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International Financial Reporting Standards
Quiz:
IFRS 7 and IFRS 4
Joint World Bank and IFRS Foundation ‘train
the trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
The views expressed in this presentation are those of the
The
views expressed
in this
presentation
areor
those
presenter,
not necessarily
those
of the IASB
IFRSof the
presenter,
Foundation.
not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 1
2
To which of the following financial instruments should
IFRS 7 be applied:
a. insurance contracts
b. the majority of interests in subsidiaries, associates
and joint ventures accounted for in accordance with
IFRS 10, IAS 27 and IAS 28
c. financial instruments within the scope of IFRS 5
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 1
3
To which of the following financial instruments should
IFRS 7 be applied:
a. insurance contracts
b. the majority of interests in subsidiaries, associates
and joint ventures accounted for in accordance with
IFRS 10, IAS 27 and IAS 28
c. financial instruments within the scope of IFRS 5
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 2
4
The concept of a ‘category’ of financial instruments is the
same as that of a ‘class’ of financial instruments.
a. true
b. false
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 2
5
The concept of a ‘category’ of financial instruments is the
same as that of a ‘class’ of financial instruments.
a. true
b. false
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 3
6
Entity A, a bank has a category of financial instruments,
‘loans and receivable’ presented on its statement of
financial position.
What classes of financial instruments (for IFRS 7
disclosure purposes) could be included in this category?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 3
7
Entity A, a bank has a category of financial instruments,
‘loans and receivable’ presented on its statement of
financial position.
What classes of financial instruments (for IFRS 7
disclosure purposes) could be included in this category?
• Types of loans—for example, overdrafts, credit cards,
mortgages and unsecured loans
• Types of customers—commercial loans or loans to
individuals
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 4
8
An insurer A enters a contract with B in terms of which the
insurer undertakes to pay CU1,000 to B in the event of
the credit default by C. The client has no relationship with
the third party.
Does the contract fall within the scope of IFRS 4?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 4
9
An insurer A enters a contract with B in terms of which the
insurer undertakes to pay CU1,000 to B in the event of
the credit default by C. The client has no relationship with
the third party.
Does the contract fall within the scope of IFRS 4?
No. Although there is risk transfer, and a specified
uncertain future event, the occurrence of the event will not
adversely affect B (B has no exposure to C). This is a
financial contract.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 5
10
Same facts as in Question 4, but B periodically advances
money to C. The payment of the CU1,000 is not however
dependent on any amount being owed to the B at the time
of default.
Does the contract fall within the scope of IFRS 4?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 5
11
Same facts as in Question 4, but B periodically advances
money to C. The payment of the CU1,000 is not however
dependent on any amount being owed to the B at the time
of default.
Does the contract fall within the scope of IFRS 4?
No. Similar to the previous example, there is risk transfer,
and a specified uncertain future event. Although in this
circumstance, B periodically has exposure to C, there is
no certainty that the occurrence of the event will
adversely affect B and the contract is not dependent on
that adverse affect. This is a financial contract.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 6
12
Same facts as in Question 4, but the contract stipulates
that an amount will only be paid if, and to the extent that B
suffers an actual loss.
Does the contract fall within the scope of IFRS 4?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 6
13
Same facts as in Question 4, but the contract stipulates
that an amount will only be paid if, and to the extent that B
suffers an actual loss.
Does the contract fall within the scope of IFRS 4?
Yes. Similar to the previous example, there is risk
transfer, and a specified uncertain future event.
Additionally there is defined event which will adversely
affect B, and contractual payout is dependent on, and
limited to that adverse effect.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 7
14
An insurer A enters into a life insurance contract with an
insured B. In terms of the contract, the insurer will pay
out a sum of CU1, 000 on the death of B. In addition, the
contract contains an investment element. In terms of this
latter element, A is obliged to pay B an amount on
surrender of the contract.
At 31/12/X1, A calculates the probability weighted liability
under the contract as a whole as CU300. The probability
weighted value of the surrender benefit is CU180. The
liability for the surrender value is CU200 if the policy were
to be surrendered on 31/12/xX.
What should the insurer record on its balance sheet?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 7 continued
15
a. Insurance liability
CU300
b. Insurance liability
CU120
Deposit liability
c. Insurance liability
Deposit liability
d. A choice
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
CU180
CU120
CU200
Solution 7
16
a. Insurance liability
CU300
Although the insurer can separately identify an
amount which may qualify as a deposit component, it
would not be permitted to measure this amount
separately. This is because the surrender value and
the insurance value are mutually dependent – they
can only be measured by reference to each other.
b. Insurance liability
CU120
Deposit liability
CU180
c. Insurance liability
CU120
Deposit liability
CU200
d. A choice
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 8
17
Same facts as in Question 7, but instead of a
surrender value, the insurance contract contains an
explicit account balance the value of which will be
paid out on the earlier of the death of the
policyholder, or the surrender of the contract.
a. Insurance liability
CU300
b. Insurance liability
CU120
Deposit liability
CU180
c. Insurance liability
CU120
Deposit liability
CU200
d. A choice
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Solution 8
18
a. Insurance liability
CU300
b. Insurance liability
CU120
Deposit liability
CU180
c. Insurance liability
CU120
Deposit liability
CU200
An explicit account balance can be separately
measured, so the answer to the first test is ‘yes’. The
second test asks whether all rights and obligations are
recognised. Since the value of the account is 200, a
value of 180 doesn’t recognise all obligations, and
therefore the entity must unbundle
d. A choice
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 9
An insurer has insurance liabilities with a probability
weighted value of CU20,000. It has entered into reinsurance contracts which exactly mirror the terms and
conditions of 20% of the insurance contracts.
What should it record on its statement of financial
position:
a.Insurance liabilities of CU16,000 (80% of CU20,000)
b.Insurance liabilities of CU20,000 and re-insurance
assets of CU4,000
c.Insurance liabilities of CU20,000 and re-insurance
assets of another amount (insufficient information)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
19
Solution 9
20
What should it record on its statement of financial
position:
a.Insurance liabilities of CU16,000 (80% of CU20,000)
b. Insurance liabilities of CU20,000 and re-insurance
assets of CU4,000
Reinsurance assets and insurance liabilities must be
grossed up on the face of statement of financial
position even though they represent the same risk
c.Insurance liabilities of CU20,000 and re-insurance
assets of another amount (insufficient information)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 10
21
An insurer reporting under IFRS has insurance liabilities
in a closed portfolio at 31/12/X1 at a discounted value of
CU10,000 (undiscounted CU12,000). At 31/12/X2, the
value of these liabilities has changed as follows:
• increased by CU250 due to the unwinding of present
value discount,
• increased by CU500 due to a decrease in the long term
discount rate
• decreased by CU600 due to expected claims
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Question 10 continued
22
What is the correct liability on the balance sheet for the
two years:
x1
x2
a. 12 000
11 400
b. 10 000
9 650
c. 10 000
10 150
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
(12 000 – 600)
(10 000 + 250 – 600)
(10 000 + 250 + 500 – 600)
Solution 10
23
What is the correct liability on the balance sheet for the
two years:
x1
x2
a. 12 000
11 400
b. 10 000
9 650
c. 10 000
10 150
(12 000 – 600)
(10 000 + 250 – 600)
(10 000 + 250 + 500 – 600)
All the above treatments are acceptable under IFRS 4
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
Expressions of individual views
by members of the IASB and its
staff are encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB on
accounting matters are
determined only after extensive
due process and deliberation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org