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IFRS 17Case studies (Step 3 of 5)

Case study

Step 3 of 5
Professional fileIFRS 17L4 · Expert

File on a group of insurance contracts: aggregation, initial measurement, contractual service margin, simplified approach and presentation (IFRS 17)

7 documents27 tasks≈ 300 min
0 / 31 items completed
Standards
IFRS 17 — Insurance Contracts
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Sorvalis Assurances SA (fictitious entity) closes its accounts on 31 December 20X6; the financial statements will be authorised for issue on 28 February 20X7. The preparer builds the file for the first application of IFRS 17 for the group protection portfolio (two groups) and for a one-year travel insurance group. The file is reviewed by a reviewer before sign-off. Teaching simulation: the review trail of the file (preparation, reviewer notes and final sign-off) is simulated for demonstration purposes; it is neither a real review nor a validation of the content.

Your assignment

Draw up the plan of the file; classify groups G1 and G2 and check the cohort of G2; compute the loss of G2 and record it; measure G1 at inception (present values, fulfilment cash flows, margin) and record the premium; build the margin roll-forward of G1 at the closing date and record the release; judge the eligibility of G3 for the premium allocation approach, compute its amounts and record the entries; present the insurance revenue of the year, the cumulative effect and the information to prepare; deal with the review points and conclude. One document is not useful.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

7 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Sorvalis Assurances SA (fictitious entity) closes its accounts on 31 December 20X6, in EUR. Case conventions (pedagogical assumptions, not attributed to IFRS 17): annual discount rate of 5% for all flows, flows at year end, each flow discounted separately; risk adjustment given; share of 50% of the coverage units for the first year of group G1; acquisition cash flows of G3 expensed; the claims of G1 for the year are as expected; the entry of each group is illustrative. For G1, the six entries of the file record only the first premium flow and the release of the margin: claims, the release of the risk adjustment and the unwinding of the discount (including the interest on the margin, EUR 850) have no entry in the file.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Annual discount rate5%
Due date of the first year1 year
Due date of the second year2 years
Floor (zero)€0.00
Premium of G1 received at issue€40,000.00
Premium of G1 receivable at the end of the first year€42,000.00
Claims expected for G1, first year€31,500.00
Claims expected for G1, second year€33,075.00
Risk adjustment of G1€3,000.00
Fulfilment cash flows of G2 (net outflow)€4,800.00
Locked-in rate of G15%
Favourable change relating to future service€1,000.00
Adverse change relating to future service€200.00
Margin before release per the accounting records€18,650.00
Share of the units of the first year (case fraction)50%
Release of the risk adjustment of G1, first year€1,500.00
Initial margin of G1 under the adverse scenario€7,000.00
Premium received for G3€24,000.00
Acquisition cash flows deducted from the liability (zero: expensed)€0.00
Acquisition cash flows expensed€2,400.00
Premium to allocate over the coverage€24,000.00
Months of coverage elapsed2 months
Closing liability per the accounting records€20,000.00
Actuarial software invoice€7,500.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort7

  • Company profile and case conventions

  • Group G1: estimated flows

  • Group G2: flows and contracts

  • Group G1: movements of the margin in 20X6

  • Group G3: one-year travel insurance contracts

  • Reply from underwriting: dates of group G2

  • Invoice for actuarial software

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Draw up the plan of the file: which points are at stake and which documents are useful?

      2. Task 2Professional judgement

        Classify G1 and G2 into their profitability group.

      3. Task 3Professional judgement

        May the contracts of G2 form a single cohort?

      4. Task 4Calculation

        Compute the loss of G2 at initial recognition.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the loss of G2 at initial recognition.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Journal entries

        Record the loss of G2.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      6. Task 6Calculation

        G1: discount each outflow.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: discount each outflow.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Present value of the claims of the second year (33,075 ÷ 1.05²)

      7. Task 7Calculation

        G1: discount the premium receivable.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: discount the premium receivable.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Calculation

        G1: compute the discounted net outflow before risk adjustment.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the discounted net outflow before risk adjustment.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Calculation

        G1: compute the fulfilment cash flows.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the fulfilment cash flows.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      10. Task 10Calculation

        G1: compute the initial contractual service margin.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the initial contractual service margin.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Initial margin of G1 (max(0; 17,000))

      11. Task 11Journal entries

        G1: record the premium received and the liability.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      12. Task 12Calculation

        G1: compute the interest on the margin of the year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the interest on the margin of the year.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      13. Task 13Calculation

        G1: compute the margin before release.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the margin before release.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      14. Task 14Professional judgement

        Are the coverage unit and the 50% share defensible, and what to do for the second year?

      15. Task 15Calculation

        G1: compute the release of the period.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the release of the period.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      16. Task 16Calculation

        G1: compute the closing margin.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G1: compute the closing margin.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      17. Task 17Journal entries

        G1: record the release of the margin to insurance revenue.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      18. Task 18Professional judgement

        Is G3 eligible for the premium allocation approach?

      19. Task 19Calculation

        G3: compute the initial liability.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G3: compute the initial liability.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      20. Task 20Calculation

        G3: compute the revenue of the period.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G3: compute the revenue of the period.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      21. Task 21Calculation

        G3: compute the closing liability.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        G3: compute the closing liability.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      22. Task 22Journal entries

        G3: record the premium received and the acquisition cash flows expensed.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      23. Task 23Journal entries

        G3: record the insurance revenue of the period.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      24. Task 24Analysis

        Present the insurance revenue of the year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Present the insurance revenue of the year.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Insurance revenue of the year (42,325 + 4,000)

      25. Task 25Effects on the financial statements

        What is the cumulative effect of the six entries on the financial statements (excluding claims, the release of the adjustment and the interest on the margin, which have no entry in the file)?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      26. Task 26Analysis

        Which information is to be prepared for the notes?

      27. Task 27Conclusion

        Write the conclusion of the file and deal with the review points.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedReview point (blocking): attach the confirmation from underwriting on the issue dates of G2
      • Non-blockingOpenReview point: document the profile of the coverage units of the second year

      Information requests

      • ObtainedRequest to underwriting: issue date of the last contract of G2
      • Assumption documentedDocumented assumption: 50% of the coverage units for the first year

      Completion checklist

      • Grouping and cohort established from the confirmed datesDone
      • Fulfilment cash flows, margin and loss recomputedDone
      • Closing margin reconciled with the accounting recordsDone
      • Eligibility of G3 supported and liability reconciledDone
      • Entries balanced and effect on the financial statements establishedDone
      • Profile of the coverage units of the second year to be specifiedTo review

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 31).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 17 §22
      • IFRS 17 §B119
      • IFRS 17 §53