regardless of the level of service required during the contract
period). IFRS 17 does not refer to service contracts in which the level of fee varies
according to the level of service. These contracts are within the scope of IFRS 15 as they
should not contain significant insurance risk.
4440 Chapter 52
3
THE DEFINITION OF AN INSURANCE CONTRACT
3.1 The
definition
The definition of an insurance contract in
IFRS 17 is:
‘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’.
[IFRS 17 Appendix A].
This definition determines which contracts are within the scope of IFRS 17 rather than
other standards.
Is there significant insurance risk in the contract?
Yes
No
Apply IFRS 17 to
Accounting for entire contact
insurance components
under applicable IFRS
(e.g. IFRS 9 or IFRS 15)
The definition of an insurance contract is, in essence, the same as for IFRS 4.Therefore,
in many cases, contracts that were insurance contracts under IFRS 4 are expected to be
insurance contracts under IFRS 17 although IFRS 17 contains no transitional provisions
which ‘grandfather’ conclusions made under IFRS 4 except for the consequential
amendments to IFRS 3 – Business Combinations (see 13 below).
However, there have been clarifications to the related application guidance explaining
the definition to require that: [IFRS 17.BC67]
• an insurer should consider the time value of money in assessing whether the
additional benefits payable in any scenario are significant (see 3.2 below); and
• a contract does not transfer significant insurance risk if there is no scenario with
commercial substance in which the insurer can suffer a loss on a present value basis
(see 3.2 below).
Both of these clarifications are intended to ensure that the determination of insurance
risk is made on a present value basis as it was considered that IFRS 4 was unclear on the
matter. Additionally, the definition of significant insurance risk (see 3.2 below) uses the
word ‘amounts’ instead of ‘benefits’ in order to capture payments that may not
necessarily be payable to policyholders (for example claim handling expenses).
While the definition of an insurance contract has not changed much from IFRS 4, the
consequences of qualifying as an insurance contract have changed. This is because
IFRS 4 allowed entities to use their previous accounting policies for contracts that
qualified as insurance contracts. Hence, under IFRS 4, many non-insurance entities,
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 878