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WorkpaperIFRS 17 — Insurance ContractsL2 · L3

Initial measurement of a group: present values of the flows, fulfilment cash flows, contractual service margin or loss, and recognition entry

3 missions10 sections to document90 min
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Objective of the workpaper

Record the future flows of the group, the discount rate and the risk adjustment for non-financial risk: they are case data. Discount each flow separately, total the discounted net outflow, add the risk adjustment to obtain the fulfilment cash flows, then derive the margin (never a profit at inception) or the loss of the onerous group. Record the matching entry and write the conclusion.

10 sections · 36 blocks · 10 calculations · 2 entries

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    File and entity
    Initial measurement of a group: fulfilment cash flows, risk adjustment, contractual service margin and onerous group
    Case tasks documented here
    • Group A: discount each outflow.
    • Group A: discount the premium receivable.
    • Group A: compute the discounted net outflow before risk adjustment.
    • Group A: compute the fulfilment cash flows.
    • Group A: compute the initial contractual service margin.
    • Group A: compute any loss at initial recognition.
    • Group A: record the premium received and the liability.
    • Group B: discount each outflow.
    • Group B: discount the premium receivable.
    • Group B: compute the discounted net outflow before risk adjustment.
    • Group B: compute the fulfilment cash flows.
    • Group B: compute the initial contractual service margin.
    • Group B: compute the loss at initial recognition.
    • Group B: record the loss of the onerous group.
    1

    Facts and data

    Inputs

    • Group of contracts: portfolio, cohort, coverage period

      TextRequired

      TWO_YEAR_GROUP_ISSUED_ON_1_JANUARY_20X6_WITH_A_FIRST_PREMIUM_RECEIVED

    • Nature of the flow estimates used and of their assumptions

      Text

      EXPLICIT_ESTIMATES_WEIGHTED_BY_THE_PROBABILITY_OF_THREE_SCENARIOS

    • Origin of the discount rate and of the risk adjustment for non-financial risk

      Text

      RATE_OF_5_PERCENT_AND_RISK_ADJUSTMENT_SET_BY_MANAGEMENT

    • Annual discount rate (case data)

      Number

      5 %

    • Time of the first flow (end of the first year)

      Number

      1 years

    • Time of the second flow (end of the second year)

      Number

      2 years

    • Claims expected in the first year

      Number

      52,500

    • Claims expected in the second year

      Number

      55,125

    • Management expenses of the first year

      Number

      10,500

    • Acquisition cash flows paid at the end of the first year

      Number

      8,400

    • Premium received at initial recognition

      Number

      70,000

    • Premium receivable at the end of the first year

      Number

      73,500

    • Risk adjustment for non-financial risk (case data)

      Number

      6,000

    • Floor (zero)

      Number

      0

    2

    Supporting documents

    Evidence

    • Documents obtained and referenced (actuarial note on the flows, rate used, risk adjustment calculation)

      EvidenceRequired

    3

    Analysis of the initial measurement

    Analysis

    IFRS 17

    • Points examined: components of the fulfilment cash flows, no profit at inception, onerous group

      ChecklistRequired

      • Fulfilment cash flows = estimates of future flows, discounting and risk adjustment for non-financial risk
      • Each flow discounted separately from its due date (case convention)
      • Margin set so that no income or expense arises at initial recognition
      • Onerous group: loss in profit or loss, zero margin, liability brought to the fulfilment cash flows
    4

    Calculations

    Calculations

    IFRS 17

    • Present value of the claims of the first year

      Calculation

      50,000

      Claims expected in the first year ; Annual discount rate (case data) ; Time of the first flow (end of the first year)

    • Present value of the claims of the second year

      Calculation

      50,000

      Claims expected in the second year ; Annual discount rate (case data) ; Time of the second flow (end of the second year)

    • Present value of the management expenses

      Calculation

      10,000

      Management expenses of the first year ; Annual discount rate (case data) ; Time of the first flow (end of the first year)

    • Present value of the acquisition cash flows

      Calculation

      8,000

      Acquisition cash flows paid at the end of the first year ; Annual discount rate (case data) ; Time of the first flow (end of the first year)

