MT
ACCOUNTANCY PROFESSION (GENERAL ACCOUNTING PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE ENTITIES RELATED TO THE
Table of Provisions (14)
Statutory Text (14 Articles)
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
SUBSIDIARY LEGISLATION 281.07
ACCOUNTANCY PROFESSION (GENERAL
ACCOUNTING PRINCIPLES IN RESPECT OF
CERTAIN ELIGIBLE ENTITIES RELATED TO THE
BUSINESS OF INSURANCE) REGULATIONS
1 st January, 2023
LEGAL NOTICE 299 of 2023, as amended by Legal Notice 299 of 2025 * .
The title of these regulations is the Accountancy
Profession (General Accounting Principles in respect of certain
Eligible Entities related to the business of Insurance) Regulations.
L.N. 299 of
(regulations 3, 4 and 5)
2025. General Accounting Principles in respect of certain Eligible
Entities related to the business of Insurance
Section 1: Citation and objective
1.1
The title of this schedule is the General Accounting
Principles in respect of certain Eligible Entities related to the business
of Insurance (GAPEE).
1.2
The objective of GAPEE is to ensure that reporting
entities or groups falling within its scope provide in their financial
statements information about the financial position and financial
performance and cash flows of the entity or group that is useful to
users in assessing the stewardship of management and for making
economic decisions, recognising that the balance between users’ needs
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
in respect of stewardship and economic decision-making for entities or
groups falling within its scope is different from that for other reporting
entities or groups.
Section 2: Interpretation
2.1
The terms "GAPEE", "these Principles", "this Schedule"
and "General Accounting Principles in respect of certain Entities
related to the business of Insurance" all refer to the general accounting
principles in respect of certain entities related to the business of
Insurance set out in the Schedule to these regulations and forming an
integral part hereof.
2.2
Most terms used in these Principles are defined in
regulation 3 of these regulations and in various relevant Sections of
this Schedule. Nevertheless, terms that are not so defined shall have
the following meaning, unless the context otherwise requires
(a)
"Amortisation" means the systematic allocation of
the depreciable amount of an asset over its useful life.
(b)
"Carrying amount" refers to the amount at which
an asset or liability is recognised in the balance sheet.
(c)
"Cash flows" means inflows and outflows of cash
and cash equivalents.
(d)
"Class of assets" means a grouping of assets of a
similar nature and use in an entity’s operations.
(e)
"Closing rate of exchange" is the spot exchange
rate between two currencies at the balance sheet date.
(f)
"Depreciable amount" is the cost of an asset, or
other amount substituted for cost (in the financial statements),
less its residual value.
(g)
"Depreciation" means the systematic allocation of
the depreciable amount of an asset over its useful life.
(h)
"Derecognition" is the removal of a previously
recognised asset or liability from an entity’s balance sheet.
(i)
"Economic life" is either
(i)
the period over which an asset is expected
to be economically useable by one or more users; or
(ii)
the number of production or similar units
expected to be obtained from the asset by one or more
users.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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(j)
"Employee benefits" refers to all forms of
consideration given by an entity in exchange for service
rendered by employees.
(k)
"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.
(l)
"Fellow subsidiary" is an entity which is under
common control with the reporting entity.
(m) "Finance costs" means interest and other costs
incurred by an entity in connection with the borrowing of funds.
(n)
"Goodwill" means future economic benefits
arising from assets that are not capable of being individually
identified and separately recognised.
(o)
"Group" means a parent and all its subsidiaries
and the term group entities shall be construed accordingly.
(p)
"Impracticable"- applying a requirement is
impracticable when the entity cannot apply it after making
every reasonable effort to do so.
(q)
"Measurement" is the process of determining the
monetary amounts at which the elements of the financial
statements are to be recognised and carried in the balance sheet
and income statement.
(r)
"Minority interest" refers to that portion of the
profit or loss and net assets of a subsidiary attributable to equity
interests that are not owned, directly or indirectly through
subsidiaries, by the parent.
(s)
"Present value" is a current estimate of the present
discounted value of the future net cash flows in the normal
course of business.
(t)
"Probable" means more likely than not.
(u)
"Profit" is the residual amount that remains after
expenses have been deducted from income.
(v)
"Reporting date" or "balance sheet date" are the
end of the latest financial reporting period covered by financial
statements.
(w) "Reporting period" or "financial reporting period"
refer to a period, ending on the entity’s reporting date, for
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which financial statements have been prepared.
(x)
"Residual value" (of an asset) is the estimated
amount that an entity would currently obtain from disposal of
an asset, after deducting the estimated costs of disposal, if the
asset were already of the age and in the condition expected at
the end of its useful life.
(y)
"Useful life" (Section 14) means the estimated
remaining period, from the commencement of the lease term,
without limitation by the lease term, over which the economic
benefits embodied in the asset are expected to be consumed by
the entity.
(z)
"Useful life" (Sections 7, 11, 12 and 21) means
either
(i)
the period over which an asset is
expected to be available for use by the entity; or
(ii)
the number of production or similar
units expected to be obtained from the asset by the
entity.
Section 3: Concepts and pervasive principles
3.1
The scope of this Section is to deal with
(a)
the objective of financial statements and the
underlying assumptions;
(b)
the qualitative characteristics that determine the
usefulness of information in financial statements; and
(c)
the definition and recognition of the elements of
financial statements.
Objective of financial statements and underlying assumptions
3.2
The objective of financial statements prepared under
GAPEE is to provide information about an entity’s
(a)
financial position,
(b)
financial performance, and
(c)
the ability to generate cash and cash equivalents
that is useful to a wide range of users in assessing the
stewardship of management and for economic decision-making.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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3.3
In order to meet their objective, financial statements
(with the exception of cash flow information) shall be prepared on the
accrual basis of accounting. Under this basis, the effects of
transactions and other events giving rise to assets, liabilities, equity,
income or expenses are recognised when they occur, rather than when
cash or its equivalent is received or paid, and hence they are recorded
in the accounting records and reported in the financial statements of
the financial reporting periods to which they relate.
3.4
The entity shall be presumed to be carrying on business
as a going concern. The financial statements shall be prepared on this
basis unless management either intends to liquidate the entity or to
cease trading, or it has no realistic alternative but to do so. When
management is aware, in making its assessment, of material
uncertainties related to events or conditions that may cast significant
doubt upon the entity’s ability to continue as a going concern, those
uncertainties shall be disclosed. When financial statements are not
prepared on a going concern basis, that fact shall be disclosed, together
with the basis on which the financial statements are prepared and the
reason why the entity is not regarded as a going concern. The period
considered by management in making its assessment of the entity’s
ability to continue as a going concern shall not be less than twelve
months from the balance sheet date. The financial statements shall not
be prepared on a going concern basis if management determines after
the balance sheet date either that it intends to liquidate the entity or to
cease trading, or that it has no realistic alternative but to do so.
3.5
The uncertainties that inevitably surround many events
and circumstances are acknowledged by the disclosure of their nature
and extent and by the exercise of prudence in the preparation of the
financial statements. Prudence is the inclusion of a degree of caution
in the exercise of the judgements needed in making the estimates
required under conditions of uncertainty, in particular
(a)
only profits made by the balance sheet date may
be recognised,
(b)
all liabilities arising in the course of the financial
year concerned or in the course of a previous financial year
shall be recognised, even if such liabilities become apparent
only between the balance sheet date and the date on which the
balance sheet is drawn up, and
(c)
all negative value adjustments shall be
recognised, whether the result of the financial year is a profit or
a loss.
However, the exercise of prudence does not allow the deliberate
understatement of assets or income, or the deliberate overstatement of
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liabilities or expenses. In short, prudence does not permit bias.
3.6
The requirements set out in these Principles regarding
recognition, measurement, presentation, disclosure and consolidation
need not be complied with when the effect of complying with them is
immaterial. Information is material if its omission or misstatement
could influence the economic decisions of users made on the basis of
the financial statements. Materiality depends on the size of the item or
error judged in the particular circumstances of its omission or
misstatement. However, it is inappropriate to make, or leave
uncorrected, immaterial departures from GAPEE to achieve a
particular presentation of an entity’s financial position, financial
performance or cash flows.
Qualitative
characteristics
of
information
in
financial
statements
3.7
Qualitative characteristics are the attributes that make the
information provided in financial statements useful to users.
3.8
Understandability – The information provided in
financial statements should be presented in a way that makes it
comprehensible by users who have a reasonable knowledge of
business and economic activities and accounting and a willingness to
study the information with reasonable diligence. However, the need
for understandability does not allow relevant information to be omitted
on the grounds that it may be too difficult for some users to
understand.
3.9
Relevance – The information provided in financial
statements must be relevant to the decision-making needs of users.
Information has the quality of relevance when it influences the
economic decisions of users by helping them evaluate past, present or
future events or confirming, or correcting, their past evaluations.
3.10 Reliability – The information provided in financial
statements must be reliable. Information is reliable when it is free from
material error and bias and represents faithfully that which it either
purports to represent or could reasonably be expected to represent.
Financial statements are not free from bias if, by the selection or
presentation of information, they are intended to influence the making
of a decision or judgement in order to achieve a predetermined result
or outcome.
3.11 Substance over form – Transactions and other events and
conditions shall be accounted for and presented in accordance with
their substance and economic reality and not merely their legal form.
This enhances the reliability of financial statements.
3.12
Completeness – To be reliable, the information in
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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financial statements must be complete within the bounds of materiality
and cost. An omission can cause information to be false or misleading
and thus unreliable and deficient in terms of its relevance.
3.13 Comparability – Users must be able to compare the
financial statements of an entity through time in order to identify
trends in its financial position and performance. Users must also be
able to compare the financial statements of different entities in order to
evaluate their relative financial position, performance and cash flows.
Hence, the measurement and display of the financial effect of like
transactions and other events and conditions must be carried out in a
consistent way throughout an entity and over time for that entity and in
a consistent way for different entities. In addition, users must be
informed of the accounting policies employed in the preparation of the
financial statements, and of any changes in those policies and the
effects of such changes.
3.14 Timeliness – To be relevant, financial information must
be able to influence the economic decisions of users. Timeliness
involves providing the information within the decision time frame. If
there is undue delay in the reporting of information it may lose its
relevance. Management may need to balance the relative merits of
timely reporting and the provision of reliable information. In achieving
a balance between relevance and reliability, the overriding
consideration is how best to satisfy the needs of users in making
economic decisions.
3.15 Balance between benefit and cost – The benefits derived
from information should exceed the cost of providing it. The
evaluation of benefits and costs is substantially a judgemental process.
Furthermore, the costs are not necessarily borne by those users who
enjoy the benefits. In applying a costs and benefits test, an entity
should understand that the benefits of the information may also be
enjoyed by a broad range of external users.
True and fair view
3.16 Preparation of financial statements in accordance with
these Principles is presumed to result in financial statements which
give a true and fair view of the financial position, financial
performance and cash flows of an entity.
3.17 The annual financial statements shall give a true and fair
view of the entity's assets, liabilities, financial position and profit or
loss. Where the application of these Principles would not be sufficient
to give a true and fair view of the entity's assets, liabilities, financial
position and profit or loss, such additional information as is necessary
to comply with that requirement shall be given in the notes to the
financial statements.
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3.18 Transactions and other events and conditions shall be
accounted for and presented within items in the income statement and
balance sheet in accordance with their substance and economic reality
and not merely their legal form. To determine the substance of a
transaction it is necessary to identify whether the transaction has given
rise to new assets or liabilities for the reporting entity and whether it
has changed the entity’s existing assets or liabilities.
3.19 The application of the qualitative characteristics and
appropriate Sections within these Principles normally results in
financial statements that convey a true and fair view. However, if in
exceptional cases an entity’s management concludes that compliance
with any of the requirements of these Principles is inconsistent with
the requirement to give a true and fair view, an entity shall depart from
that requirement to the extent necessary to give a true and fair view.
Particulars of the departure, the reasons for it and its effect must be
given in a note to the financial statements as follows
(a)
a statement that there has been a departure from
the requirements of GAPEE and that the departure is necessary
to give a true and fair view;
(b)
an explanation of the nature and the reasons for
the departure;
(c)
its effect on the entity’s assets, liabilities, financial
position and profit or loss.
3.20 Where a departure continues in subsequent financial
statements, the disclosures shall be made in all subsequent financial
statements and shall include comparative amounts for the previous
financial reporting period.
The elements of financial statements
3.21 Financial statements portray the financial effects of
transactions and other events by grouping them into broad classes
according to their economic characteristics. These broad classes are
termed the elements of financial statements, which term includes
assets, liabilities, equity, income and expenses. Paragraphs 3.22 – 3.30
define these elements.
3.22 The elements directly related to the measurement of
financial position are assets, liabilities and equity.
3.23 An asset is a resource controlled by the entity as a result
of past events and from which future economic benefits are expected
to flow to the entity. The future economic benefit embodied in an asset
is the potential to contribute, directly or indirectly, to the flow of cash
and cash equivalents to the entity, for example through use in the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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entity’s operating activities, or through convertibility to cash and cash
equivalents, or through its capability to reduce cash outflows.
3.24 A liability is a present obligation of the entity arising
from past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits. An
essential characteristic of a liability is that the entity has a present,
rather than a future, obligation. A present obligation therefore arises
from past transactions or other past events. Moreover, the settlement of
the present obligation usually involves the entity giving up resources
embodying economic benefits, such as the payment of cash, transfer of
other assets, provision of services, replacement of that obligation with
another obligation, or conversion of that obligation to equity.
3.25 Equity is the residual interest in the assets of the entity
after deducting all its liabilities. However it may be sub-classified in
the balance sheet, for example in funds contributed by shareholders,
retained earnings and other reserves.
3.26 Profit is frequently used as a measure of an entity’s
performance. The elements directly related to the measurement of
profit are income and expenses.
3.27 Income is increases in economic benefits during the
financial reporting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
3.28 The definition of income encompasses both revenue and
gains. Revenue arises in the course of the ordinary activities of an
entity and is referred to by a variety of different names including sales,
fees, interest, dividends, royalties and rent. Gains represent other items
that meet the definition of income in paragraph 3.27 and may, or may
not, arise in the course of the ordinary activities of an entity. Gains
include, for example, those arising on the disposal of non-current
assets or from increases in their carrying amounts.
3.29 Expenses are decreases in economic benefits during the
financial reporting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
3.30 The definition of expenses encompasses losses as well as
those expenses that arise in the course of the ordinary activities of the
entity. The latter include, for example, cost of sales, wages and
depreciation. They usually take the form of an outflow or depletion of
assets such as cash and cash equivalents, inventory, property, plant and
equipment. Losses represent other items that meet the definition of
expenses in paragraph 3.29 and may, or may not, arise in the course of
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ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
the ordinary activities of the entity. Losses include, for example, those
resulting from disasters such as fire and flood, those arising on the
disposal of non-current assets, and those unrealised losses arising from
the effects of increases in the rate of exchange for a foreign currency in
respect of the borrowing of an entity in that currency.
Recognition of the elements of financial statements
3.31 Recognition is the process of incorporating in the balance
sheet or income statement an item that meets the definition of an
element and satisfies the following criteria
(a)
it is probable that any future economic benefit
associated with the item will flow to or from the entity;
(b)
the item has a cost or value that can be measured
reliably.
3.32 An asset is recognised in the balance sheet when it is
probable that the future economic benefits will flow to the entity and
the asset has a cost or value that can be measured reliably. An asset is
not recognised in the balance sheet when expenditure has been
incurred for which it is considered improbable that economic benefits
will flow to the entity beyond the current financial reporting period.
Such a transaction would therefore be recognised as an expense in the
income statement.
3.33 A liability is recognised in the balance sheet when it is
probable that an outflow of resources embodying economic benefits
will result from the settlement of a present obligation and the amount
at which the settlement will occur can be measured reliably.
3.34 Income is recognised in the income statement when an
increase in future economic benefits related to an increase in an asset
or a decrease of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of income occurs
simultaneously with the recognition of increases in assets or decreases
in liabilities.
3.35 Expenses are recognised in the income statement when a
decrease in future economic benefits related to a decrease in an asset
or an increase of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of expenses occurs
simultaneously with the recognition of an increase in liabilities or a
decrease in assets. Expenditure incurred on assets that generate
economic benefits over several financial reporting periods is normally
recognised as an expense in the income statement on the basis of
systematic and rational allocation procedures. This is often necessary
in recognising the expenses associated with the using up of assets such
as property, plant and equipment, patents and trademarks; in such
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cases the expense is referred to as depreciation or amortisation. An
expense is also recognised immediately in the income statement when
an expenditure produces no future economic benefits or when, and to
the extent that, future economic benefits do not qualify, or cease to
qualify, for recognition in the balance sheet as an asset. An expense is
also recognised in the income statement in those cases when a liability
is incurred without the recognition of an asset.
3.36 The requirements for recognising and measuring assets,
liabilities, income and expenses in these Principles are based on
pervasive principles that are identified in paragraphs 3.21 – 3.35 of
this Section. In the absence of a requirement in GAPEE that applies
specifically to a transaction or other event or condition, paragraph 5.5
establishes a hierarchy for an entity to follow in deciding on the
appropriate accounting policy in the circumstances. The second level
of that hierarchy (paragraph 5.5(b)) requires an entity to consider the
pervasive recognition and measurement principles set out in
paragraphs 3.21 – 3.35 and paragraph 3.39 of this Section.
Derecognition of the elements of financial statements
3.37 After an asset or liability is recognised on the balance
sheet, it shall be derecognised if, and to the extent that, it is no longer
probable that any future economic benefits associated with the item
will flow to or from the entity.
Measurement of the elements of financial statements
3.38 Measurement is the process of determining the monetary
amounts at which assets, liabilities, income and expenses are to be
recognised and carried in the balance sheet and income statement.
Measurement involves the selection of a basis of measurement. These
Principles specify which measurement basis an entity shall use for
many types of assets, liabilities, income and expenses. In the absence
of a requirement in GAPEE that applies specifically to a transaction or
other event or condition, an entity shall have regard to measurement
bases for similar assets, liabilities, income and expenses when
determining monetary amounts at which such transactions, other
events or conditions are to be initially and subsequently measured.
3.39 Items recognised in the financial statements shall be
measured by reference to their cost unless these Principles allow an
alternative measurement basis.
3.40 The components of asset and liability items shall be
valued separately.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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Section 4: Presentation of financial statements
4.1
A complete set of financial statements comprises
(a)
a balance sheet;
(b)
an income statement;
(c)
notes to the financial statements; and
(d)
statement of changes in equity and statement of
cash flows as provided for in paragraphs 4.30 and 4.33 of these
Principles.
Provided that in respect of the statements referred to in
paragraphs 4.1 (a), (b) and (d), an entity may use titles for the
statements other than those used in these Principles.
