IFRS 4 is an

International Financial Reporting Standard International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...

(IFRS) issued by the

International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). ...

(IASB) providing guidance for the accounting of

insurance contract In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as ...

s. The standard was issued in March 2004, and was amended in 2005 to clarify that the standard covers most financial guarantee contracts. Paragraph 35 of IFRS also applies the standard to financial instruments with discretionary participation features. IFRS 4 was intended to provide limited improvements to accounting for insurance contracts until the IASB completed the second, more comprehensive phase of its insurance accounting project. The replacement standard, IFRS 17 was issued in May 2017 and will become effective on January 1, 2023, supplanting IFRS 4 at that time.

Provisions

Generally, IFRS 4 permitted companies to continue previous accounting practices for insurance contracts, but did enhance the disclosure requirements. IFRS 4 defines an insurance contract as a "contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder." The standard provides definitions to distinguish "insurance risk" from "financial risk." IFRS 4 exempts insurance companies from certain other IFRS standards, including

IAS 8 International Accounting Standard 8 ''Accounting Policies, Changes in Accounting Estimates and Errors'' or IAS 8 is an international financial reporting standard (IFRS) adopted by the International Accounting Standards Board (IASB). It prescribe ...

on changes in accounting policies, until phase II is complete, but IFRS 4 does introduce its own requirements for changes in accounting policies. Among the accounting requirements IFRS 4 introduced are a requirement to test that insurance liabilities are adequate and that

reinsurance Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event. With reinsurance, the company passes on ("cedes") some part of its own insu ...

assets are not

impaired Disability is the experience of any condition that makes it more difficult for a person to do certain activities or have equitable access within a given society. Disabilities may be Cognitive disability, cognitive, Developmental disability, dev ...

. It also prohibits setting up a liability for insurance claims that have not been incurred. Although insurance contracts are subject to the requirements of

IFRS 9 IFRS 9 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measuremen ...

that embedded derivatives within other contracts be measured separately at

fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated wi ...

, IFRS 4 makes a limited exception for embedded derivatives that meet the definition of an insurance contract. Such embedded derivatives within insurance contracts do not need to be measured separately.

Criticism

6 of the 14 IASB board members dissented from issuing IFRS 4. Board members James J. Leisenring, Mary E. Barth, Robert P. Garnett, Gilbert Gélard and John T. Smith dissented because they disagreed with the temporary exemption from the accounting policy changes of

. Leisenring, Barth, Garnett and Smith further objected to the certain practices permitted by IFRS 4 related to the accounting for assets backing insurance companies, including " shadow accounting." Leisenring, Barth and Smith also objected to the inclusion of financial instruments with discretionary participation features within IFRS 4 rather than within the accounting guidance for financial instruments (which at the time was

IAS 39 IAS 39: Financial Instruments: Recognition and Measurement was an international accounting standard which outlined the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell n ...

), and Smith raised other objections as well, including the exception to separately measure embedded derivatives that meet the definition of insurance. Board member Tatsumi Yamada dissented separately because he did not believe that IFRS 4 appropriately addressed mismatches between the accounting for insurance contracts and the assets backing the insurance contracts. Leisenring continued to criticize IFRS 4 after its issue, including a statement that “IFRS 4 is a gift of the IASB to the insurance community that keeps on giving."

References

{{International Financial Reporting Standards IFRS 04 Derivatives (finance) Actuarial science Insurance