    • Present value of the premium receivable

      Calculation

      70,000

      Premium receivable at the end of the first year ; Annual discount rate (case data) ; Time of the first flow (end of the first year)

    • Discounted net outflow before risk adjustment (outflows − inflows)

      Calculation

      -22,000

      Present value of the claims of the first year ; Present value of the claims of the second year ; Present value of the management expenses ; Present value of the acquisition cash flows ; − Present value of the premium receivable ; − Premium received at initial recognition

    • Fulfilment cash flows (discounted net outflow + risk adjustment)

      Calculation

      -16,000

      Discounted net outflow before risk adjustment (outflows − inflows) ; Risk adjustment for non-financial risk (case data)

    • Fulfilment cash flows with the sign reversed (net inflow less risk adjustment)

      Calculation

      16,000

      − Discounted net outflow before risk adjustment (outflows − inflows) ; − Risk adjustment for non-financial risk (case data)

    • Initial contractual service margin (the higher of zero and the net inflow)

      Calculation

      16,000

      Floor (zero) ; Fulfilment cash flows with the sign reversed (net inflow less risk adjustment)

    • Initial loss of the onerous group (the higher of zero and the fulfilment cash flows)

      Calculation

      0

      Floor (zero) ; Fulfilment cash flows (discounted net outflow + risk adjustment)

    5

    Illustrative entries

    Entries

    • Recognition entry of the profitable group

      Entry

      AccountDebitCredit
      Cash: premium received70,000
      Insurance contract liability70,000

    • Entry of the loss of the onerous group

      Entry

      Debit Loss on onerous group ← Initial loss of the onerous group (the higher of zero and the fulfilment cash flows) ; Credit Insurance contract liability ← Initial loss of the onerous group (the higher of zero and the fulfilment cash flows)

    6

    Judgments: estimates, discount rate and profitability of the group

    Judgment

    IFRS 17

    • Flow estimates, discount rate and risk adjustment

      JudgmentRequired

      Assumptions supported by the data of the case

      Assumptions supported by the data of the case / Assumptions to revise before recognition / Not applicable

      Professional judgment: the rate and the risk adjustment are case data, based on the judgment of the entity; the standard does not impose their value in this exercise.

    • Rationale: source of the estimates, origin of the rate, risk adjustment technique (case data)

      Text

      ESTIMATES_AND_RATE_ARE_CASE_DATA_BASED_ON_THE_JUDGMENT_OF_THE_ENTITY

    • Profitability of the group at initial recognition

      JudgmentRequired

      Profitable group: positive margin, no loss

      Profitable group: positive margin, no loss / Onerous group: loss in profit or loss, zero margin / Not applicable

      Professional judgment: the conclusion follows from the sign of the computed fulfilment cash flows, not from a preference of management.

    • Rationale: sign of the fulfilment cash flows and consequence for the margin and the loss

      Text

      FULFILMENT_CASH_FLOWS_ARE_A_NET_INFLOW_SO_A_MARGIN_AND_NO_LOSS

    7

    Items to document for the notes

    Disclosure

    IFRS 17

    • Information to prepare on the initial measurement

      Checklist

      • Initial margin or loss of the new groups
      • Discount rate used
      • Approach followed for the risk adjustment
    8

    Effect on the financial statements

    FS impact

    • Effect derived from the entries

      Table

    9

    Conclusion

    Conclusion

    • Fulfilment cash flows of the group, margin or loss at initial recognition, entry and judgments on the assumptions

      ConclusionRequired

    10

    Normative references

    References

    • Normative references cited in this workpaper

      References

    11

    Checks and financial statement impact

    • Group describedPass
    • Assumptions judged and supportedPass
    • Profitability of the group judged and supportedPass
    • Fulfilment cash flows = discounted net outflow + risk adjustmentPass
    • Profitable group entry balancedPass
    • Loss entry balancedNot evaluated
    Assets
    70,000
    Liabilities
    70,000
    Profit or loss
    0
    OCI
    0
    Equity
    0