The annual financial statements shall constitute a composite
whole. They shall be drawn up in accordance with the provisions of
these Principles.
4.2
The financial statements shall be identified clearly and
distinguished from other information in the same published document
and each component of the financial statements shall be identified
clearly. In addition, the following information shall be displayed
prominently, and repeated when it is necessary for a proper
understanding of the information presented
(a)
the name of the reporting entity and any change in
its name since the end of the preceding financial reporting
period;
(b)
the information necessary to identify the register
with which the entity is registered, together with the number of
the company in the register, the legal form of the company, the
location of the registered office, and where appropriate, the fact
that the company is being wound up.
(c)
whether the financial statements cover the
individual entity or a group of entities;
(d)
the date of the end of the financial reporting
period or the period covered by the financial statements,
whichever is appropriate to that component of the financial
statements;
(e)
the presentation currency, as defined in Section 18
of these Principles; and
(f)
the level of rounding, if any, used in presenting
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amounts in the financial statements.
4.3
An entity that is permitted to apply GAPEE in
accordance with regulation 5 of these regulations, and that opts to
apply these Principles, shall present a complete set of financial
statements (including comparative information) at least annually.
When the end of an entity’s financial reporting period changes and the
annual financial statements (including comparatives) are presented for
a period longer or shorter than one year, the entity shall disclose
(a)
that fact;
(b)
the reason for using a longer or shorter period; and
(c)
the fact that comparative amounts for the income
statement, statement of changes in equity, statement of cash
flows and related notes are not entirely comparable.
4.4
An entity shall retain the presentation and classification
of items in the financial statements from one financial reporting period
to the next unless
(a)
it is apparent, following a significant change in
the nature of the entity’s operations or a review of its financial
statements, that another presentation or classification would be
more appropriate having regard to the criteria for the selection
and application of accounting policies; or
(b)
these Principles require a change in presentation.
4.5
When the presentation or classification of items in the
financial statements is changed, an entity shall reclassify comparative
amounts unless the quantification of that reclassification is
impracticable. When comparative amounts are reclassified, an entity
shall disclose
(a)
the nature of the reclassification;
(b)
the amount of each item or class of items that is
reclassified; and
(c)
the reason for the reclassification.
4.6
When it is impracticable to quantify the amount of the
reclassification, an entity shall disclose
(a)
the reason for not reclassifying the amounts; and
(b)
the nature of the adjustments that would be
required, had the amounts been able to be determined.
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4.7
Comparative amounts for the previous financial
reporting period shall be shown for every item presented in the
financial statements and notes thereto. Comparative information shall
be included for narrative and descriptive information when it is
relevant to an understanding of the current financial reporting period’s
financial statements. Where there is no amount to be shown for an item
for the current financial reporting period but a comparative amount
can be shown for the previous period, the comparative amount shall be
shown. Where a comparative amount is not comparable with that for
the current financial reporting period for the reason contemplated in
paragraphs 5.7 – 5.9 of these Principles, it shall be adjusted and
particulars of the adjustment and the reasons for it shall be disclosed in
a note to the financial statements.
4.8
Comparative amounts are not required to be disclosed in
relation to any amounts stated in the notes to the financial statements
for the items listed below
(a)
a reconciliation of the carrying amount of
property, plant and equipment and investment property at the
beginning and end of the financial reporting period as required
by sub-paragraph (f) of paragraph 7.27, and paragraph 8.14 (by
virtue of a reference to the requirements of paragraph 7.27),
respectively of these Principles ;
(b)
a reconciliation of the carrying amount of
intangible assets at the beginning and end of the financial
reporting period as required by sub-paragraph (b) of paragraph
The objective of these regulations is to prescribe the
general accounting principles that shall be adhered to by eligible
entities complying with all the criteria set out in regulation 5.
(1)
In these regulations, unless the context otherwise
requires
"the Act" means the Accountancy Profession Act;
"ancillary insurance undertaking" means an authorised
insurance undertaking writing contracts of insurance referred to
in regulation 3(a) to (c) of the Insurance Distribution
(Exemption) Regulations that have a contract boundary of up
to twelve (12) months;
"ancillary reinsurance undertaking" means an authorised
reinsurance undertaking writing business restricted to the
reinsurance of contracts of insurance referred to in regulation
3(a) to (c) of the Insurance Distribution (Exemption)
Regulations that have underlying insurance contracts that have
a contract boundary of up to twelve (12) months;
"authorised
insurance
undertaking"
means
an
undertaking whose head office is in Malta and has received
authorisation pursuant to article 7 of the Insurance Business Act
to carry on direct general insurance business and, or long term
insurance business, and includes an undertaking authorised to
carry on direct insurance and reinsurance business;
"authorised reinsurance undertaking" means an
undertaking whose head office is in Malta and has received
authorisation pursuant to article 7 of the Insurance Business Act
*These regulations shall apply to financial reporting periods commencing on or after
1st January 2025. Vide regulation 1(2) of Legal Notice 299 of 2025.
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ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
to carry on business restricted to reinsurance;
"balance sheet date" means the date on which the balance
sheet of an eligible entity is drawn up;
"captive insurance undertaking" means an authorised
insurance undertaking, owned either by a financial undertaking,
other than an insurance or reinsurance undertaking or a group
of insurance or reinsurance undertakings within the meaning of
article 2 of the Insurance Business Act, or by a non-financial
undertaking, the purpose of which is to provide insurance cover
exclusively for the risks of the undertaking or undertakings to
which it belongs or of an undertaking or undertakings of the
group of which it is a member.
For the purpose of this definition
"group" means the same as the meaning
assigned to it in the Insurance Business Act; and
"risks of the undertaking or undertakings to
which it belongs or of an undertaking or undertakings
of the group of which it is a member" means risks
where the direct policyholder is
(a)
a shareholder (direct or indirect)
of the captive insurance undertaking; or
(b)
the group of the captive insurance
undertaking; or
(c)
undertakings in the same group of
the captive insurance undertaking;
"captive reinsurance undertaking" means an authorised
reinsurance undertaking, owned either by a financial
undertaking, other than an insurance or reinsurance undertaking
or a group of insurance or reinsurance undertakings within the
meaning of article 2 of the Insurance Business Act, or by a non-
financial undertaking, the purpose of which is to provide
reinsurance cover exclusively for the risks of the undertaking or
undertakings to which it belongs or of an undertaking or
undertakings of the group of which it is a member.
For the purpose of this definition
"group" means the same as the meaning
assigned to it in the Insurance Business Act; and
"risks of the undertaking or undertakings to
which it belongs or of an undertaking or undertakings
of the group of which it is a member" means risks
where the ultimate policyholder is
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(a)
a shareholder (direct or indirect) of
the captive reinsurance undertaking; or
(b)
the group of the captive
reinsurance undertaking; or
(c)
undertakings in the same group of
the captive reinsurance undertaking; or
(d)
persons associated to paragraph
(b) or paragraph (c) by virtue of an employee
and, or director and, or officer relationship;
"cessation undertaking" means an authorised insurance
undertaking or an authorised reinsurance undertaking which has
given notice to the competent authority of its intention to cease
to carry on the business they are authorised to carry on in terms
of article 39 of the Insurance Business Act;
"company" means the same as the meaning assigned to it
in the Companies Act;
"competent authority" means the Malta Financial
Services Authority established in terms of the Malta Financial
Services Authority Act;
"contract boundary" means the coverage period which is
the period during which the eligible entity provides insurance
contract services, including those services that relate to all
premiums within the boundary of the insurance contract. Cash
flows are within the boundary of an insurance contract if they
arise from substantive rights and obligations that exist during
the reporting period in which the eligible entity can compel the
policyholder to pay the premiums or in which the eligible entity
has a substantive obligation to provide the policyholder
with insurance contract services. A substantive obligation to
provide insurance contract services ends when
(a)
the eligible entity has the practical ability
to reassess the risks of the particular policyholder and, as
a result, can set a price or level of benefits that fully
reflects those risks; or
(b)
both of the following criteria are satisfied
(c)
the eligible entity has the practical ability
to reassess the risks of the portfolio of insurance
contracts that contains the contract and, as a result, can
set a price or level of benefits that fully reflects the risk
of that portfolio; and
(d)
the pricing of the premiums up to the date
when the risks are reassessed does not take into account
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
the risks that relate to periods after the reassessment date.
For the purpose of this definition
"insurance contract services" means the following
services (as applicable) that an eligible entity provides to a
policyholder of an insurance contract
(a)
coverage for an insured event (insurance
coverage);
(b)
for insurance contracts without direct
participation features, the generation of an investment
return for the policyholder, if applicable (investment-
return service); and
(c)
for insurance contracts with direct
participation features, the management of underlying
items on behalf of the policyholder (investment-related
service).
"EEA State" means any State which is a contracting party
to the agreement on the European Economic Area signed at
Oporto on the 2nd May, 1992 as adjusted by the Protocol signed
at Brussels on 17th March, 1993 and as amended by any
subsequent acts;
"eligible entity or eligible entities" means the entities
referred to in paragraphs (a) to (l) of sub-regulation 1 of
regulation 5;
"entity" or "reporting entity" means a commercial
partnership as defined in the Companies Act and any other
body, corporate or unincorporate, which carries on a trade or
business and which is required to prepare financial statements
in terms of the laws of Malta;
"European Union" or "EU" means the same as the
meaning assigned to it in article 2 of the European Union Act;
"financial reporting period" means the period ending on
the eligible entity’s balance sheet date for which financial
statements are prepared;
"financial statements" means the statements prepared by
an eligible entity comprising the following documents
(a)
a balance sheet;
(b)
an income statement;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(c)
notes to the financial statements;
(d)
a statement of changes in equity; and
(e)
a statement of cash flows.
"financial undertaking" means any of the following
entities
(a)
a credit institution, a financial institution or
an ancillary banking services undertaking within the
meaning of sub-paragraphs (1), (17) and (22) of
paragraph (1) of Article 3 of Directive 2013/36/EU of the
European Parliament and of the Council of 26 June 2013
on access to the activity of credit institutions and the
prudential supervision of credit institutions and
investment firms respectively;
(b)
an insurance undertaking, or a reinsurance
undertaking or an insurance holding company within the
meaning of Article 212 (1)(f) of the Solvency II
Directive;
(c)
an investment firm or a financial institution
within the meaning of point 1 of Article 4(1) of Directive
2014/65/EU of the European Parliament and of the
Council of 15 May 2014 on markets in financial
instruments; or
(d)
a mixed financial holding company within
the meaning of Article 2(15) of Directive 2002/87/EC of
the European Parliament and of the Council of 16
December 2002 on the supplementary supervision of
credit institutions, insurance undertakings and
investment firms in a financial conglomerate;
"foreign eligible insurance and, or reinsurance
undertakings" means insurance and, or reinsurance
undertakings whose activities would have qualified them as an
eligible entity had they been authorised under article 7 of the
Insurance Business Act;
"insurance and, or reinsurance parent undertaking"
means a parent undertaking which is subject to group
supervision in terms of the Insurance Business (Supervision Of
Insurance and Reinsurance Undertakings in a Group)
Regulations;
Provided that the only undertakings being
consolidated in the financial statements of the said parent
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
undertaking are
(a)
eligible entities in terms of paragraphs (a)
to (i) of sub-regulation (1) of regulation 5; or
(b)
foreign eligible
insurance
and,
or
reinsurance undertakings; or
(c)
insurance holding undertakings; or
(d)
undertakings
providing
any
of
the
following services
(i)
the management of claims of an
insurance undertaking on a professional basis, and
loss adjusting and expert appraisal of claims;
(ii)
services rendered by insurance
intermediaries registered or regulated to carry out
such services in an EU, EEA State, non-Member
State or non-EEA State and managing general
agents;
(iii) management,
advisory,
legal,
internal audit, actuarial and consulting services;
(iv) accounting, tax, financial, payroll
and administrative services,
(v)
provision of personnel;
(vi) electronic communications and
application services, systems development,
operation and maintenance services;
(vii) use of office
equipment
and
provision of office space.
"insurance holding undertakings" means undertakings,
whether registered in Malta or outside Malta, which act directly
or indirectly as holding undertakings of eligible entities, foreign
eligible insurance and, or reinsurance undertakings or insurance
related services undertakings;
"insurance undertakings" means undertakings, whether
registered in Malta or outside Malta which are licensed,
registered or, otherwise authorised to carry on insurance and,
or reinsurance activities;
"licensed special purpose vehicle" means an undertaking
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
authorised to securitise a transaction within the scope of section
25 of the Schedule;
"MiFID II Directive" means Directive 2014/65/EU of the
European Parliament and of the Council of 15 May 2014 on
markets in financial instruments and amending Directive 2002/
92/EC and Directive 2011/61/EU (recast), as amended from
time to time and includes any implementing measures that have
been or may be issued thereunder;
"protected cell company" means an authorised insurance
undertaking or an authorised reinsurance undertaking
established as a protected cell company in terms of the
Companies Act (Cell Companies Carrying On Business Of
Insurance) Regulations where taking every cell of the said cell
company and the core (if the core carries on insurance or
reinsurance activities), as a separate company, each such cell
and the core (if the core carries on insurance or reinsurance
activities), would qualify as an eligible entity;
Provided that for the purposes of protected cell
company in assessing whether the cell or the core qualifies as a
captive insurance undertaking or a captive reinsurance
undertaking reference should be made to the above definitions
of "captive insurance undertaking" and "captive reinsurance
undertaking". For the purposes of this definition, "core" shall
refer to that part of a protected cell company in which non-
cellular assets are held.
"public company" means the same as the meaning
assigned to it in the Companies Act;
"public interest entity" means the same as the meaning
assigned to it in the Act;
"redomiciled undertaking" means an authorised
insurance undertaking or an authorised reinsurance undertaking
which has notified the competent authority of its intention to
transfer its registered office or to continue its operations in
another jurisdiction pursuant to the Insurance Business
(Continuance of Companies Carrying on Business of Insurance)
Regulations or Transfer of Registered Office of a European
Company (SE) Regulations or Cross-border Conversions of
Limited Liability Companies Regulations or Cross-border
Mergers of Limited Liability Companies Regulations or Cross-
border Divisions of Limited Liability Companies Regulations.
"regulated market" means the same as the meaning
assigned to it in the Companies Act;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
"reinsurance special purpose vehicle" means a reinsurance
special purpose vehicle as defined under the Reinsurance Special
Purpose Vehicles Regulations, whether established under the said
Regulation or constituted as a securitisation cell company carrying on
business as reinsurance special purpose vehicles under the
Securitisation Cell Companies Regulations
"risk transferee vehicle" means a reinsurance special purpose
vehicle or a securitisation vehicle or a licensed special purpose
vehicle;
"risk transferee vehicle parent undertaking" means a parent
undertaking of a risk transferee vehicle
"the Schedule" means the Schedule to these regulations and
forming an integral part hereof;
" "securitisation vehicle" means a securitisation vehicle
established under the Securitisation Act or as a securitisation cell
company under the Securitisation Cell Companies Regulations, which
is not a reinsurance special purpose vehicle and which satisfies all of
the following conditions
(a)
it enters into a transaction within the scope of
Section 25 of the Schedule;
(b)
it is fully funded by always having assets the
value of which is equal to or exceeds the aggregate maximum
risk exposure and being able to pay the amounts it is liable for
as they fall due; and
(c)
the providers of any debt or financing are
professional clients as defined in Annex II of the MiFID II
Directive
Provided that in the case of a securitisation cell company,
every cell of the said cell company and the core, to the extent that
such cells and, or the core have entered into a transaction within the
scope of Section 25 of the Schedule, shall satisfy the conditions
above for the securitisation cell company to be an eligible entity.
"security" means the same as the meaning assigned to it in the
Companies Act;
"Solvency II Directive" means Directive 2009/138/EC of the
European Parliament and of the Council of 25 November 2009 on the
taking-up and pursuit of the business of Insurance and Reinsurance
(Solvency II);
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
"Solvency II Directive exempted insurance undertaking" means
an authorised insurance undertaking which fulfills the conditions set
out in sub-regulation (1) of regulation 3 of the Insurance Business
(Exemptions) Regulation;
"specialised run-off undertaking" means authorised insurance
undertakings or authorised reinsurance undertaking whose business
model is to actively acquire legacy portfolios or undertakings solely
in run-off or to be run-off.
(2)
References to an "entity" or "reporting entity" in these
regulations shall, in the case of an entity or reporting entity preparing
consolidated financial statements in terms of item 22 of the Schedule,
be construed as referring to the group of entities in respect of which
consolidated financial statements are presented for as a single
economic entity.
(3)
Unless the context otherwise requires, terms used in
these regulations and which are not defined herein shall have the
meaning assigned to them in the Insurance Business Act.
An eligible entity shall, for financial reporting periods
commencing on or after 1st January 2023, prepare financial statements
in accordance with the general accounting principles in respect of
certain eligible entities related to the business of Insurance as set out in
the Schedule provided that the Board of Directors of a company has
resolved to do so and the eligible entity satisfies the requirements set
out in regulation 5 for the applicability of the Schedule. In the absence
of such resolution, the eligible entity shall prepare financial statements
in accordance with IFRS as adopted by the EU for that reporting
period.
(1)
These regulations shall apply to the following
entities as defined within these regulations and shall not apply to any
other entity
(a)
a captive insurance undertaking; or
(b)
a captive reinsurance undertaking; or
(c)
a Solvency II Directive exempted insurance
undertaking; or
(d)
a specialised run-off undertaking; or
(e)
an ancillary insurance undertaking; or
(f)
an ancillary reinsurance undertaking; or
(g)
a protected cell company; or
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(h)
a cessation undertaking; or
(i)
redomiciled undertaking; or
(j)
insurance and, or risk transferee vehicle; or
(k)
insurance and, or reinsurance parent undertaking;
or
(l)
risk transferee vehicle parent undertaking.
Provided that the undertaking referred to in paragraphs
(h) and (i) of sub-regulation (1) of regulation 5 will be considered as
an eligible entity only during the transitory period until it ceases to
provide insurance business or has transferred its registered office to or
continued its operations in another jurisdiction, as applicable.
(2)
Where, throughout the financial reporting period, an
eligible entity ceases to fall within the definition of one of the entities
set out in sub-regulation (1), these regulations shall no longer apply to
such entity.
(3)
The Schedule shall not apply to
(i)
listed companies whose securities are traded on a
regulated market; and
(ii)
public interest entities other than eligible entities.
