Onerous groups at inception

Learning objectives

• Explain that a group whose fulfilment cash flows are a net outflow is onerous, that the loss is recognised in profit or loss and that the margin is nil.L1
• Calculate the initial loss of an onerous group from given cash flows and a given risk adjustment.L3

Normative references

• IFRS 17 §47A contract is onerous at initial recognition if the fulfilment cash flows allocated to it, any previously recognised acquisition cash flows and any cash flows arising at that date are in total a net outflow; such contracts form a separate group, the loss is recognised in profit or loss, the carrying amount of the group equals its fulfilment cash flows and the margin is nil.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• When, on initial recognition, the sum of the fulfilment cash flows, the acquisition cash flows previously recognised and the cash flows arising at that date is a net outflow, the group is onerous, the loss is recognised in profit or loss and the contractual service margin is nil.L1
• Sablier SA recognises a group of contracts: it receives {premium_received} of premiums at issue and expects to pay {claims_amount} of claims in two years. Case data, from management's judgement: the discount rate is {discount_rate} (a rate not imposed by the standard) and the risk adjustment for non-financial risk is {risk_adjustment}. Calculate the present value of the claims, the net amount of the fulfilment cash flows and the premiums received at issue, and the loss on initial recognition.L3
• Gabarit SA recognises a group of contracts for which the present value of outflows is {pv_outflows}, the present value of inflows is {pv_inflows} and the risk adjustment for non-financial risk is {risk_adjustment} (case data; acquisition cash flows nil). The group is onerous on initial recognition. Record the entry for the loss on the group (the receipt of premiums is recorded separately).L3