The margin in the variable fee approach

Learning objectives

• Explain that the contractual service margin of contracts with direct participation features absorbs the change in the entity's share of the underlying items.L3
• Analyse the effect of a change in the fair value of the underlying items on the margin.L4

Normative references

• IFRS 17 §45For contracts with direct participation features, the contractual service margin is adjusted for the change in the entity's share of the fair value of the underlying items and for changes in fulfilment cash flows relating to future service (variable fee approach).
• IFRS 17 §B104The variable fee is the entity's share of the fair value of the underlying items less the fulfilment cash flows that do not vary based on the returns on those items.

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

1 question

• A contract of Prisme SA is a contract with direct participation features. At the closing date, the fair value of the underlying items falls by 1,000 euros. The entity's share of those items (variable fee) is 20%, and the fulfilment cash flows that do not vary with the underlying items are nil (case data). Write a short justification explaining why this fall adjusts the contractual service margin rather than going directly to profit or loss, and by what amount.L3