Amended by:
20of these Principles;
(c)
a reconciliation of the carrying amount of
goodwill at the beginning and end of the financial reporting
period as required by paragraph 21.22 of these Principles;
(d)
a reconciliation of the carrying amount of each
category of investments classified as non-current assets at the
beginning and end of the financial reporting period as required
by sub-paragraph (b) of paragraph 9.39 of these Principles;
(e)
a reconciliation of the carrying amount of non-
current investments in subsidiaries, associates and jointly
controlled entities at the beginning and end of the financial
reporting period as required by sub-paragraph (b) of paragraph
10.29 of these Principles; and
(f)
a reconciliation of the carrying amount of each
class of provisions at the beginning and the end of the financial
reporting period as required by subparagraph (c) of paragraph
17 of these Principles.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
4.9
An entity shall present separately each material class of
similar items. An entity shall present separately items of a dissimilar
nature or function unless they are immaterial. Omissions or
misstatements of items are material if they could, individually or
collectively, influence the economic decisions of users taken on the
basis of the financial statements. Materiality depends on the size and
nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of
both, could be the determining factor.
4.10 An entity shall not offset assets and liabilities, or income
and expenses, unless required or permitted by these Principles, in
which case the amounts which are set off shall be specified as gross
amounts in the notes to the financial statements.
4.11 An entity’s financial statements shall comply with the
requirements set out in this Section as to their form and content.
Balance Sheet
4.12 The balance sheet presents an entity’s assets, liabilities
and equity at a point in time. The opening balance sheet for each
financial year shall correspond to the closing balance sheet for the
preceding financial year.
4.13 An entity may adopt one of the layouts set out in this
Section. The following items shall be shown separately on the face of
the balance sheet, in the order indicated, and under the headings and
sub-headings listed below. Items preceded by Arabic numerals may be
combined under their respective sub-heading when they are immaterial
for the purposes of the financial statements giving a true and fair view,
or such combination makes for greater clarity, in which latter case the
items combined shall be dealt with separately in the notes. The layout,
nomenclature and terminology of items in the balance sheet that are
preceded by Arabic numerals may be amended according to the nature
of the entity and its transactions to provide information that is relevant
to an understanding of the entity’s financial position.
In respect of each item an entity also needs to show the
corresponding amount for the preceding financial reporting period.
Unless there is a corresponding item that needs to be shown, an entity
shall not show any item listed below for which there is no amount for
the current period.
Horizontal layout of the balance sheet
ASSETS
Non-current assets
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
I.
Intangible assets
1. Development costs
2. Concessions, patents, licences, trade marks and similar
rights and assets, if they were acquired for valuable consideration
3. Goodwill
4. Payments on account
II.
Property, plant and equipment
1. Land and buildings
2. Plant and machinery
3. Other fixtures and fittings, tools and equipment
4. Payments on account and tangible assets in the course of
construction
III.
Investment property
IV.
Financial investments
1. Shares in subsidiaries
2. Loans to subsidiaries
3. Shares in associates and jointly controlled entities
4. Loans to associates and jointly controlled entities
5. Other non-current investments (other than loans)
6. Other loans
V.
Trade and other receivables
1. Trade receivables
2. Amounts owed by group entities
3. Amounts owed by associates and jointly controlled
entities
4. Other receivables
5. Subscribed capital called but not paid
6. Prepayments and accrued income
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
VI.
Deferred tax assets
Current assets
I.
Inventories
1. Raw materials and consumables
2. Work in progress
3. Finished goods and goods for resale
4. Payments on account
II.
Trade and other receivables
Trade receivables
1. Amounts owed by group entities
2. Amounts owed by associates and jointly controlled
entities
3. Other receivables
4. Subscribed capital called but not paid
5. Prepayments and accrued income
III.
Current tax assets
IV.
Financial investments
1. Shares in subsidiaries
2. Loans to subsidiaries
3. Shares in associates and jointly controlled entities
4. Loans to associates and jointly controlled entities
5. Other current investments
V.
Cash and cash equivalents
EQUITY AND LIABILITIES
Equity
I.
Share capital
II.
Share premium account
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
III.
Revaluation reserve
IV.
Other reserves
V.
Retained earnings
VI.
Minority interest
Liabilities
Non-current liabilities
I.
Borrowings
1. Bank loans
2. Other borrowings
II.
Trade and other payables
1. Payments received on account of orders
2. Trade payables
3. Bills of exchange payable
4. Amounts owed to group entities
5. Amounts owed to associates and jointly controlled
entities
6. Other creditors (including indirect tax and social
security)
7. Accruals and deferred income
III.
Deferred tax liabilities
IV.
Provisions
1. Provisions for employee benefits and similar obligations
2. Other provisions
Current liabilities
I.
Borrowings
1. Bank loans
2. Other borrowings
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
II.
Trade and other payables
1. Payments received on account of orders
2. Trade payables
3. Bills of exchange payable
4. Amounts owed to group entities
5. Amounts owed to associates and jointly controlled
entities
6. Other creditors (including indirect tax and social
security)
7. Accruals and deferred income
III.
Current tax liabilities
IV.
Provisions
1. Provisions for employee benefits and similar obligations
2. Other provisions
Vertical layout of the balance sheet
ASSETS
Non-current assets
I.
Intangible assets
1. Development costs
2. Concessions, patents, licences, trade marks and similar
rights and assets, if they were acquired for valuable consideration
3. Goodwill
4. Payments on account
II.
Property, plant and equipment
1. Land and buildings
2. Plant and machinery
3. Other fixtures and fittings, tools and equipment
4. Payments on account and tangible assets in the course of
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
construction
III.
Investment property
IV.
Financial investments
1. Shares in subsidiaries
2. Loans to subsidiaries
3. Shares in associates and jointly controlled entities
4. Loans to associates and jointly controlled entities
5. Other non-current investments (other than loans)
6. Other loans
V.
Trade and other receivables
1. Trade receivables
2. Amounts owed by group entities
3. Amounts owed by associates and jointly controlled
entities
4. Other receivables
5. Subscribed capital called but not paid
6. Prepayments and accrued income
VI.
Deferred tax assets
Current assets
I.
Inventories
1. Raw materials and consumables
2. Work in progress
3. Finished goods and goods for resale
4. Payments on account
II.
Trade and other receivables
1. Trade receivables
2. Amounts owed by group entities
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
3. Amounts owed by associates and jointly controlled
entities
4. Other receivables
5. Subscribed capital called but not paid
6. Prepayments and accrued income
III.
Current tax assets
IV.
Financial investments
1. Shares in subsidiaries
2. Loans to subsidiaries
3. Shares in associates and jointly controlled entities
4. Loans to associates and jointly controlled entities
5. Other current investments
V.
Cash and cash equivalents
Current liabilities
I.
Borrowings
1. Bank loans
2. Other borrowings
II.
Creditors: amounts becoming due and payable within
one year
1. Payments received on account of orders
2. Trade payables
3. Bills of exchange payable
4. Amounts owed to group entities
5. Amounts owed to associates and jointly controlled
entities
6. Other creditors (including indirect tax and social
security)
7. Accruals and deferred income
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
III.
Current tax liabilities
IV.
Provisions
1. Provisions for employee benefits and similar obligations
2. Other provisions
Net current assets/liabilities
Total assets less current liabilities
Non-current liabilities
I.
Borrowings
1. Bank loans
2. Other borrowings
II.
Creditors: amounts becoming due and payable after
more than one year
1. Payments received on account of orders
2. Trade payables
3. Bills of exchange payable
4. Amounts owed to group entities
5. Amounts owed to associates and jointly controlled
entities
6. Other creditors (including indirect tax and social
security)
7. Accruals and deferred income
III.
Deferred tax liabilities
IV.
Provisions
1. Provisions for employee benefits and similar obligations
2. Other provisions
Equity
I.
Share capital
II.
Share premium account
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
III.
Revaluation reserve
IV.
Other reserves
V.
Retained earnings
VI.
Minority interest
4.14 The face of the balance sheet shall also include line items
that present the following amounts, if applicable
(a)
the total of assets classified as held for sale and
assets included in disposal groups classified as held for sale in
accordance with Section 23 of these Principles; and
(b)
liabilities included in disposal groups classified as
held for sale in accordance with Section 23.
4.15 An entity shall present additional line items, headings
and subtotals on the face of the balance sheet when such presentation
is relevant to an understanding of the entity’s financial position. An
entity shall include additional line items in relation to insurance and/or
reinsurance contracts in accordance with Section 25. Additional line
items are also included when the size, nature or function of an item or
aggregation of similar items is such that separate presentation is
relevant to an understanding of the entity’s financial position. The
judgment on whether additional items are presented separately is
based on an assessment of
(a)
the nature and liquidity of assets;
(b)
the function of assets within the entity; and
(c)
the amounts, nature and timing of liabilities.
4.16 An entity shall present current and non-current assets,
and current and non-current liabilities, as separate classifications on
the face of its balance sheet in accordance with paragraphs 4.17 and
4.18, except when a presentation based on liquidity provides
information that is reliable and more relevant. When this applies, all
assets and liabilities shall be presented in order of approximate
liquidity.
4.17
An entity shall classify an asset as current when
(a)
it expects to realise the asset, or intends to sell or
consume it, in the entity’s normal operating cycle;
(b)
it holds the asset primarily for the purpose of
trading;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(c)
it expects to realise the asset within twelve months
after the end of the reporting period; or
(d)
the asset is cash or a cash equivalent, unless it is
restricted from being exchanged or used to settle a liability for
at least twelve months after the end of the reporting period.
An entity shall classify all other assets as non-current. When the
entity’s normal operating cycle is not clearly identifiable, its duration
is assumed to be twelve months.
4.18
An entity shall classify a liability as current when
(a)
it expects to settle the liability in the entity’s
normal operating cycle;
(b)
it holds the liability primarily for the purpose of
trading;
(c)
the liability is due to be settled within twelve
months after the end of the reporting period; or
(d)
the entity does not have an unconditional right to
defer settlement of the liability for at least twelve months after
the end of the reporting period.
An entity shall classify all other liabilities as non-current.
4.19 Where an asset or liability relates to more than one
layout item, its relationship to other items shall be disclosed either
under the item where it appears or in the notes to the financial
statements.
Income statement
4.20 All items of income and expense recognised in the
financial statements for the period shall be included in the income
statement, unless these are specifically permitted or required to be
taken directly to reserves.
These Principles provide different treatment for the following,
amongst others
(a)
the effects of corrections of errors and changes in
accounting policies are presented as adjustments of prior
periods in accordance with Section 5 rather than as part of
profit or loss in the period in which they arise; and
(b)
revaluation surpluses (see Section 7) and some
gains and losses arising on translating the financial statements
of a foreign operation (see Section 18) are reported directly in
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
equity, rather than as part of profit or loss, when they arise.
4.21 In relation to the income statement, an entity may adopt
one of the layouts set out in this Section. The items prescribed in
paragraph 4.22 shall be shown separately on the face of the income
statement, in the order indicated. Items preceded by Arabic numerals
may be combined when they are immaterial for the purposes of the
financial statements giving a true and fair view, or such combination
makes for greater clarity, in which latter case the items combined are
dealt with separately in the notes. The layout, nomenclature and
terminology of items in the income statement that are preceded by
Arabic numerals may be amended according to the nature of the entity
and its transactions to provide information that is relevant to an
understanding of the entity’s financial performance.
4.22 An entity shall present in its income statement an
analysis of expenses using a classification based on either the nature of
expenses or their function within the entity, whichever provides
information that is reliable and more relevant.
The ‘function of expense’ method classifies expenses according
to their function as part of cost of sales or, for example, the costs of
distribution or administrative activities. An entity that adopts a
classification using the ‘function of expense’ method presents the
following items (which may be combined or amended as appropriate
in accordance with paragraph 4.21 of these Principles)
1. Revenue
2. Cost of sales (after taking into account any necessary
provisions for depreciation, amortisation and impairment of assets)
3. Gross profit or loss
4. Distribution costs (after taking into account any
necessary provisions for depreciation, amortisation and impairment of
assets)
5. Administrative expenses (after taking into account any
necessary provisions for depreciation, amortisation and impairment of
assets)
6. Other operating income
7. Income from shares in subsidiaries, associates and jointly
controlled entities accounted for under the cost method and recognised
in accordance with paragraph 10.13 (with a separate indication of that
derived from subsidiaries)
8. Share of profit or loss of subsidiaries, associates and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
jointly controlled entities accounted for under the equity method and
recognised in accordance with paragraph 10.17(with a separate
indication of that derived from subsidiaries)
9. Income from other investments (with as separate
indication of that derived from subsidiaries)
10. Other interest receivable and similar income (with a
separate indication of that derived from subsidiaries)
11. Adjustments to the
carrying
amounts
of
other
investments held as current assets
12. Interest payable and similar charges (with a separate
indication of the amount payable to subsidiaries)
13. Profit or loss before tax for the period/year
14. Tax on profit or loss before tax
15. Profit or loss after tax for the period/year
The ‘nature of expense’ method aggregates expenses in the
income statement according to their nature (for example, depreciation,
purchases of materials, transport costs, employee benefits and
advertising costs), and are not reallocated among various functions
within the entity. An entity that adopts a classification using the
‘nature of expense’ method presents the following items (which may
be combined or amended as appropriate in accordance with paragraph
4.21 of these Principles)
1. Revenue
2. Changes in inventories of finished goods and work in
progress
3. Work performed by the entity for its own purposes and
capitalised.
4(a)
Raw materials and consumables used
4(b)
Other external expenses
5. Staff costs
(a)
wages and salaries;
(b)
social security costs, with a separate indication of
those relating to pensions.
6. Depreciation, amortisation and impairment
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
7. Other operating expenses
8. Other operating income
9. Income from shares in subsidiaries, associates and jointly
controlled entities accounted for under the cost method and recognised
in accordance with paragraph 10.13 (with a separate indication of that
derived from subsidiaries)
10. Share of profit or loss of subsidiaries, associates and
jointly controlled entities accounted for under the equity method and
recognised in accordance with paragraph 10.17 (with a separate
indication of that derived from subsidiaries)
11. Income from other investments (with as separate
indication of that derived from subsidiaries)
12. Other interest receivable and similar income (with a
separate indication of that derived from subsidiaries)
13. Adjustments to the
carrying
amounts
of
other
investments held as current assets
14. Interest payable and similar charges (with a separate
indication of the amount payable to subsidiaries)
15. Tax on profit or loss before tax
16. Profit or loss after tax
17. Profit or loss for the period / year
4.23 If an entity prepares consolidated financial statements, it
shall disclose separately the following items on the face of the income
statement as allocations of profit or loss for the period
(a)
profit or loss attributable to minority interest; and
(b)
profit or loss attributable to equity holders of the
parent.
4.24 An entity shall present additional line items, headings
and subtotals on the face of the income statement when such
presentation is relevant to an understanding of the entity’s financial
performance. An entity shall include additional line items in relation to
income and expenses arising from insurance and/or reinsurance
contracts in accordance with Section 25.
4.25 An entity shall disclose separately, either on the face of
the income statement or in the notes, the amount and nature of
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
individual items of income or expenditure which are of exceptional
size or incidence, such as
(a)
write-downs of inventories to net realisable value,
and the reversal of such write-downs;
(b)
write-downs of property, plant and equipment to
recoverable amount, and the reversal of such write-downs;
(c)
restructurings of the activities of an entity and
reversals of any provisions for the costs of restructuring;
(d)
disposals of items of property, plant and
equipment;
(e)
disposals of investment property;
(f)
disposals of investments;
(g)
litigation settlements; and
(h)
the reversal of other provisions.
4.26 An entity shall disclose the average number of
employees during the financial year (as determined in accordance with
paragraph (c) of sub-regulation (2) of regulation 5 of these
regulations).
Income statement – Additional disclosures
4.27 An entity classifying expenses by function shall disclose
the amounts of depreciation and amortisation expense (if not disclosed
elsewhere), and employee benefits expense (analysed into wages and
salaries, social security costs and pension costs), recognised in the
income statement for the period.
4.28 In addition to the disclosure required in paragraph 4.26,
an entity shall also disclose the average number of employees during
the financial year broken down by categories.
4.29 Entities shall disclose the remuneration of the entity’s
auditors, including sums paid in respect of expenses, in a note to the
financial statements.
Statement of changes in equity
4.30
Entities shall prepare a statement of changes in equity.
4.31
The statement of changes in equity presents
4.32
an entity’s profit or loss for a period, items of income and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
expense recognised directly in equity for the period, the effects of
changes in accounting policies and corrections of errors recognised in
the period, and the amounts of investments by, and dividends and other
distributions to, equity holders during the period.
4.33 An entity presenting a statement of changes in equity
shall show on the face of the statement
(a)
the profit or loss for the period;
(b)
each item of income or expense for the period
that, as required by these Principles, is credited or charged
directly in equity, and the total of these items;
(c)
total income and expense for the period
(calculated as the sum of (a) and (b)), showing separately the
total amounts attributable to equity holders of the parent and to
minority interest;
(d)
for each component of equity, the effects of
changes in accounting policies and corrections of prior period
errors;
(e)
the amounts of investments by, and dividends and
other distributions to, equity holders;
(f)
the balance of retained earnings at the beginning
of the period and at the end of the reporting period, and the
changes during the period; and
(g)
a reconciliation between the carrying amount of
each class of contributed equity and each reserve at the
beginning and the end of the period.
Statement of cash flows
4.33
Entities shall prepare a statement of cash flows.
4.34 The statement of cash flows provides information about
the historical changes in cash and cash equivalents of an entity,
showing separately changes during the period from operating,
investing and financing activities. Cash is taken as ‘cash held at call
with banks and in hand’. Cash equivalents are held to meet short-term
cash commitments rather than for investment or other purposes.
Therefore, an investment normally qualifies as a cash equivalent only
when it has a short maturity of, say, three months or less from the date
of acquisition. Bank overdrafts are normally considered financing
activities similar to borrowings. However, if they are repayable on
demand and form an integral part of an entity’s cash management,
bank overdrafts are a component of cash and cash equivalents.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
4.35 An entity shall present a statement of cash flows that
reports cash flows for a period classified by operating activities,
investing activities and financing activities.
4.36 Cash flows from operating activities are primarily
derived from the principal revenue-producing activities of the entity.
Therefore, they generally result from the transactions and other events
and conditions that enter into the determination of profit or loss. An
entity shall report cash flows from operating activities using either
(a)
the direct method, whereby major classes of gross
cash receipts and gross cash payments are disclosed; or
(b)
the indirect method, whereby profit or loss is
adjusted for the effects of non-cash transactions, any deferrals
or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with
investing or financing cash flows.
4.37 Under the direct method, information about major
classes of gross cash receipts and gross cash payments may be
obtained either
(a)
from the accounting records of the entity; or
(b)
by adjusting sales, cost of sales and other items in
the income statement for
(i)
changes during the period in inventories
and operating receivables and payables;
(ii)
other non-cash items; and
(iii) other items for which the cash effects are
investing or financing cash flows.
