Introduction and the Framework


IFRS 4 Insurance Contracts



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IFRS 4 Insurance Contracts

  • Related Standards
  • IFRS 4 Insurance Contracts
  • IAS 11 Construction contracts
  • IAS 17 Leases
  • IAS 28 Investments in Associates
  • IAS 39 Financial Instruments: Recognition and Measurement
  • IAS 41 Agriculture

Objective and scope

  • Objective and scope
  • Measurement of revenue
  • Identification of the transaction
  • Sale of goods
  • Rendering of services
  • Interest, royalties, and dividends
  • Disclosure

IAS 18 deals with the recognition and measurement of revenues

  • IAS 18 – Objective and Scope
  • IAS 18 deals with the recognition and measurement of revenues
  • Revenues are generated by ordinary business activities such as:
    • Sale of goods
    • Sale of services
    • Fees
    • Interest
    • Royalties
    • Dividends and other sources
  • According to IAS 18.6, the following are examples of items scoped out of the standard:
    • Lease agreements
    • Changes in the value of other current assets
    • Extraction of mineral ores
  • IAS 18 – Objective and Scope
  • The IAS framework defines income to include both revenues and gains
  • IAS 18.7 provides the following definition of revenue:
  • “Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants”
  • It is important to separate income from ordinary activities and income from atypical/infrequent activities since many users use the financial statements to assess the nature, timing, and amount of future earnings and cash flows
  • Income from ordinary activities is more likely to recur than income from atypical/infrequent activities

Revenue is measured at the fair value of the consideration received or receivable

  • Revenue is measured at the fair value of the consideration received or receivable
  • Fair value is defined in IAS 18.7 as follows:
  • “Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction”

AMOUNTS PAID OVER TIME:

  • IAS 18 – Measurement of Revenue
  • AMOUNTS PAID OVER TIME:
  • The fair value is the amount of cash or cash equivalents received
  • When the amount due is paid over time, the cash flows are discounted using:
  • • a discount rate that reflects either the prevailing rate for a similar instrument, or
  • • an imputed rate of interest that equates the receivables to the current cash
  • sales price
  • The choice of interest rate should reflect the riskiness of the cash flows.
    • Generally, with sales, the amount and timing of the receivables is fixed, although there will often be credit risk attached to the cash flow stream
    • The discount rate might therefore reflect the customer’s incremental borrowing rate
  • An alternate view is to impute an interest rate.
    • If we know the cash selling price and the total cash flows to be paid under the arrangement, the difference should theoretically be interest

BARTER TRANSACTIONS:

  • IAS 18 – Measurement of Revenue
  • BARTER TRANSACTIONS:
  • Barter transactions that deal with items that are similar in nature and value are not accounted for as revenues
    • The standard contemplates situations where commodities like oil or milk might be exchanged by suppliers to facilitate customer sales
    • The substance of this type of transaction is that it is more like a loan of the commodity by one supplier to the other, which will be repaid when the supplier who borrowed the commodity returns it
  • If the goods are dissimilar, it is considered to be a sale and recorded as revenues
    • The entity has transferred the risks and rewards of the one asset (a sale) and taken on new and different risks and rewards for the other asset (a purchase)
    • The transaction is measured at the fair value of the asset received unless it cannot be reliably measured, in which the fair value of the asset given up is used

BARTER TRANSACTIONS (continued):

  • IAS 18 – Measurement of Revenue
  • BARTER TRANSACTIONS (continued):
  • Barter transactions involving an exchange of advertising services are dealt with separately
  • Barter transactions involving advertising may result in revenue recognition as long as the advertising services provided and received are different
  • The problem arises with measurement
  • Although it may be difficult to measure the services received, the entity may be able to measure the services rendered by looking at similar advertising contracts that occur frequently and represent a predominant number of transactions involving cash or cash-like consideration with other parties
  • Thus, these transactions may be measured based on the fair value of the services provide
  • IAS 18 – Identification of the Transaction
  • In order to understand how to account for a transaction, we must understand the substance of the business transaction
  • In many cases, the transaction involves a collection of items or a bundle
    • Because the revenue recognition points may be different depending on the asset sold or service rendered, we must break the transaction down into separately identifiable components
    • Each component is then accounted for separately
  • The standard does not give concrete guidance as to how to divide the transaction into separate units so judgment must be used


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