4.38 Under the indirect method, the net cash flow from
operating activities is determined by adjusting profit or loss for the
effects of
(a)
changes during the period in inventories and
operating receivables and payables;
(b)
non-cash items such as depreciation, provisions,
deferred taxes, unrealised foreign currency gains and losses,
undistributed profits of subsidiaries, associates and joint
ventures, and minority interests; and
(c)
all other items for which the cash effects relate to
investing or financing activities.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
4.39 Cash flows arising from investing activities represent
expenditures made for resources intended to generate future income
and cash flows related to the acquisition and disposal of non-current
assets and other investments not included in cash equivalents.
4.40 Financing activities result in changes in the size and
composition of the contributed equity and borrowings of the entity.
4.41 An entity shall report separately major classes of gross
cash receipts and gross cash payments arising from investing and
financing activities. The aggregate cash flows arising from
acquisitions and from disposals of subsidiaries or other business units
shall be presented separately and classified as investing activities.
4.42 Cash flows from interest and dividends received and paid
shall each be disclosed separately. Cash flows shall be classified in a
consistent manner from period to period as either operating, investing
or financing activities.
4.43 Cash flows arising from taxes on income shall be
separately disclosed and shall be classified as cash flows from
operating activities unless they can be specifically identified with
financing and investing activities.
4.44 An entity shall disclose the components of cash and cash
equivalents and shall present a reconciliation of the amounts reported
in the statement of cash flows to the equivalent items reported in the
balance sheet.
4.45 An entity shall exclude from the statement of cash flows,
investing and financing transactions that do not require the use of cash
or cash equivalents. An entity shall disclose such transactions
elsewhere in the financial statements in a way that provides all the
relevant information about these investing and financing activities.
Notes to the financial statements
4.46 The notes, which form an integral part of the financial
statements, shall
(a)
present information about the basis of preparation
of the financial statements and the specific accounting policies
used;
(b)
disclose
(i)
the information required by these
Principles that is not presented on the face of the balance
sheet, income statement, statement of changes in equity,
or statement of cash flows; and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(ii)
all the disclosures required
by
the
respective Sections of these Principles; and
(c)
provide additional information that is not
presented on the face of the balance sheet, income statement,
statement of changes in equity or statement of cash flows but is
relevant to an understanding of any of them.
4.47 Notes shall, as far as practicable and applicable, be
presented in a systematic manner. Each item on the face of the balance
sheet, income statement, statement of changes in equity and statement
of cash flows shall be cross-referenced to any related information in
the notes.
4.48
Notes are normally presented in the following order
(a)
a statement that the financial statements have been
prepared in compliance with these Principles;
(b)
a summary of significant accounting policies
applied;
(c)
supporting information for items presented on the
face of the balance sheet, income statement, statement of
changes in equity and statement of cash flows, in the order in
which each statement and each line item is presented; and
(d)
other disclosures as required by these Principles
Section 5: Accounting policies, estimates and errors
5.1
Accounting policies are those principles, bases,
conventions, rules and practices applied by an entity that specify how
the effects of transactions and other events are to be reflected in its
financial statements through recognising, selecting measurement bases
for, and presenting assets, liabilities, income, expenses and changes to
equity. Accounting policies define the process whereby transactions
and other events are reflected in the financial statements. For example,
an accounting policy for a particular type of expenditure may specify
whether an asset or an expense is to be recognised; the basis on which
it is to be measured; and where in the income statement or balance
sheet it is to be presented.
5.2
A change in accounting estimate is an adjustment of the
carrying amount of an asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the
present status of, and expected future benefits and obligations
associated with, assets and liabilities. Changes in accounting estimates
result from new information or new developments and, accordingly,
are not corrections of errors. Examples of estimates include those
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
required of
(a)
bad debts;
(b)
inventory obsolescence;
(c)
the useful lives of, or expected pattern of
consumption (depreciation method) of the future economic
benefits embodied in, depreciable assets.
5.3
Prior period errors are omissions from, and
misstatements in, the entity’s financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable
information that was available when the financial statements for those
periods were authorised for issue, and that information could
reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements. Such
errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts,
and fraud.
Accounting policies
5.4
When a Section of these Principles specifically applies to
a transaction, event or condition, the accounting policy or policies
applied to that item shall be determined by applying the relevant
Section. In the absence of a Section in these Principles that specifically
applies to a transaction, event or condition, management shall use its
judgement in developing and applying an accounting policy that
results in information that is
(a)
relevant to the economic decision-making needs
of users; and
(b)
reliable, in that the financial statements
(i)
represent faithfully the financial position,
financial performance and cash flows of the entity;
(ii)
reflect the economic substance of the
transactions, other events and conditions, and not merely
their legal form;
(iii)
are neutral, i.e. free from bias;
(iv)
are prudent; and
(v)
are complete in all material respects.
5.5
In making the judgement described in the preceding
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
paragraph, management shall refer to, and consider the applicability
of, the following sources in descending order
(a)
the requirements and guidance in these Principles
dealing with similar and related issues;
(b)
the definitions, recognition criteria and
measurement concepts for assets, liabilities, income and
expenses in paragraphs 3.21 – 3.35 and paragraph 3.39 of
Section 3 of these Principles; and
(c)
the requirements and guidance in generally
accepted accounting principles and practice dealing with
similar and related issues.
If additional guidance is needed to make the judgement
described in the preceding paragraph, management may also consider
the most recent pronouncements of standard-setting bodies that use a
conceptual framework to develop accounting standards that is similar
to that used in the development of generally accepted accounting
principles and practice, other accounting literature and accepted
industry practices, to the extent that these do not conflict with the
requirements and guidance in these Principles.
5.6
An entity shall select and apply its accounting policies
consistently for similar transactions, other events and conditions.
Where GAPEE permits a choice of accounting policy for categories of
transactions, events and conditions, an entity shall select the policy
that is most appropriate to its particular circumstances for the purpose
of giving a true and fair view, taking account of the objectives of
relevance, reliability, comparability and understandability, and shall
apply that policy consistently to each such category of transactions,
events and conditions.
5.7
An entity shall change an accounting policy only if the
change
(a)
is required by these Principles; or
(b)
results in the financial statements providing
reliable and more relevant information about the effects of
transactions, events or conditions on the entity’s financial
position, financial performance or cash flows.
5.8
The initial application of a policy to revalue assets in
accordance with Section 7 and Section 8, is a change in an accounting
policy to be dealt with in accordance with the requirements of the
relevant Section, rather than in accordance with this Section.
5.9
An entity shall account for all changes in accounting
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
policy retrospectively. When a change in accounting policy is applied
retrospectively, the entity adjusts the opening balance of each affected
component of equity for the earliest prior period presented, and the
other comparative amounts disclosed for each prior period presented,
as if the new accounting policy had always been applied. When it is
impracticable to determine the period-specific effects of changing an
accounting policy on comparative information for one or more prior
periods presented, the entity shall apply the new accounting policy to
the carrying amounts of assets and liabilities as at the beginning of the
earliest period for which retrospective application is practicable,
which may be the current period, and shall make a corresponding
adjustment to the opening balance of each affected component of
equity for that period.
5.10 In addition to the disclosures on accounting policies
required by Section 4 of these Principles, an entity shall also disclose
the following information
(a)
the measurement basis (or bases) used in
preparing the financial statements;
(b)
the accounting policy the entity has chosen
whenever GAPEE allows an accounting policy choice for a
category of transaction, event or condition;
(c)
the other accounting policies used that are
relevant to an understanding of the financial statements; and
(d)
whenever there has been a change in accounting
policy that has an effect on the current period or any prior
period, or might have an effect on future periods, the entity
shall also disclose the following information
(i)
the nature of the change in accounting
policy and, if applicable, the title of the Section of these
Principles that requires the change in accounting policy;
(ii)
unless the change in accounting policy is
required by these Principles, the reasons why applying
the new accounting policy provides reliable and more
relevant information;
(iii) for the current period and each prior period
presented, to the extent practicable, the amount of the
adjustment for each financial statement line item
affected;
(iv) the amount of the adjustment relating to
periods before those presented, to the extent practicable;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
and
(v)
an explanation if it is impracticable to
determine the amounts to be disclosed in (iii) or (iv)
above.
Financial statements of subsequent periods need not repeat these
disclosures.
Changes in accounting estimates
5.11 An entity shall recognise the effect of a change in an
accounting estimate prospectively by including it in profit or loss in
(a)
the period of the change, if the change affects that
period only; or
(b)
the period of the change and future periods, if the
change affects both.
5.12 To the extent that a change in an accounting estimate
gives rise to changes in assets and liabilities, or relates to an item of
equity, it shall be recognised by adjusting the carrying amount of the
related asset, liability or equity item in the period of the change.
5.13 An entity shall disclose the nature and amount of a
change in an accounting estimate that has a significant effect in the
current period or is expected to have a significant effect in future
periods, except for the disclosure of the effect on future periods when
it is impracticable to estimate that effect.
Correction of prior period errors
5.14 To the extent practicable, an entity shall correct material
prior period errors retrospectively in the first set of financial
statements authorised for issue after its discovery by
(a)
restating the comparative amounts for the prior
period presented in which the error occurred; or
(b)
if the error occurred before the earliest prior
period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.
5.15
An entity shall disclose the following about prior period
errors
(a)
the nature of the prior period error;
(b)
for each prior period presented, to the extent
practicable, the amount of the correction for each financial
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
statement line item affected;
(c)
in the circumstances described in paragraph
5.14(b), the amount of the correction at the beginning of the
earliest prior period presented; and
(d)
if retrospective restatement is impracticable for a
particular prior period, the circumstances that led to the
existence of that condition and a description of how and from
when the error has been corrected.
Financial statements of subsequent periods need not repeat these
disclosures.
Section 6: Revenue and construction contracts
6.1
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.
This Section shall be applied in accounting for revenue arising
from the following transactions and events
(a)
the sale of goods;
(b)
the rendering of services; and
(c)
the use by others of entity assets yielding income
such as interest, royalties, rent and dividends.
6.2
This Section shall also be applied in accounting for
construction contracts in the financial statements of contractors. A
construction contract is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use. Because of the nature of the
activity undertaken in construction contracts, the date at which the
contract activity is entered into and the date when the activity is
completed usually fall into different accounting periods. This Section
lays down principles for determining when contract revenue and
contract costs should be recognised as revenue and expenses in the
income statement.
Measurement of revenue
6.3
An entity shall measure revenue at the fair value of the
consideration received or receivable. The fair value of the
consideration received or receivable excludes the amount of any trade
discounts and volume rebates allowed by the entity.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
6.4
An entity shall include in revenue only the gross inflows
of economic benefits received and receivable by the entity on its own
account. An entity shall therefore exclude from revenue all amounts
collected on behalf of third parties such as sales taxes, goods and
services taxes and value added taxes. Similarly, in an agency
relationship, the gross inflows of economic benefits exclude amounts
collected on behalf of the principal and which do not result in
increases in equity for the entity. The amounts collected on behalf of
the principal are not revenue. Instead, revenue is the amount of
commission.
6.5
In most cases, the consideration is in the form of cash or
cash equivalents and the amount of revenue is the amount of cash or
cash equivalents received or receivable. However, when the inflow of
cash or cash equivalents is deferred, and the arrangement constitutes in
substance a financing transaction, the fair value of the consideration is
the present value of all future receipts determined using an imputed
rate of interest. An entity shall recognise the difference between the
present value of all future receipts and the nominal amount of the
consideration as interest revenue.
Sale of goods
6.6
An entity shall recognise revenue from the sale of goods
when all the following conditions are satisfied
(a)
the entity has transferred to the buyer the
significant risks and rewards of ownership of the goods;
(b)
the entity retains neither continuing managerial
involvement to the degree usually associated with ownership
nor effective control over the goods sold;
(c)
the amount of revenue can be measured reliably;
(d)
it is probable that the economic benefits
associated with the transaction will flow to the entity; and
(e)
the costs incurred or to be incurred in respect of
the transaction can be measured reliably.
Rendering of services
6.7
When the outcome of a transaction involving the
rendering of services can be estimated reliably, an entity shall
recognise revenue associated with the transaction by reference to the
stage of completion of the transaction at the end of the reporting period
(sometimes referred to as the percentage of completion method) and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
paragraph 6.13 of these Principles shall apply in that regard. The
outcome of a transaction can be estimated reliably when all the
following conditions are satisfied
(a)
the amount of revenue can be measured reliably;
(b)
it is probable that the economic benefits
associated with the transaction will flow to the entity;
(c)
the stage of completion of the transaction at the
end of the reporting period can be measured reliably; and
(d)
the costs incurred for the transaction and the costs
to complete the transaction can be measured reliably.
6.8
When the outcome of the transaction involving the
rendering of services cannot be estimated reliably, an entity shall
recognise revenue only to the extent of the expenses recognised that
are recoverable.
Interest, royalties, rent and dividends
6.9
An entity shall recognise revenue arising from the use by
others of entity assets yielding interest, royalties, rent and dividends
on the bases set out in paragraph 6.10 when
(a)
it is probable that the economic benefits
associated with the transaction will flow to the entity; and
(b)
the amount of the revenue can be measured
reliably.
6.10
An entity shall recognise revenue on the following bases
(a)
interest shall be recognised on an accrual or time
proportion basis;
(b)
royalties shall be recognised on an accrual basis in
accordance with the substance of the relevant agreement;
(c)
dividends shall be recognised when
the
shareholder’s right to receive payment is established; and
(d)
taking into account the provisions of Section 14 of
these Principles, rent shall be recognised on an accrual basis in
accordance with the substance of the relevant agreement.
Construction contracts
6.11 When the outcome of a construction contract can be
estimated reliably, an entity shall recognise contract revenue and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
contract costs associated with the construction contract as revenue and
expenses respectively by reference to the stage of completion of the
contract activity at the end of the reporting period (often referred to as
the percentage of completion method). Reliable estimation of the
outcome requires reliable estimates of the stage of completion, future
costs and collectability of billings.
6.12 An entity shall review and, when necessary, revise the
estimates of revenue and costs as the service transaction or
construction contract progresses.
6.13 An entity shall determine the stage of completion of a
transaction or contract using the method that measures most reliably
the work performed. Possible methods include
(a)
the proportion that costs incurred for work
performed to date bear to the estimated total costs. Costs
incurred for work performed to date do not include
(i)
costs relating to future activity on the
contract, such as costs of material that have been
delivered to a contract site or set aside for use in a
contract but not yet installed, used or applied during
contract performance, unless the materials have been
made specially for the contract; and
(ii)
prepayments, such as payments made to
subcontractors in advance of work performed under the
subcontract;
(b)
surveys of work performed; or
(c)
completion of a physical proportion of the service
transaction or contract work.
Progress payments and advances received from customers often
do not reflect the work performed.
6.14 An entity shall recognise costs that relate to future
activity on the transaction or contract, such as for materials or
prepayments, as an asset if it is probable that the costs will be
recovered. Such costs represent an amount due from the customer and
are classified as work in progress.
6.15 An entity shall recognise as an expense immediately any
costs that are not probable of being recovered.
6.16 When the outcome of a construction contract cannot be
estimated reliably
(a)
an entity shall recognise revenue only to the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
extent of contract costs incurred that it is probable will be
recoverable; and
(b)
the entity shall recognise contract costs as an
expense in the period in which they are incurred.
6.17 When it is probable that total contract costs will exceed
total contract revenue on a construction contract, the expected loss
shall be recognised as an expense immediately.
6.18 If the collectability of an amount already recognised as
contract revenue is no longer probable, the entity shall recognise the
uncollectible amount as an expense rather than as an adjustment of the
amount of contract revenue.
6.19
An entity shall present
(a)
the gross amount due from customers for contract
work as an asset; and
(b)
the gross amount due to customers for contract
work as a liability.
6.20 The gross amount due from customers for contract work
is the net amount of (i) costs incurred plus recognised profits, less (ii)
the sum of recognised losses and progress billings for all contracts in
progress for which costs incurred plus recognised profits (less
recognised losses) exceeds progress billings.
6.21 The gross amount due to customers for contract work is
the net amount of (i) costs incurred plus recognised profits, less (ii) the
sum of recognised losses and progress billings for all contracts in
progress for which progress billings exceed costs incurred plus
recognised profits (less recognised losses).
Revenue – disclosures
6.22 An entity shall disclose the accounting policies adopted
for the recognition of revenue, including the methods adopted to
determine
(a)
the stage of completion of transactions involving
the rendering of services;
(b)
the contract revenue recognised in the period; and
(c)
the stage of completion of contracts in progress.
6.23 In addition to the disclosure in paragraph 6.22, an entity
shall also disclose the amount of each category of revenue recognised
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
during the period, including revenue arising from
(a)
the sale of goods;
(b)
the rendering of services;
(c)
interest;
(d)
royalties;
(e)
rent; and
(f)
dividends.
Construction contracts – Additional disclosures
6.24 In addition to the disclosures required in paragraph 6.23,
an entity shall also disclose the amount of contract revenue recognised
as revenue in the period.
6.25 An entity shall disclose each of the following for
contracts in progress at the balance sheet date
(a)
the aggregate amount of costs incurred and
recognised profits (less recognised losses) to date;
(b)
the amount of advances received; and
(c)
the amount of retentions.
6.26 Retentions are amounts of progress billings that are not
paid until the satisfaction of conditions specified in the contract for the
payment of such amounts or until defects have been rectified. Progress
billings are amounts billed for work performed on a contract whether
or not they have been paid by the customer. Advances are amounts
received by the contractor before the related work is performed.
Section 7: Property, plant and equipment
7.1
Property, plant and equipment are tangible assets that
(a)
are held for use in the production or supply of
goods or services, for rental to others (unless they meet the
definition of investment property in paragraph 8.1), or for
administrative purposes; and
(b)
are expected to be used during more than one
period.
Recognition
7.2
The cost of an item of property, plant and equipment
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
shall be recognised as an asset if, and only if
(a)
it is probable that future economic benefits
associated with the item will flow to the entity; and
(b)
the cost of the item can be measured reliably.
Measurement at recognition
7.3
An entity shall measure an item of property, plant and
equipment at initial recognition at its cost.
7.4
The cost of an item of property, plant and equipment
comprises
(a)
its purchase price, including legal and brokerage
fees, import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;
(b)
any costs directly attributable to bringing the asset
to the location and condition necessary for it to be capable of
operating in the manner intended by management. These can
include staff costs arising directly from the construction or
acquisition of the item of property, plant and equipment, the
costs of site preparation, initial delivery and handling,
installation and assembly, and testing of functionality; and
(c)
the initial estimate of the costs of dismantling and
removing the item and restoring the site on which it is located,
the obligation for which an entity incurs either when the item is
acquired or as a consequence of having used the item during a
particular period for purposes other than to produce inventories
during that period.
The cost of a self-constructed asset is determined using the
same principles as for an acquired asset.
7.5
Subsequent expenditure shall be capitalised as part of the
cost of property, plant and equipment only if
(a)
it enhances the economic benefits of an asset in
excess of the previously assessed standard of performance (i.e.
if it is an ‘improvement’); or
(b)
it replaces or restores a component that has been
separately depreciated over its useful life.
Otherwise it shall be recognised in the income statement as it is
incurred.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
7.6
An entity may adopt an accounting policy of capitalising
finance costs (such as interest). Where such a policy is adopted, only
those finance costs that are directly attributable to the acquisition,
construction or production of a qualifying asset shall be capitalised as
part of the cost of that asset. A qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its
intended use. The total amount of finance costs capitalised during a
period shall not exceed the total amount of finance costs incurred
during that period.
7.7
Capitalisation of directly attributable costs, including
finance costs, shall be suspended during extended periods in which
active development is interrupted. Recognition of such costs in the
carrying amount of an item of property, plant and equipment ceases
when the item is in the location and condition necessary for it to be
capable of operating in the manner intended by management, even if
the asset has not yet been brought into use.
Measurement after recognition
7.8
A class of property, plant and equipment is a grouping of
assets of a similar nature and use in an entity’s operations.
7.9
An entity shall account for all items in the same class of
property, plant and equipment (i.e. having a similar nature, function or
use in the business) after initial recognition using either
(a)
the cost model in paragraph 7.10; or
(b)
the revaluation model in paragraphs 7.11 – 7.19.
7.10 Under the cost model, an entity shall measure an item of
property, plant and equipment at cost less any accumulated
depreciation and any accumulated impairment losses.
7.11 Under the revaluation model, an item of property, plant
and equipment whose fair value can be measured reliably shall be
carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations shall be
made with sufficient regularity to ensure that the carrying amount does
not differ materially from that which would be determined using fair
value at the balance sheet date.
7.12 Where an item of property, plant and equipment is
revalued all items in the same class shall be revalued, but a policy of
revaluation need not be applied to all classes of property, plant and
equipment.
7.13
The fair value of land and buildings is usually
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
determined from market-based evidence by appraisal that is normally
undertaken by professionally qualified valuers. The fair value of items
of plant and equipment is usually their market value determined by
appraisal.
7.14 If there is no market-based evidence of fair value because
of the specialised nature of the item of property, plant and equipment
and the item is rarely sold, except as part of a continuing business, an
entity may need to estimate fair value using an income or a depreciated
replacement cost approach.
7.15 The frequency of revaluations depends upon the changes
in fair values of the items of property, plant and equipment being
revalued. Nevertheless, revaluations shall be made at least every five
years and in the intervening years where it is likely that there has been
a material change in value. When the fair value of a revalued asset
differs materially from its carrying amount, a further revaluation is
required. Some items of property, plant and equipment experience
significant and volatile changes in fair value, thus necessitating annual
revaluation. Such frequent revaluations are unnecessary for items of
property, plant and equipment with only insignificant changes in fair
value. Instead, it may be necessary to revalue the item only every three
or five years.
7.16 Gains and losses arising on the revaluation of assets shall
be recognised in an equity reserve, net of any attributable taxation
element.
7.17 If an asset’s carrying amount is increased as a result of a
revaluation, the increase shall be credited directly to an equity reserve.
However, the increase shall be recognised in profit or loss to the extent
that it reverses a revaluation decrease of the same asset previously
recognised in profit or loss in accordance with paragraph
7.18. If an asset’s carrying amount is decreased as a result of a
revaluation, the decrease shall be recognised in profit or loss.
However, the decrease shall be debited directly to an equity reserve to
the extent of any credit balance existing in that reserve in respect of
that asset.
7.19 The revaluation surplus included in an equity reserve in
respect of an item of property, plant and equipment may be transferred
directly to retained earnings (not through profit or loss) when the asset
is derecognised. This may involve transferring the whole of the surplus
when the asset is retired or disposed of. However, some of the surplus
may be transferred as the asset is used by an entity. In such a case, the
amount of the surplus transferred would be the difference between
depreciation based on the revalued carrying amount of the asset and
depreciation based on the asset’s original cost.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
Depreciation
7.20 The cost (or revalued amount) less estimated residual
value of an item of property, plant and equipment shall be depreciated
on a systematic basis over the asset’s useful life. An entity shall select
a depreciation method that reflects the pattern in which it expects to
consume the asset’s future economic benefits. The possible
depreciation methods include the straight-line method.
7.21 Depreciation of an asset begins when it is available for
use, i.e. when it is in the location and condition necessary for it to be
capable of operating in the manner intended by management.
Depreciation of an asset ceases at the earlier of the date that the asset is
classified as held for sale (or included in a disposal group that is
classified as held for sale) and the date that the asset is derecognised.
Therefore, depreciation does not cease when the asset becomes idle or
is retired from active use unless the asset is fully depreciated.
7.22 The depreciation charge for each period shall be
recognised in profit or loss, unless it is included in the carrying amount
of another asset.
7.23 Where an item of property, plant and equipment
comprises two or more major components with substantially different
useful lives, each component shall be accounted for separately for
depreciation purposes and depreciated over its individual useful life.
Each part of an item of property, plant and equipment with a cost that
is significant in relation to the total cost of the item shall be
depreciated separately. With certain exceptions, such as sites used for
extractive purposes or landfill, land has an unlimited life and therefore
is not depreciated.
7.24 The useful lives and residual values of property, plant
and equipment shall be reviewed regularly and, when necessary,
revised. On revision, the carrying amount of the item of property, plant
and equipment at the date of revision, less the revised residual value,
shall be depreciated over the revised remaining useful life. Such a
change shall be accounted for as a change in an accounting estimate in
accordance with Section 5 of these Principles.
7.25 An entity shall review the depreciation method regularly.
If there has been a significant change in the pattern in which the entity
expects to consume the asset’s future economic benefits, the entity
shall change the method to reflect the new pattern. A change from one
method of providing depreciation to another is permissible only on the
grounds that the new method will give a fairer presentation of the
results and of the financial position. Such a change does not, however,
constitute a change of accounting policy; the carrying amount of the
item of property, plant and equipment is depreciated using the revised
method over the remaining useful life, beginning in the period in
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
which the change is made. A change in the depreciation method shall
be accounted for as a change in an accounting estimate in accordance
with Section 5 of these Principles.
Impairment
7.26 To determine whether an item of property, plant and
equipment is impaired, an entity applies Section 12 of these Principles.
That Section explains how an entity reviews the carrying amount of its
assets, how it determines the recoverable amount of an asset, and when
it recognises, or reverses the recognition of, an impairment loss.
Disclosure
7.27 An entity shall disclose, for each class of property, plant
and equipment
(a)
the measurement bases used for determining the
gross carrying amount;
(b)
the depreciation methods used;
(c)
the useful lives or the depreciation rates used;
(d)
where material, the financial effect of a change
during the period in either the estimate of useful lives or the
estimate of residual values;
(e)
the gross carrying amount and the accumulated
depreciation (aggregated with accumulated impairment losses)
at the beginning and end of the period; and
(f)
having regard to paragraph 4.8(a) of these
Principles, for each class of property, plant and equipment, a
reconciliation of the carrying amount at the beginning and end
of the period showing
(i)
additions (reflecting additions resulting
from business combinations);
(ii)
disposals;
(iii) transfers (reflecting transfers to assets
classified as held for sale or included in a disposal group
classified as held for sale in accordance with section 23
of the Principles);
(iv)
revaluation gains and losses;
(v)
impairment losses recognised or reversed
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
in profit or loss in accordance with Section 12 of these
Principles;
(vi)
depreciation;
(vii) accumulated depreciation and impairment
losses released on disposal and transfers;
(viii) the net exchange differences arising on the
translation of the financial statements from the functional
currency into a different presentation currency (see
Section 18 of these Principles); and
(ix)
other changes.
7.28 Where there has been a change in the depreciation
method used, the effect, if material, shall be disclosed in the period of
change. The reason for the change shall also be disclosed.
7.29 Where applicable, the notes shall disclose(i) the fact that
finance costs are incurred in determining the cost of the assets, and (ii)
the amount of finance costs so capitalised.
7.30 Where property, plant and equipment have been revalued
an entity shall disclose
(a)
a table in the notes showing movements in the
revaluation reserve in the financial year, with an explanation of
the tax treatment of items therein, with disclosure of the
treatment for taxation purposes of amounts debited or credited
to equity;
(b)
the comparable amounts determined under the
cost model (i.e. the aggregate historical cost amount, less
accumulated depreciation, that would have been included had
the assets not been revalued, reflecting any write-downs to
recoverable amount that would have been necessary); and
(c)
the bases of the valuation, including the
significant assumptions underlying the valuation models and
techniques.
7.31
Entities shall disclose
(a)
the amount of property, plant and equipment
pledged as security for liabilities; and
(b)
the amount of contractual commitments for the
acquisition of property, plant and equipment (however
authorised but not contracted commitments should also be
reflected).
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
Additional disclosures
7.32 In respect of the reconciliation referred to in paragraph
7.27(f), in addition to the items mentioned therein, and having regard
to paragraph 4.8(a) of these Principles, an entity shall also disclose
(a)
assets classified as held for sale or included in a
disposal group classified as held for sale in accordance with
Section 23 of these Principles; and
(b)
additions resulting from business combinations.
7.33 Where items of property, plant and equipment were
revalued, the year in which they were revalued shall be disclosed.
When an item of property, plant and equipment was revalued during
the financial year to which the financial statements relate, in addition
to the disclosures referred to in paragraph 7.30, an entity shall also
disclose in those financial statements
(a)
the effect of any revaluation made during the year;
and
(b)
whether an independent valuer was involved.
Section 8: Investment property
8.1
Investment property is property (land or a building, or
part of a building, or both) held by the owner or by the lessee under a
finance lease to earn rentals or for capital appreciation or both, rather
than for
(a)
use in the production or supply of goods or
services or for administrative purposes (hence covered by the
definition of property, plant and equipment under Section 7 of
these Principles and accounted for in accordance with the
provisions of that Section); or
(b)
sale in the ordinary course of business (hence
covered by the definition of inventories under Section 15 of
these Principles and accounted for in accordance with the
provisions of that Section).
Recognition
8.2
Investment property shall be recognised as an asset
when, and only when
(a)
it is probable that the future economic benefits
that are associated with the investment property will flow to the
entity; and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(b)
the cost of the investment property can be
measured reliably.
Measurement at recognition
8.3
An entity shall measure investment property at its cost at
initial recognition. The cost of a purchased investment property
comprises its purchase price and any directly attributable expenditure
such as legal and professional fees, property transfer taxes and other
transaction costs. The cost of a self-constructed investment property is
its cost at the date when the construction or development is complete.
Until that date an entity shall apply the measurement principles in
Section 7 of these Principles.
Measurement after recognition
8.4
After initial recognition, an entity shall choose as its
accounting policy either the cost model in paragraph 8.5, or the fair
value model in paragraphs 8.6 – 8.10, and shall apply that policy to all
of its investment property.
8.5
An entity that chooses the cost model shall measure all of
its investment property after initial recognition at cost less any
accumulated depreciation and any accumulated impairment losses and
shall account for all of its investment property by applying the
principles for property, plant and equipment measured under the cost
model in accordance with the requirements of paragraph 7.10 and
paragraphs 7.20 – 7.25 of Section 7 of these Principles. To determine
whether an investment property is impaired, an entity applies Section
12 of these Principles. That Section explains how an entity reviews the
carrying amount of its assets, how it determines the recoverable
amount of an asset, and when it recognises, or reverses the recognition
of, an impairment loss.
8.6
An entity that chooses the fair value model shall measure
all of its investment property after initial recognition at fair value less
any accumulated depreciation.
8.7
The best evidence of fair value is given by current prices
in an active market for similar property in the same location and
condition and subject to similar lease and other contracts. In the
absence of current prices in an active market, an entity considers
information from a variety of sources, including
(a)
current prices in an active market for properties of
different nature, condition or location (or subject to different
lease or other contracts), adjusted to reflect those differences;
(b)
recent prices of similar properties on less active
markets, with adjustments to reflect any changes in economic
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
conditions since the date of the transactions that occurred at
those prices; and
(c)
discounted cash flow projections based on reliable
estimates of future cash flows and using discount rates that
reflect current market assessments of the uncertainty in the
amount and timing of the cash flows.
8.5
If, in exceptional cases, there is clear evidence when an
entity first acquires an investment property (or when an existing
property first becomes investment property following the completion
of construction or development, or after a change of use) that the fair
value of the investment property is not reliably determinable on a
continuing basis, an entity shall measure that investment property
using the cost model in paragraph 8.5 and the residual value of that
investment property shall be assumed to be zero. The fair value of an
investment property is not reliably determinable on a continuing basis
when, and only when, comparable market transactions are infrequent
and alternative reliable estimates of fair value are not available. An
entity may nevertheless measure all its other investment property
using the fair value model.
8.9
Paragraphs 7.15 – 7.19 and paragraphs 7.20 – 7.25 of
Section 7 of these Principles shall also apply to investment property
measured under the fair value model.
8.10 Upon first-time adoption of GAPEE an entity shall
transfer any fair value gains on an item of investment property,
previously recognised in profit or loss and standing to the credit of
retained earnings or another reserve in accordance with another
financial reporting framework, to a separate component of equity.
Transfers
8.11 If an item of property, plant and equipment becomes an
investment property, and the entity will account for the investment
property under the fair value model, any difference between the asset’s
carrying amount and its fair value at the date when it becomes an
investment property shall be treated in the same way as a revaluation
in accordance with Section 7 of these Principles.
8.12 If a property held as inventories, or a completed self-
constructed property, becomes an investment property, and the entity
will account for the investment property under the fair value model,
any difference between the asset’s previous carrying amount and its
fair value at the date when it becomes an investment property shall be
recognised in a separate component of equity.
8.13
When an investment property carried at fair value is
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
transferred to property, plant and equipment or inventories, following
a change of use, the property’s deemed cost for subsequent accounting
in accordance with Sections 7 and 15 respectively, shall be its fair
value at the date of change of use. The cumulative amount recognised
in equity in respect of that investment property may be transferred to
retained earnings when, and only when, the asset (property, plant and
equipment or inventory) is derecognised.
Disclosure
8.14 Entities shall make the disclosures required by
paragraphs 7.27 – 7.33 of Section 7 of these Principles, insofar as
applicable.
Section 9: Financial assets, financial liabilities and equity
9.1
This Section does not apply to
(a)
Investments in subsidiaries, associates and joint
ventures as defined in Section 10; and
(b)
Finance leases as defined in Section 14;
9.2
A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of another entity.
9.3
A financial asset is primarily any asset that is
(a)
cash;
(b)
an equity instrument of another entity; or
(c)
a contractual right
(i)
to receive cash or another financial asset
from another entity; or
(ii)
to exchange financial assets or financial
liabilities with another entity under conditions that are
potentially favourable to the entity.
9.4
A financial liability is primarily any liability that is a
contractual obligation
(a)
to deliver cash or another financial asset to
another entity; or
(b)
to exchange financial assets or financial liabilities
with another entity under conditions that are potentially
unfavourable to the entity.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
9.5
A derivative is a financial instrument with all three of the
following characteristics
(a)
its value changes in response to the change in a
specified interest rate, financial instrument price, commodity
rating or credit index, or other variable, provided in the case of
a non-financial variable that the variable is not specific to a
party to the contract;
(b)
it requires no initial net investment or an initial
net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar
response to changes in market factors; and
(c)
it is settled at a future date.
Commodity-based contracts that give either contracting party
the right to settle in cash or some other financial instrument shall be
considered to be derivative financial instruments, except where such
contracts
(a)
were entered into and continue to meet the entity’s
expected purchase, sale or usage requirements at the time they
were entered into and subsequently;
(b)
were designated as commodity-based contracts at
their inception; and
(c)
are expected to be settled by delivery of the
commodity.
9.6
An equity instrument is any contract that evidences a
residual interest in the assets of an entity after deducting all of its
liabilities.
9.7
The amortised cost of a financial asset or financial
liability is the amount at which the financial asset or financial liability
is measured at initial recognition minus principal repayments, plus or
minus the cumulative amortisation using the effective interest method
of any difference between that initial amount and the maturity amount,
and minus any reduction (directly or through the use of an allowance
account) for impairment or uncollectibility.
9.8
The effective interest method is a method of calculating
the amortised cost of a financial asset or a financial liability and of
allocating the interest income or interest expense over the relevant
period. The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected life of
the financial instrument or, when appropriate, a shorter period to the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
net carrying amount of the financial asset or financial liability.
9.9
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.
9.10 Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial asset or
financial liability. An incremental cost is one that would not have been
incurred if the entity had not acquired, issued or disposed of the
financial instrument.
Definitions of categories of financial instruments
9.11 A financial asset or financial liability is classified as held
for trading if
(a)
it is acquired or incurred principally for the
purpose of selling or repurchasing it in the near term;
(b)
on initial recognition it is part of a portfolio of
identified financial instruments that are managed together and
for which there is evidence of a recent actual pattern of short-
term profit-taking; or
(c)
it is a derivative (except for a derivative that is a
designated and effective hedging instrument).
9.12 Held-to-maturity investments are non-derivative
financial assets with fixed or determinable payments and fixed
maturity that an entity has the positive intention and ability to hold to
maturity other than
(a)
those that the entity designates as available-for-
sale; and
(b)
those that meet the definition of loans and
receivables.
An entity shall not classify any financial assets as held to
maturity if the entity has, during the current financial year or during
the two preceding financial years, sold or reclassified more than an
insignificant amount of held-to-maturity investments before maturity
(more than insignificant in relation to the total amount of held-to-
maturity investments) other than sales or reclassifications that
(a)
are so close to maturity or the financial asset’s call
date (for example, less than three months before maturity) that
changes in the market rate of interest would not have a
significant effect on the financial asset’s fair value;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(b)
occur after the entity has collected substantially
all of the financial asset’s original principal through scheduled
payments or prepayments; or
(c)
are attributable to an isolated event that is beyond
the entity’s control, is non-recurring and could not have been
reasonably anticipated by the entity.
9.13 Loans and receivables are non-derivative financial assets
with fixed or determinable payments that are not quoted in an active
market, other than
(a)
those that the entity intends to sell immediately or
in the near term, which shall be classified as held for trading;
and
(b)
purchased loans and receivables that the entity
upon initial recognition designates as available-for-sale.
9.14 Available-for-sale financial assets are those non-
derivative financial assets that are designated as available-for-sale or
are not classified as
(a)
loans and receivables;
(b)
held-to-maturity investments; or
(c)
held for trading financial assets.
Recognition
9.15 An entity shall recognise a financial asset or a financial
liability in its balance sheet when, and only when, the entity becomes a
party to the contractual provisions of the instrument.
Measurement of financial assets and financial liabilities at
recognition
9.16 When a financial asset or financial liability is recognised
initially, an entity shall measure it at its fair value, plus in the case of a
financial asset or financial liability not classified as held for trading
subsequently measured at fair value, transaction costs that are directly
attributable to the acquisition or issue of the financial asset or financial
liability.
An arrangement involving a financial asset or a financial
liability constitutes, in effect, a financing transaction if payment is
deferred beyond normal business terms or is financed at a rate of
interest that is not a market rate. If an arrangement constitutes a
financing transaction, an entity shall measure the financial asset or
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
financial liability at initial recognition at the present value of future
payments discounted at a market rate of interest for a similar debt
instrument.
Accordingly, an entity shall measure all of its financial
instruments at initial recognition at cost (equivalent to transaction
that are not held for trading subsequently measured at fair value,
transaction costs that are directly attributable to the acquisition of the
instrument. Transaction costs do not include debt premiums or
discounts, financing costs or internal administrative or holding costs.
Measurement of financial assets after recognition
9.17 After initial recognition, an entity may measure a
specific category of financial assets (excluding derivatives that are
assets) at their fair values, without any deduction for transaction costs
it may incur on sale or other disposal, except for the following
financial assets
(a)
loans and receivables, which shall be measured at
amortised cost using the effective interest method;
(b)
held-to-maturity investments, which shall be
measured at amortised cost using the effective interest method;
and
(c)
investments in equity instruments that do not have
a quoted market price in an active market and whose fair value
cannot be reliably measured and derivatives that are linked to
and must be settled by delivery of such equity instruments,
which shall be measured at cost.
Notwithstanding the above and paragraph 9.29, an entity may, at
initial recognition, irrevocably designate any financial asset or any
financial liability as measured at fair value through profit or loss
("FVTPL") when doing so results in more relevant information,
because either
(i)
it eliminates or significantly reduces a
measurement or recognition inconsistency (sometimes referred
to as 'an accounting mismatch') that would otherwise arise from
measuring assets or liabilities or recognising the gains and
losses on them on different bases; or
(ii)
a group of financial assets, financial liabilities or
both is managed and its performance is evaluated on a fair
value basis, in accordance with a documented risk management
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or investment strategy, and information about the group is
provided internally on that basis.
An entity that prepared its financial statements under the
requirements of the Accountancy Profession (General Accounting
Principles for Small and Medium-Sized Entities) Regulations (S.L.
281.05) for financial years ended on or before 31 December 2022, is
allowed to apply the irrevocable designation referred to above solely
to financial instruments initially recognised on 1 January 2023 or
thereafter.
When pursuant to the entity’s accounting policy choice,
financial assets classified as held for trading and available-for-sale
financial assets are not subsequently measured at fair value, each
category shall be measured at cost or amortised cost using the effective
interest method, whichever is applicable taking cognisance of the debt
or equity nature of the instrument. For avoidance of doubt, the
application of cost or amortised cost using the effective interest
method is not an accounting policy choice.
Financial assets that are designated as hedged items are subject
to measurement under the hedge accounting requirements. All
financial assets except those classified as held for trading and
subsequently measured at fair value are subject to review for
impairment (see paragraph 9.21-9.28). After initial recognition, an
entity shall measure derivative instruments that are assets at their fair
values. The carrying amount of quoted financial assets that are
classified as current assets and are not measured at fair value, shall be
the lower of cost and fair value less costs to sell.
9.18 The best evidence of fair value is quoted prices in an
active market. If the market for a financial instrument is not active, an
entity establishes fair value by using a valuation technique. The
objective of using a valuation technique is to establish what the
transaction price would have been on the measurement date in an
arm’s length exchange motivated by normal business considerations.
Valuation techniques include using recent arm’s length market
transactions between knowledgeable, willing parties, if available,
reference to the current fair value of another instrument that is
substantially the same, discounted cash flow analysis and other
models. If there is a valuation technique commonly used by market
participants to price the instrument and that technique has been
demonstrated to provide reliable estimates of prices obtained in actual
market transactions, the entity uses that technique. The chosen
valuation technique makes maximum use of market inputs and relies
as little as possible on entity-specific inputs. It incorporates all factors
that market participants would consider in setting a price and is
consistent with accepted economic methodologies for pricing financial
instruments. Periodically, an entity calibrates the valuation technique
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and tests it for validity using prices from any observable current
market transactions in the same instrument or based on any available
observable market data.
9.19 A gain or loss arising from a change in the fair value of a
financial asset or financial liability shall be recognised, as follows.
(a)
A gain or loss on a financial asset or financial
liability classified as held for trading, which is measured at fair
value, or irrevocably designated at initial recognition as
measured at fair value through profit or loss ("FVTPL"), shall
be recognised in profit or loss.
(b)
A gain or loss on an available-for-sale financial
asset, which is measured at fair value, shall be recognised
directly in equity except for impairment losses and foreign
exchange gains and losses until the financial asset is
derecognised, at which time the cumulative gain or loss
previously recognised in equity shall be recognised in profit or
loss. However, interest calculated using the effective interest
method is recognised in profit or loss. Dividends on an
available-for-sale equity instrument are recognised in profit or
loss when the entity’s right to receive payment is established.
For the purpose of recognising foreign exchange gains and
losses under Section 18, a monetary available-for-sale financial
asset is treated as if it were carried at amortised cost in the
foreign currency. Accordingly, for such a financial asset,
exchange differences resulting from changes in amortised cost
are recognised in profit or loss and other changes in carrying
amount are recognised in equity. For available-for-sale
financial assets that are not monetary items under Section 18
(for example, equity instruments), the gain or loss that is
recognised in equity includes any related foreign exchange
component.
For financial assets and financial liabilities carried at amortised
cost, a gain or loss is recognised in profit or loss when the financial
asset or financial liability is derecognised or impaired, and through the
amortisation process.
Impairment of financial assets
9.21 A financial asset or a group of financial assets is
impaired and impairment losses are incurred if, and only if, there is
objective evidence of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a ‘loss event’) and
that loss event (or events) has an impact on the estimated future cash
flows of the financial asset or group of financial assets that can be
reliably estimated.
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9.22 If there is objective evidence that an impairment loss on
financial assets carried at amortised cost has been incurred, the amount
of the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows
(excluding future credit losses that have not been incurred) discounted
at the financial asset’s original effective interest rate (ie the effective
interest rate computed at initial recognition). The amount of the loss
shall be recognised in profit or loss.
9.23 If, in a subsequent period, the amount of the impairment
loss decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss shall be reversed. At the date the
impairment is reversed, the reversal shall not result in a carrying
amount of the financial asset that exceeds what the amortised cost
would have been had the impairment not been recognised. The amount
of the reversal shall be recognised in profit or loss.
9.24 If there is objective evidence that an impairment loss has
been incurred on an unquoted equity instrument that is not carried at
fair value, the amount of the impairment loss is measured as the
difference between the carrying amount of the financial asset and the
present value of estimated future cash flows discounted at the current
market rate of return for a similar financial asset. Such impairment
losses shall not be reversed.
9.25 When a decline in the fair value of an available-for-sale
financial asset has been recognised directly in equity and there is
objective evidence that the asset is impaired, the cumulative loss that
had been recognised directly in equity shall be reclassified from equity
to profit or loss as a reclassification adjustment even though the
financial asset has not been derecognised.
9.26 The amount of the cumulative loss that is removed from
equity and recognised in profit or loss shall be the difference between
the acquisition cost (net of any principal repayment and amortisation)
and current fair value, less any impairment loss on that financial asset
previously recognised in profit or loss.
9.27 Impairment losses recognised in profit or loss for an
investment in an equity instrument classified as available-for-sale shall
not be reversed through profit or loss.
9.28 If, in a subsequent period, the fair value of a debt
instrument classified as available-for-sale increases and the increase
can be objectively related to an event occurring after the impairment
loss was recognised in profit or loss, the impairment loss shall be
reversed, with the amount of the reversal recognised in profit or loss.
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Measurement of financial liabilities after recognition
9.29 After initial recognition, an entity shall measure all
financial liabilities at amortised cost using the effective interest
method, except for
(a)
financial liabilities classified as held for trading
(excluding derivatives that are liabilities), which may be
measured at fair value; and
(b)
derivatives that are liabilities, which shall be
measured at fair value.
Financial liabilities that are designated as hedged items are
subject to the hedge accounting requirements.
For avoidance of doubt, when pursuant to the entity’s
accounting policy choice, financial liabilities classified as held for
trading (excluding derivatives) are not subsequently measured at fair
value, these liabilities shall be measured at amortised cost using the
effective interest method.
Hedging
9.30 If there is a designated hedging relationship between a
hedging instrument and a hedged item, accounting for the gain or loss
on the hedging instrument and the hedged item shall follow the rules
below.
9.31
Hedging relationships are of three types
(a)
fair value hedge: a hedge of the exposure to
changes in fair value of a recognised asset or liability or an
unrecognised firm commitment, or an identified portion of such
an asset, liability or firm commitment, that is attributable to a
particular risk and could affect profit or loss.
(b)
cash flow hedge: a hedge of the exposure to
variability in cash flows that(i) is attributable to a particular risk
associated with a recognised asset or liability or a highly
probable forecast transaction and (ii) could affect profit or loss.
(c)
hedge of a net investment in a foreign operation.
9.32 A hedging relationship qualifies for hedge accounting if,
and only if, all of the following conditions are met.
(a)
At the inception of the hedge there is formal
designation and documentation of the hedging relationship and
the entity’s risk management objective and strategy for
undertaking the hedge. That documentation shall include
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identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the
entity will assess the hedging instrument’s effectiveness in
offsetting the exposure to changes in the hedged item’s fair
value or cash flows attributable to the hedged risk.
(b)
The hedge is expected to be highly effective in
achieving offsetting changes in fair value or cash flows
attributable to the hedged risk, consistently with the originally
documented risk management strategy for that particular
hedging relationship.
(c)
For cash flow hedges, a forecast transaction that is
the subject of the hedge must be highly probable and must
present an exposure to variations in cash flows that could
ultimately affect profit or loss.
(d)
The effectiveness of the hedge can be reliably
measured, ie the fair value or cash flows of the hedged item that
are attributable to the hedged risk and the fair value of the
hedging instrument can be reliably measured.
(e)
The hedge is assessed on an ongoing basis and
determined actually to have been highly effective throughout
the financial reporting periods for which the hedge was
designated.
9.33 If a fair value hedge meets the aforesaid conditions
during the period, it shall be accounted for as follows
(a)
the gain or loss from remeasuring the hedging
instrument at fair value (for a derivative hedging instrument)
shall be recognised in profit or loss; and
(b)
the gain or loss on the hedged item attributable to
the hedged risk shall adjust the carrying amount of the hedged
item and be recognised in profit or loss. This applies if the
hedged item is otherwise measured at cost. Recognition of the
gain or loss attributable to the hedged risk in profit or loss
applies if the hedged item is an available-for-sale financial asset
which is measured at fair value.
9.34 If a cash flow hedge meets the aforesaid conditions
during the period, it shall be accounted for as follows
(a)
the portion of the gain or loss on the hedging
instrument that is determined to be an effective hedge shall be
recognised directly in equity; and
(b)
the ineffective portion of the gain or loss on the
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hedging instrument shall be recognised in profit or loss.
9.35 Hedges of a net investment in a foreign operation,
including a hedge of a monetary item that is accounted for as part of
the net investment, shall be accounted for similarly to cash flow
hedges
(a)
the portion of the gain or loss on the hedging
instrument that is determined to be an effective hedge shall be
recognised directly in equity; and
(b)
the ineffective portion shall be recognised in
profit or loss.
Debt/Equity classification
9.36 A financial instrument, or its component parts, shall be
classified as a financial liability, a financial asset or an equity
instrument in accordance with the substance of the contractual
arrangement rather than its legal form. Some financial instruments
take the legal form of equity but are liabilities in substance and others
may combine features associated with equity instruments and features
associated with financial liabilities. For example a preference share
that provides for mandatory redemption by the issuer for a fixed or
determinable amount at a fixed or determinable future date, or gives
the holder the right to require the issuer to redeem the instrument at or
after a particular date for a fixed or determinable amount, is a financial
liability. The entity shall assess the terms of the instrument to
determine whether it contains both a liability and an equity
component. Such components shall be classified separately as
financial liabilities, financial assets or equity instruments in
accordance with the requirements of this paragraph. The entity shall
allocate the initial recognition amount between the liability and equity
component by assigning to the equity component the residual amount
after deducting from the fair value of the instrument as a whole the
amount separately determined for the liability component in
accordance with the requirements of paragraph 9.16.
9.37 Dividends relating to a financial instrument or a
component that is a financial liability shall be recognised as expense in
profit or loss. Distributions to holders of an equity instrument shall be
debited by the entity directly to equity, net of any related income tax
benefit. If an entity declares dividends after the balance sheet date, the
dividends shall not be recognised as a liability at the balance sheet
date.
Disclosure
9.38 For financial instruments measured at fair value an entity
shall disclose in the notes, for each category of financial instrument
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(a)
the significant assumptions underlying the
valuation models and techniques used, if any, in accordance
with paragraph 9.18 of these Principles; and
(b)
the fair value at the balance sheet date and the
changes in fair value recognised in the income statement and
changes included in fair value reserves during the period in
accordance with paragraph 9.39(b)(iii) and (iv).
9.39
An entity shall disclose
(a)
its accounting policy for each category of
financial instrument; and
(b)
having regard to paragraph 4.8(d) of these
Principles, a reconciliation of the carrying amount of each
category of instrument or investment, classified as non-current
assets at the beginning and end of the period showing
(i)
additions;
(ii)
disposals;
(iii) impairment losses or
reversal
of
impairment losses where applicable;
(iv) write-downs to fair value less costs to sell
for quoted instruments that are classified as current
assets and not measured at fair value;
(v)
gains and losses resulting from changes in
the fair value of instruments measured under the fair
value through equity model, distinguishing between
those recognised in equity and those recognised in profit
or loss;
(vi) gains and losses resulting from changes in
the fair value of held-for-trading investments measured
under the fair value through profit or loss model,
recognised in profit or loss;
(vii) the net exchange differences arising on the
translation of the financial statements from the functional
currency into a different presentation currency (see
Section 18 of these Principles); and
(viii) other changes.
Unless presented elsewhere in the financial statements, an entity
shall disclose a table showing movements in fair value reserves during
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the financial year.
9.40 For each class of derivative financial instrument, an
entity shall disclose in the notes, information about the extent and the
nature of the instruments, including significant terms and conditions
that may affect the amount, timing and certainty of future cash flows.
9.41
An entity shall disclose
(a)
amounts owed by the entity becoming due and
payable after more than five years; and
(b)
financial liabilities covered by valuable security
furnished by the entity, together with an indication of the nature
and form of the security given.
Additional disclosures
9.42 An entity that carries quoted investments at cost or
amortised cost shall disclose the market value of those investments if it
is materially different from their carrying amount.
9.43 An entity that carries unquoted non-current investments
at cost or amortised cost, the carrying amount of which is in excess of
their fair value, shall disclose the following
(a)
the book value and the fair value of either the
individual assets or appropriate groupings of those individual
assets, and
(b)
the reasons for not reducing the book value,
including the nature of the evidence underlying the assumption
that the book value will be recovered;
9.44 When the fair value of an unquoted equity investment
cannot be measured reliably, and that investment is hence measured at
cost, an entity shall disclose that fact together with the reason why the
fair value of that investment cannot be measured reliably.
9.45 An entity shall disclose the carrying amount of any
financial assets that it has pledged as collateral for liabilities or
contingent liabilities.
Equity disclosures
9.46 An entity with share capital shall disclose the following
in the notes
(a)
for each class of share capital
(i)
the number of shares authorised;
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(ii)
the number of shares issued and fully paid,
and issued but not fully paid;
(iii) the nominal value, or in the absence of a
nominal value the accounting par value, of the shares
subscribed during the financial year;
(iv) a reconciliation of the number of shares
outstanding at the beginning and at the end of the period
showing the number allotted, their aggregate nominal
value, and the consideration received by the entity during
the year for the allotment;
(v)
the rights, preferences and restrictions
attaching to that class including restrictions on the
distribution of dividends and the repayment of capital;
(vi) the existence of any participation
certificates, convertible debentures, warrants, options or
similar securities or rights, with an indication of their
number and the rights they confer.
(vii)
shares in the entity held by the entity itself;
and
(viii) shares reserved for issue under options and
contracts for the sale of shares, including the terms and
amounts.
(b)
a description of each reserve within equity; and
(c)
for any part of the allotted share capital that
consists of redeemable shares
(i)
the earliest and latest dates on which the
company has the power to redeem those shares;
(ii)
whether those shares must be redeemed in
any event or are liable to be redeemed at the option of the
company or of the shareholder; and
(iii) whether any (and, if so, what) premium is
payable on redemption.
9.47
The notes shall state
(a)
the aggregate amounts of dividends paid in the
financial year (other than those for which a liability existed at
the immediately preceding balance sheet date);
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(b)
the aggregate amount of dividends that the
company is liable to pay at the balance sheet date; and
(c)
the aggregate amount of dividends that are
proposed before the date of approval of the financial
statements, and not otherwise disclosed under paragraph (a) or
(b) above.
9.48 If any fixed cumulative dividends on the company’s
shares are in arrears, the amount of the arrears and the period for
which each class of dividends is in arrears shall be disclosed.
Section 10: Investments in subsidiaries, associates and joint
ventures
10.1 This Section shall be applied by an investor in
accounting for its equity investments in subsidiaries, associates and
joint ventures in its individual financial statements. Individual
financial statements are the financial statements of the investor
prepared in accordance with these Principles. Except as provided for in
paragraph 22.19 of these Principles, this Section does not apply to
consolidated financial statements, which are specifically covered in
Section 22 of GAPEE.
10.2 Investments in entities other than subsidiaries, associates
and joint ventures shall be accounted for in accordance with the
requirements of Section 9 of these Principles.
Definitions
10.3 A subsidiary is an entity, including an unincorporated
entity such as a partnership, which is controlled by another entity,
known as the parent (also referred to as the ‘investor’ throughout this
Section). Control is the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. Control
is presumed to exist when the parent has, directly or indirectly through
subsidiaries, a majority of the shareholders’ voting rights of an entity
unless, in exceptional circumstances, it can be clearly demonstrated
that such ownership does not constitute control. Control also exists
when the parent owns half or less of the voting power of an entity but
it
(a)
has sole control pursuant to an agreement with
other shareholders in or members of that entity (a subsidiary
entity), a majority of shareholders' or members' voting rights in
that entity and is at the same time a shareholder in or member of
that entity;
(b)
has the right to exercise a dominant influence over
an entity (a subsidiary entity); or
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(c)
has the right to appoint or remove the majority of
the members of the board of directors or equivalent governing
body and control of the entity is by that board or body and is at
the same time a shareholder in or a member of that entity.
The existence and effect of potential voting rights that are
currently exercisable or convertible, including potential voting rights
held by another entity, are considered when assessing whether an
entity has the power to govern the financial and operating policies of
another entity.
In any case, an entity is required to draw up consolidated
financial statements if that entity has the power to exercise, or actually
exercises, dominant influence or control over another entity.
10.4 An associate is an entity, including an unincorporated
entity such as a partnership, over which the investor has significant
influence and that is neither a subsidiary nor an interest in a joint
venture. Significant influence is the power to participate in the
financial and operating policy decisions of the associate but is not
control or joint control over those policies. If an investor holds,
directly or indirectly (e.g. through subsidiaries), 20% or more of the
voting power of the investee, it is presumed that the investor has
significant influence, unless it can be clearly demonstrated that this is
not the case. Conversely, if the investor holds, directly or indirectly
(e.g. through subsidiaries), less than 20% of the voting power of the
investee, it is presumed that the investor does not have significant
influence, unless such influence can be clearly demonstrated. A
substantial or majority ownership by another investor does not
preclude an investor from having significant influence. The existence
of significant influence by an investor is usually evidenced in one or
more of the following ways
(a)
representation on the board of directors or
equivalent governing body of the investee;
(b)
participation in policy making processes;
(c)
material transactions between the investor and the
investee;
(d)
interchange of managerial personnel; or
(e)
provision of essential technical information.
The existence and effect of potential voting rights that are
currently exercisable or convertible, including potential voting rights
held by other entities, are considered when assessing whether an entity
has significant influence.
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10.5 A joint venture is a contractual arrangement whereby two
or more parties undertake an economic activity that is subject to joint
control. The following characteristics are common to all joint
ventures
(a)
two or more venturers are bound by a contractual
arrangement; and
(b)
the contractual arrangement establishes joint
control.
Joint control is the contractually agreed sharing of control over
an economic activity, and exists only when the strategic financial and
operating decisions relating to the activity require the unanimous
consent of the parties sharing control (the venturers). A venturer (also
referred to as the ‘investor’ throughout this Section) is a party to a
joint venture and has joint control over that joint venture.
10.6 Joint ventures can take the form of jointly controlled
operations, jointly controlled assets, or jointly controlled entities.
10.7 The operation of some joint ventures involves the use of
the assets and other resources of the venturers rather than the
establishment of a corporation, partnership or other entity or of a
financial structure that is separate from the venturers themselves. Each
venturer uses its own property, plant and equipment and carries its own
inventories. It also incurs its own expenses and liabilities and raises its
own finance, which represent its own obligations. The joint venture
activities may be carried out by the venturer’s employees alongside the
venturer’s similar activities. The joint venture agreement usually
provides a means by which the revenue from the sale of the joint
product and any expenses incurred in common are shared among the
venturers. These are referred to as jointly controlled operations.
10.9 Some joint ventures involve the joint control, and often
the joint ownership, by the venturers of one or more assets contributed
to, or acquired for the purpose of, the joint venture and dedicated to the
purposes of the joint venture. These are referred to as jointly
controlled assets. A jointly controlled entity is a joint venture that
involves the establishment of a corporation, partnership or other entity
in which each venturer has an interest. The entity operates in the same
way as other entities, except that a contractual arrangement between
the venturers establishes joint control over the economic activity of the
entity.
10.10 Investments in subsidiaries, associates and jointly
controlled entities are sometimes collectively referred to as "investee"
throughout this Section.
Accounting for investments in subsidiaries, associates and
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jointly controlled entities
10.11 An investor shall initially account for all investments in
subsidiaries, associates and jointly controlled entities at cost,
comprising its purchase price and any directly attributable cost.
10.12 Subsequent to initial recognition, an investor shall
account for all its investments in subsidiaries, associates and jointly
controlled entities, using one of the following
(a)
the cost method in paragraphs 10.13 and 10.14; or
(b)
the equity method in paragraphs 10.15 – 10.25.
Cost method
10.13 Under the cost method, an investor shall measure all its
investments in subsidiaries, associates and jointly controlled entities at
cost less any accumulated impairment losses. The investor shall
recognise a dividend from a subsidiary, associate or jointly controlled
entity in profit or loss in its individual financial statements when its
right to receive the dividend is established.
10.14 The investor shall recognise impairment in accordance
with Section 12 of these Principles. In assessing whether there is an
indication that an investment in a subsidiary, associate or jointly
controlled entity (collectively referred to as investee) may be impaired
an entity shall consider available evidence that indicates that the
dividend from an investee recognised in the current financial reporting
period exceeds that investee’s profit for the financial reporting period
in which the dividend is declared. Where applicable, an entity shall
apply the guidance in paragraph 10.24 for the purposes of determining
an investment’s recoverable amount.
Equity method
10.15 Where an investee draws up consolidated financial
statements, the equity method shall be based on the consolidated
financial statements of the investee.
10.16 Investments in subsidiaries, associates or jointly
controlled entities are accounted for under the equity method from the
date on which they fall within the respective definition. Under the
equity method, the investment is initially recognisedat cost. The
difference between that amount and the amount corresponding to the
investor’s share of the capital and reserves of the investee shall be
disclosed separately in the consolidated balance sheet or in the notes to
the consolidated financial statements. That difference shall be
calculated as at the date on which that method is used for the first time.
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10.17 The investor’s share of the profit or loss of the investee
is recognised in the investor’s profit or loss. Distributions received
from an investee reduce the carrying amount of the investment.
Adjustments to the carrying amount may also be necessary for changes
in the investor’s proportionate interest in the subsidiary, associate or
jointly controlled entity arising from changes in the investee’s equity
that have not been recognised in their profit or loss. Such changes
include those arising from the revaluation of property, plant and
equipment and from foreign exchange translation differences. The
investor’s share of those changes is recognised directly in equity of the
investor.
10.18 When potential voting rights exist, the investor’s share
of profit or loss of the investee and of changes in the investee’s equity
is determined on the basis of present ownership interests and does not
reflect the possible exercise or conversion of potential voting rights.
10.19 If an investee uses accounting policies other than those
of the investor for like transactions and events in similar
circumstances, adjustments shall be made to conform the investee’s
accounting policies to those of the investor when the investee’s
financial statements are used by the investor in applying the equity
method.
10.20 Appropriate adjustments are made to the investor’s share
of the profits or losses after acquisition to eliminate the investor’s
share of the investee’s unrealised profits and losses resulting from
transactions between an investor and an investee.
10.21 The most recent available financial statements of the
subsidiary, associate or jointly controlled entity are used by the
investor in applying the equity method. When the reporting dates of
the investor and the investee are different, the investee prepares, for
the use of the investor, financial statements as of the same date as the
financial statements of the investor unless it is impracticable to do so.
10.22 If, under the equity method, an investor’s share of losses
of a subsidiary, associate or jointly controlled entity equals or exceeds
its interest in the investment, the investor discontinues recognising its
share of further losses. The investment is reported at nil value.
Thereafter, additional losses are provided for, and a liability is
recognised, only to the extent that the investor has incurred legal or
constructive obligations or made payments on behalf of the investee. If
the subsidiary, associate or jointly controlled entity subsequently
reports profits, the investor resumes recognising its share of those
profits only after its share of the profits equals the share of losses not
recognised.
10.23 After application of the equity method, including
recognising the associate’s losses in accordance with paragraph 10.22
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
the investor applies the requirements of Section 12 to determine
whether it is necessary to recognise any additional impairment loss
with respect to the investor’s investment.
10.24 For the purposes of determining whether an investment
in a subsidiary, associate or jointly controlled entity is impaired in
accordance with Section 12 of these Principles, an entity shall compare
the investment’s recoverable amount (higher of fair value less costs to
sell and value in use) with its carrying amount, whenever there is an
indication that the investment may be impaired. In determining the
value in use of investments in subsidiaries, associates or jointly
controlled entities, an entity estimates
(a)
its share of the present value of the estimated
future cash flows expected to be generated by the investee,
including the cash flows from the operations of the subsidiary,
associate or jointly controlled entity and the proceeds on the
ultimate disposal of the investment; or
(b)
the present value of the estimated future cash
flows expected to arise from dividends to be received from the
investment and from its ultimate disposal.
Under appropriate assumptions, both methods give the same
result.
10.25 An investor shall discontinue the use of the equity
method from the date it ceases to have
(a)
control over the subsidiary’s financial and
operating policies and does not have joint control or significant
influence; or
(b)
significant influence in participating in the
financial and operating policy decisions of the associate; or
(c)
joint control over a jointly controlled entity and
does not have significant influence.
Accordingly the investor shall account for the investment in
accordance with Section 9 of these Principles. The carrying amount of
the investment at that date shall be recognised as its cost on initial
measurement.
Recognition and Measurement – investments in jointly
controlled operations and jointly controlled assets
10.26 In respect of its interests in jointly controlled operations,
a venturer shall recognise in its financial statements
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(a)
the assets that it controls and the liabilities that it
incurs; and
(b)
the expenses that it incurs and its share of the
income that it earns from the sale of goods or the rendering of
services by the joint venture
and shall measure assets and liabilities recognised in (a) above
in accordance with the respective requirements of these Principles.
10.27 In respect of its interests in jointly controlled assets, a
venturer shall recognise in its financial statements
(a)
its share of the jointly controlled assets, classified
according to the nature of the assets;
(b)
any liabilities that it has incurred;
(c)
its share of any liabilities incurred jointly with the
other venturers in relation to the joint venture;
(d)
any income from the sale or use of its share of the
output of the joint venture, together with its share of any
expenses incurred by the joint venture; and
(e)
any expenses that it has incurred in respect of its
interest in the joint venture
and shall measure assets and liabilities recognised in (a), (b) and
(c) above in accordance with the respective requirements of these
Principles.
Disclosure
10.28 An investor shall disclose its accounting policy for its
investments in subsidiaries, associates and jointly controlled entities.
10.29 An entity shall disclose for investments insubsidiaries,
associates and jointly controlled entities
(a)
the gross carrying amount and the accumulated
impairment losses at the beginning and end of the period; and
(b)
having regard to paragraph 4.8(a) of these
Principles, a reconciliation of the carrying amount at the
beginning and end of the period showing
(i)
additions;
(ii)
disposals;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(iii) impairment losses recognised or reversed
in profit or loss in accordance with Section 12 of these
Principles;
(iv) its share of the profit or loss on investments
in subsidiaries, associates and jointly controlled entities
accounted for under the equity method;
(v)
distributions received from subsidiaries,
associates and jointly controlled entitiesaccounted for
under the equity method;
(vi) the net exchange differences arising on the
translation of the financial statements from the functional
currency into a different presentation currency (see
Section 18 of these Principles);
(vii) accumulated impairment losses released on
disposals; and
(viii)
transfers.
10.30 For investments in subsidiaries, associates and jointly
controlled entities accounted for under the equity method, an investor
shall present and disclose its share of the profit or loss of the investees
separately on the face of the income statement.
Additional disclosures
10.31 For investments in subsidiaries, associates and jointly
controlled entities accounted for under the cost method an investor
shall disclose
(a)
income received from distributions out of the
investee’s accumulated profits, recognised in the investor’s
profit or loss for the period, unless shown separately on the face
of the income statement; and
(b)
the information required by Section 12 of these
Principles.
10.32 An investor shall present and disclose for investments in
subsidiaries, associates and jointly controlled entities accounted for
under the equity method
(a)
its share of changes recognised directly in the
equity of the investee in accordance with paragraph 10.17,
unless shown separately on the statement of changes in equity;
(b)
its share of the results attributable to discontinued
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
operations;
(c)
the carrying amount of those investments;
(d)
the difference referred to in paragraph 10.16 shall
be disclosed separately in the consolidated balance sheet or in
the notes to the consolidated financial statements; and
(e)
the information required by Section 12 of these
Principles.
10.33 An entity that carries non-current investments in
subsidiaries, associates and jointly controlled entities under the cost
model, the carrying amount of which is in excess of their fair value,
shall disclose the following
(a)
the book value and the fair value of either the
individual assets or appropriate groupings of those individual
assets, and
(b)
the reasons for not reducing the book value,
including the nature of the evidence underlying the assumption
that the book value will be recovered.
10.34 For each significant subsidiary, associate and jointly
controlled entity an investor, which is an entity, shall disclose
(a)
the name and registered office or principal place
of business (if incorporated) of the entity;
(b)
the legal form of the entity;
(c)
if the entity is incorporated outside Malta, the
country in which it is incorporated;
(d)
the identity and proportion of the nominal value of
each class of shares held and if different, the proportion of
voting power held;
(e)
the amount of capital and reserves and the profit
or loss for the latest financial period for which financial
statements have been prepared;
(f)
the financial reporting framework under which
those financial statements have been prepared (for example
International Financial Reporting Standards as adopted by the
EU); and
(g)
whether those financial statements have been
audited.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
10.35 The following shall also disclose
(a)
For subsidiaries and associates, the nature and
extent of any significant restrictions on the ability of the
subsidiaries and associates to transfer funds to the investor in
the form of cash dividends, or repayment of loans or advances.
(b)
In respect of associates the investor shall disclose
(i)
its share of the contingent liabilities of an
associate incurred jointly with other investors; and
(ii)
those contingent liabilities that arise
because the investor is severally liable for all or part of
the liabilities of the associate
10.36 A venturer shall disclose the aggregate amount of the
following contingent liabilities, unless the probability of loss is
remote, separately from the amount of other contingent liabilities
(a)
any contingent liabilities that the venturer has
incurred in relation to its interests in joint ventures and its share
in each of the contingent liabilities that have been incurred
jointly with other venturers;
(b)
its share of the contingent liabilities of the joint
ventures themselves for which it is contingently liable; and
(c)
those contingent liabilities that arise because the
venturer is contingently liable for the liabilities of the other
venturers of a joint venture.
10.37 A venturer shall disclose the aggregate amount of the
following commitments in respect of its interests in joint ventures
separately from other commitments
(a)
any capital commitments of the venturer in
relation to its interests in joint ventures and its share in the
capital commitments that have been incurred jointly with other
venturers; and
(b)
its share of the capital commitments of the joint
ventures themselves.
Section 11: Intangible assets other than goodwill
11.1 An intangible asset is an identifiable non-monetary asset
without physical substance. Such an asset is identifiable when
(a)
it is separable, i.e. it is capable of being separated
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
or divided from the entity and sold, transferred, licensed, rented
or exchanged, either individually or together with a related
contract, asset or liability; or
(b)
it arises from contractual or other legal rights,
regardless of whether those rights are transferable or separable
from the entity or from other rights and obligations.
Provided that for the purposes of this Section,
cryptographic assets and tokens shall not be considered as intangible
assets.
Acquired intangible assets – Recognition and Measurement at
recognition
11.2
An intangible asset shall be recognised if, and only if
(a)
it is probable that the expected future economic
benefits that are attributable to the asset will flow to the entity;
and
(b)
the cost of the asset can be measured reliably.
11.3 An intangible asset purchased with a business shall be
recognised separately from the purchased goodwill if its fair value can
be measured reliably as required by paragraph 21.7(c) of these
Principles. The probability recognition criterion is always considered
satisfied for intangible assets that are separately acquired. In a
business combination, an acquirer recognises at the acquisition date
separately from goodwill an intangible asset of the acquiree if the
asset's fair value can be measured reliably, irrespective of whether the
asset had been recognised by the acquiree before the business
combination. Therefore, the probability recognition criterion is always
considered to be satisfied for intangible assets acquired in business
combinations because the effect of probability that the future
economic benefits embodied in the asset will flow to the entity is
reflected in the fair value measurement of the intangible asset.
11.4 An intangible asset shall be measured initially at cost.
The cost of a separately acquired intangible asset comprises
(a)
its purchase price, including import duties and
non-refundable purchase taxes, after deducting trade discounts
and rebates; and
(b)
any directly attributable cost of preparing the
asset for its intended use.
If an intangible asset is acquired in a business combination, the
cost of that intangible asset is its fair value at the acquisition date.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
11.5 The nature of intangible assets is such that, in many
cases, there are no additions to such an asset or replacements of part of
it. Accordingly, most subsequent expenditures are likely to maintain
the expected future economic benefits embodied in an existing
intangible asset rather than meet the definition of an intangible asset
and the recognition criteria in these Principles.
Internally-generated intangible assets – Recognition and
Measurement at recognition
11.6 The creation of internally-generated intangible assets
involves a research phase and a development phase. Research is
original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.
Development is the application of research findings or other
knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use.
Expenditure on research (or on the research phase of an internal
project) shall be recognised as an expense in the period in which it is
incurred. An intangible asset arising from development (or from the
development phase of an internal project) shall be recognised if, and
only if, an entity can demonstrate all the following
(a)
the technical feasibility of completing the
intangible asset so that it will be available for use or sale;
(b)
its intention to complete the intangible asset and
use or sell it;
(c)
its ability to use or sell the intangible asset;
(d)
how the intangible asset will generate probable
future economic benefits. Among other things, the entity can
demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used
internally, the usefulness of the intangible asset;
(e)
the availability of adequate technical, financial
and other resources to complete the development and to use or
sell the intangible asset; and
(f)
its ability to measure reliably the expenditure
attributable to the intangible asset during its development.
11.7
The cost of an internally-generated intangible asset for
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
the purpose of paragraph 11.4 is the sum of the expenditure incurred
from the date when the intangible asset first meets the recognition
criteria in paragraphs 11.2 and 11.6 of these Principles.
11.8 The cost of an internally generated intangible asset
comprises all directly attributable costs necessary to create, produce,
and prepare the asset to be capable of operating in the manner intended
by management. Examples of directly attributable costs would
typically include costs of materials and services used, staff costs
arising from the generation of the intangible asset and fees payable to
register a legal right.
Recognition as an expense
11.9 An entity shall recognise expenditure on an intangible
item as an expense when it is incurred unless it forms part of the cost
of an intangible asset that meets the recognition criteria.
11.10 An entity shall recognise expenditure on the following
items as an expense and shall not recognise such expenditure as
intangible assets
(a)
internally
generated
brands,
mastheads,
publishing titles, customer lists and items similar in substance;
(b)
expenditure on start-up activities (i.e. start-up
costs), unless this expenditure is included in the cost of an item
of property, plant and equipment. Start-up costs may consist of
establishment costs such as legal and secretarial costs incurred
in establishing a legal entity, expenditure to open a new facility
or business (i.e. pre-opening costs) or expenditure for starting
new operations or launching new products or processes (i.e.
pre-operating costs);
(c)
expenditure on training activities;
(d)
expenditure on advertising and promotional
activities; and
(e)
expenditure on relocating or reorganising part or
all of an entity.
Intangible assets – Measurement after recognition
11.11 After initial recognition, an intangible asset shall be
carried at its cost less any accumulated amortisation and any
accumulated impairment losses. To determine whether an intangible
asset is impaired, an entity applies Section 12. That Section explains
when and how an entity reviews the carrying amount of its assets, how
it determines the recoverable amount of an asset and when it
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
recognises or reverses an impairment loss.
11.12 The cost less estimated residual value of an intangible
asset shall be amortised and allocated on a systematic basis over the
asset’s useful life. The residual value of an intangible asset shall be
assumed to be zero unless there is a commitment by a third party to
purchase the asset at the end of its useful life. Amortisation shall begin
when the asset is available for use, i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner
intended by management, and shall cease at the earlier of the date that
the asset is classified as held for sale (or included in a disposal group
that is classified as held for sale) in accordance with Section 23 and the
date that the asset is derecognised.
11.13 In exceptional cases where the useful life attributable to
development costs cannot be reliably estimated, they shall be written
off over a maximum period of 10 years.
11.14 The amortisation method used shall reflect the pattern in
which the asset's future economic benefits are expected to be
consumed by the entity. If that pattern cannot be determined reliably,
the straight-line method shall be used. The amortisation charge for
each period shall be recognised in profit or loss unless it is included in
the carrying amount of another asset.
11.15 An intangible asset’s useful life and any residual value
shall be reviewed regularly and, when necessary, revised. On revision,
the carrying amount of the intangible asset at the date of revision, less
the revised residual value, shall be amortised over the revised
remaining useful life. Such a change shall be accounted for as a change
in an accounting estimate in accordance with Section 5 of these
Principles.
11.16 An entity shall review the amortisation method
regularly. A change from one amortisation method to another is
permissible only on the grounds that the new method will give a fairer
presentation of the results and of the financial position. Such a change
does not, however, constitute a change of accounting policy; the
carrying amount of the intangible asset is amortised using the revised
method over the remaining useful life, beginning in the period in
which the change is made. A change in the amortisation method shall
be accounted for as a change in an accounting estimate in accordance
with Section 5 of these Principles.
11.17 Intangible assets shall not be revalued.
Disclosures
11.18
Entities shall disclose the following for each class of
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
intangible assets, distinguishing between
internally-generated
intangible assets and other intangible assets
(a)
the useful lives or the amortisation rates used; and
(b)
the amortisation methods used.
11.19 A class of intangible assets is a grouping of assets of a
similar nature and use in an entity’s operations. Examples of separate
classes may include
(a)
brand names;
(b)
mastheads and publishing titles;
(c)
computer software;
(d)
licences and franchises;
(e)
copyrights, patents and other industrial property
rights, service and operating rights;
(f)
recipes,
formulae,
models,
designs
and
prototypes; and
(g)
intangible assets under development.
The classes mentioned above are disaggregated (aggregated)
into smaller (larger) classes if this results in more relevant information
for the users of the financial statements.
11.20
An entity shall disclose, for each class of intangible
assets
(a)
the gross carrying amount and the accumulated
amortisation (aggregated with accumulated impairment losses)
at the beginning and end of the period; and
(b)
having regard to paragraph 4.8(b) of these
Principles, a reconciliation of the carrying amount at the
beginning and end of the period showing
(i)
additions (reflecting those from internal
development, those acquired separately, and those
acquired through a business combination);
(ii)
transfers (reflecting transfers to assets held
for sale)
(ii)
disposals;
(iii)
impairment losses recognised or reversed
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
in profit or loss in accordance with Section 12 of these
Principles;
(iv)
amortisation;
(v)
accumulated amortisation and impairment
losses released on disposals and transfers;
(vi) the net exchange differences arising on the
translation of the financial statements from the functional
currency into a different presentation currency (see
section 18 of these Principles); and
(vii)
other changes.
11.21 Section 5 of these Principles requires an entity to
disclose the nature and amount of a change in an accounting estimate
that has a material effect in the current period or is expected to have a
material effect in subsequent periods. Such disclosure may arise from
changes in
(a)
the assessment of an intangible asset’s useful life;
(b)
the amortisation method; or
(c)
residual values.
11.22 An entity shall disclose
(a)
the existence and carrying amounts of intangible
assets pledged as security for liabilities; and
(b)
the amount of contractual commitments for the
acquisition of intangible assets.
Section 12: Impairment of assets
12.1 This Section shall be applied in accounting for the
impairment of the following assets
(a)
property, plant and equipment;
(b)
investment property;
(c)
intangible assets;
(d)
goodwill; and
(e)
investments in subsidiaries, associates and jointly
controlled entities.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
12.2 This Section does not apply to financial assets within the
scope of Section 9, which contains separate provisions that prescribe
when and how an impairment loss on investments or financial assets is
to be determined, recognised and reversed.
Recognising and measuring an impairment loss on individual
assets
12.3 An entity shall assess at each reporting date whether
there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of
the asset.
12.4 The recoverable amount of an asset (or a group of assets)
is the higher of its fair value less costs to sell and its value in use. Fair
value less costs to sell is the amount obtainable from the sale of an
asset in an arm’s length transaction between knowledgeable, willing
parties, less the costs of disposal. Value in use is the present value of
the future cash flows expected to be derived from an asset. Estimating
the value in use of an asset involves the following steps
(a)
estimating the future cash inflows and outflows to
be derived from continuing use of the asset and from its
ultimate disposal; and
(b)
applying the appropriate discount rate to those
future cash flows.
12.5
In measuring value in use an entity shall
(a)
base cash flow projections on reasonable and
supportable assumptions that represent management’s best
estimate of the range of economic conditions that will exist
over the remaining useful life of the asset.
(b)
base cash flow projections on the most recent
financial budgets/forecasts approved by management. Such
projections shall cover a maximum period of five years, unless
a longer period can be justified.
12.6 To give effect to the principle in paragraph 12.4(a) an
entity shall include the following when estimating future cash flows
(a)
projections of cash inflows from the continuing
use of the asset;
(b)
projections of cash outflows that are necessarily
incurred to generate the cash inflows from continuing use of the
asset (including cash outflows to prepare the asset for use) and
can be directly attributed, or allocated on a reasonable and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
consistent basis, to the asset; and
(c)
net cash flows, if any, to be received (or paid) for
the disposal of the asset at the end of its useful life.
12.7 To give effect to the principle in paragraph 12.4(b) an
entity shall apply a pre-tax discount rate that reflects current market
assessments of
(a)
the time value of money; and
(b)
the risks specific to the asset for which the future
cash flow estimates have not been adjusted.
12.8 If, and only if, the recoverable amount of an asset is less
than its carrying amount, the carrying amount of the asset shall be
reduced to its recoverable amount. That reduction is an impairment
loss.
12.9 An impairment loss shall be recognised immediately in
profit or loss, unless the asset is carried at revalued amount in
accordance with another Section of these Principles (for example, in
accordance with the revaluation model in Section 7). Any impairment
loss of a revalued asset shall be treated as a revaluation decrease in
accordance with that other Section.
12.10 After the recognition of an impairment loss, the
depreciation (amortisation) charge for the asset shall be adjusted in
future periods to allocate the asset’s revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining useful
life.
Recognising and measuring an impairment loss on a group of
assets and goodwill
12.11 If an entity cannot estimate the recoverable amount for
an individual asset, the entity shall measure the recoverable amount for
the group of assets to which the asset belongs. For this purpose,
recoverable amount shall be estimated for the smallest identifiable
group of assets that
(a)
generates cash inflows from continuing use that
are largely independent of the cash flows from other assets or
groups of assets;
(b)
includes the asset for which impairment is
indicated; and
(c)
the recoverable amount of which can be estimated
reliably.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
For the purpose of determining the recoverable amount of a
group of assets, the principles in paragraphs 12.4 – 12.7 shall apply
and any reference to ‘an asset’ therein shall be construed as being a
reference to ‘a group of assets’.
12.12 Goodwill does not generate cash flows to an entity that
are independent of the cash flows of other assets. As a consequence the
recoverable amount of goodwill must be derived from measurement of
the recoverable amount of the larger group of assets of which the
goodwill is a part.
12.13 An impairment loss shall be recognised for a group of
assets (to which goodwill could have been allocated) if, and only if,
the recoverable amount of the group of assets is less than its carrying
amount. The impairment loss shall be allocated to reduce the carrying
amount of the assets of the group in the following order
(a)
first, to reduce the carrying amount of any
goodwill allocated to the group; and
(b)
then, to the other non-cash assets of the group pro-
rata on the basis of the carrying amount of each asset.
These reductions in carrying amounts shall be treated as
impairment losses on individual assets and recognised accordingly.
Reversing an impairment loss
12.14 An entity shall assess at each reporting date whether
there is any indication that an impairment loss recognised in prior
periods for an asset other than goodwill may no longer exist or may
have decreased. If any such indication exists, the entity shall estimate
the recoverable amount of that asset or the group of assets to which the
asset belongs if an entity cannot estimate the recoverable amount for
the individual asset.
12.15 An impairment loss recognised in prior periods for an
asset other than goodwill shall be reversed if, and only if, there has
been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was recognised. If
this is the case, the carrying amount of the asset shall, except as
described in paragraph 12.16, be increased to its recoverable amount.
That increase is a reversal of an impairment loss.
12.16 The increased carrying amount of an asset other than
goodwill attributable to a reversal of an impairment loss shall not
exceed the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been recognised
for the asset in prior years.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
12.17 A reversal of an impairment loss for an asset other than
goodwill shall be recognised immediately in profit or loss, unless the
asset is carried at revalued amount in accordance with another section
of these Principles (for example, in accordance with the revaluation
model in Section 7). Any reversal of an impairment loss of a revalued
asset shall be treated as a revaluation increase in accordance with that
other Section. A reversal of an impairment loss for a group of assets
shall be allocated to the non-cash assets of the group, except for
goodwill, pro-rata with the carrying amounts of those assets. These
increases in carrying amounts shall be treated as reversals of
impairment losses for individual assets and recognised accordingly.
12.18 After a reversal of an impairment loss is recognised, the
depreciation (amortisation) charge for the asset shall be adjusted in
future periods to allocate the asset’s revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining useful
life.
12.19 An impairment loss recognised for goodwill shall not be
reversed in a subsequent period.
Disclosures
12.20 An entity shall disclose the following for each class of
assets
(a)
the amount of impairment losses recognised in
profit or loss during the period and the line item(s) of the
income statement in which those impairment losses are
included;
(b)
the amount of reversals of impairment losses
recognised in profit or loss during the period and the line
item(s) of the income statement in which those impairment
losses are reversed;
(c)
the amount of impairment losses on revalued
assets recognised directly in equity during the period; and
(d)
the amount of reversals of impairment losses on
revalued assets recognised directly in equity during the period.
12.21 An entity shall disclose the following for each material
impairment loss recognised or reversed during the period for an
individual asset, including goodwill (insofar as applicable), or a group
of assets
(a)
the events and circumstances that led to the
recognition or reversal of the impairment loss;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(b)
the amount of the impairment loss recognised or
reversed;
(c)
for an individual asset, the nature of the asset;
(d)
for a group of assets, a description of the group;
and
(e)
whether the recoverable amount of the asset
(group) is its fair value less costs to sell or its value in use.
12.22 An entity shall disclose the following information for
the aggregate impairment losses and the aggregate reversals of
impairment losses recognised during the period for which no
information is disclosed in accordance with paragraph 12.21
(a)
the main classes of assets affected by impairment
losses and the main classes of assets affected by reversals of
impairment losses; and
(b)
the main events and circumstances that led to the
recognition of these impairment losses and reversals of
impairment losses.
Section 13: Government grants
13.1 Government grants are assistance by government, inter-
governmental agencies and similar bodies whether local, national or
international, in the form of cash or transfers of assets to an entity in
return for past or future compliance with certain conditions relating to
the operating activities of the entity. Loans at nil or low interest rate
are a form of government assistance, but the benefit is not quantified
by the imputation of interest, hence this benefit shall not be considered
as a government grant for the scope of this Section.
Recognition
13.2 Government grants shall not be recognised until there is
reasonable assurance that
(a)
the entity will comply with the conditions
attaching to them; and
(b)
the grants will be received.
13.3 Subject to paragraph 13.2, government grants shall be
recognised in the income statement so as to match them with the
expenditure towards which they are intended to contribute. Any grants
relating to future periods shall be recognised as deferred income.
13.4
To the extent that the grant is made as a contribution
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
towards expenditure on a non-current asset, the entity may choose to
deduct the grant from the purchase price or production cost of that
asset rather than recognise it in the income statement in accordance
with paragraph 13.3.
13.5 Potential liabilities to repay grants either in whole or in
part in specified circumstances shall be provided for only to the extent
that repayment is probable. The repayment of a government grant
related to income and recognised as such under paragraph 13.3 shall be
accounted for by setting off the repayment against any unamortised
deferred income relating to the grant. Any excess shall be charged
immediately to the income statement. The repayment of a grant related
to a non-current asset and recognised as such under paragraph 13.4
shall be recorded by increasing the carrying amount of the asset. The
cumulative additional depreciation that would have been recognised to
date as an expense in the absence of the grant shall be recognised
immediately as an expense.
Disclosures
13.6 An entity shall disclose the accounting policy adopted for
government grants, including an explanation of how the grant is
presented in the financial statements.
Disclosures
13.7 An entity shall disclose the following regardless of which
choice it has made under paragraph 13.4
(a)
the nature and amounts of government grants
recognised in the financial statements; and
(b)
where the results of the period are affected
materially by the receipt of forms of government assistance
other than grants, the nature of that assistance and, to the extent
that the effects on the financial statements can be measured, an
estimate of those effects.
Section 14: Leases
14.1 A lease is classified as a finance lease if it transfers
substantially all the risks and rewards incidental to ownership. A lease
is classified as an operating lease if it does not transfer substantially all
the risks and rewards incidental to ownership.
14.2 Whether a lease is a finance lease or an operating lease
depends on the substance of the transaction rather than the form of the
contract. Examples of situations that individually or in combination
would normally lead to a lease being classified as a finance lease are
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(a)
the lease transfers ownership of the asset to the
lessee by the end of the lease term;
(b)
the lessee has the option to purchase the asset at a
at the date the option becomes exercisable for it to be
reasonably certain, at the inception of the lease, that the option
will be exercised;
(c)
the lease term is for the major part of the
economic life of the asset even if title is not transferred;
(d)
at the inception of the lease the present value of
the minimum lease payments amounts to at least substantially
all of the fair value of the leased asset; and
(e)
the leased assets are of such a specialised nature
that only the lessee can use them without major modifications.
14.3 Lease classification is made at the inception of the lease
and is not changed during the term of the lease unless the lessee and
the lessor agree to change the provisions of the lease (other than
simply by renewing the lease), in which case the lease classification
shall be re-evaluated.
14.4 The inception of the lease is the earlier of the date of the
lease agreement and the date of commitment by the parties to the
principal provisions of the lease. The commencement of the lease term
is the date from which the lessee is entitled to exercise its right to use
the leased asset. It is the date of initial recognition of the lease (i.e. the
recognition of the assets, liabilities, income or expenses resulting from
the lease, as appropriate).
14.5 Minimum lease payments are the payments that the
lessee is or can be required to make, excluding contingent rent, costs
for services and taxes to be paid by and reimbursed to the lessor,
together with
(a)
for a lessee, any amounts guaranteed by the lessee
or by a party related to the lessee; or
(b)
for a lessor, any residual value guaranteed to the
lessor by
(i)
the lessee;
(ii)
a party related to the lessee; or
(iii) a third party unrelated to the lessor that is
financially capable of discharging the obligations under
the guarantee.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
14.6 The lease term is the non-cancellable period for which
the lessee has contracted to lease the asset together with any further
terms for which the lessee has the option to continue to lease the asset,
with or without further payment, when at the inception of the lease it is
reasonably certain that the lessee will exercise the option.
14.7 A hire purchase contract is a contract for the hire of an
asset that contains a provision giving the hirer an option to acquire
legal title to the asset upon the fulfilment of certain conditions stated
in the contract. Those hire purchase contracts which are of a financing
nature shall be accounted for on a basis similar to that set out below for
finance leases. Conversely, other hire purchase contracts shall be
accounted for on a basis similar to that set out below for operating
leases.
Accounting by lessees
14.8 At the commencement of the lease term, lessees shall
recognise finance leases as assets and liabilities in their balance sheets
at amounts equal to the fair value of the leased asset or, if lower, the
present value of the minimum lease payments, each determined at the
inception of the lease. The discount rate to be used in calculating the
present value of the minimum lease payments is the interest rate
implicit in the lease. The interest rate implicit in the lease is the
discount rate that, at the inception of the lease, causes the aggregate
present value of (a) the minimum lease payments and (b) the
unguaranteed residual value to be equal to the fair value of the leased
asset. Leased assets shall be recognised, initially measured and
subsequently accounted for in accordance with the applicable Sections
of these Principles.
14.9 A lessee shall apportion minimum lease payments
between the finance charge and the reduction of the outstanding
liability. The lessee shall allocate the finance charge to each period
during the lease term so as to produce a constant periodic rate of
interest on the remaining balance of the liability. In allocating the
finance charge to periods during the lease term, a lessee may use an
approximation to simplify the calculation.
14.10 The rental under an operating lease shall be charged on a
straight-line basis over the lease term even if the payments are not
made on such a basis, unless another systematic and rational basis is
more appropriate.
14.11 Incentives to sign a lease, in whatever form they may
take, shall be spread by the lessee on a straight-line basis over the lease
term or, if shorter than the full lease term, over the period to the review
date on which the rent is first expected to be adjusted to the prevailing
market rate.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
14.12 A lessee shall depreciate an asset leased under a finance
lease in accordance with paragraphs 7.20 – 7.25 of these Principles,
which apply to assets held as property, plant and equipment and
investment property, and paragraphs 11.12 – 11.16 which apply to
intangible assets. If there is no reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the asset shall be fully
depreciated over the shorter of the lease term and its useful life.
However, in the case of a hire purchase contract that has the
characteristics of a finance lease the asset shall be depreciated over its
useful life.
Accounting by lessors
14.13 Lessors shall recognise assets held under a finance lease
in their balance sheets and present them as a receivable at an amount
equal to the net investment in the lease.
14.14 Net investment in the lease is the gross investment in the
lease discounted at the interest rate implicit in the lease. Gross
investment in the lease is the aggregate of
(a)
the minimum lease payments receivable by the
lessor under a finance lease, and
(b)
any unguaranteed residual value accruing to the
lessor.
14.15 The recognition of finance income shall be based on a
pattern reflecting a constant periodic rate of return on the lessor's net
investment in the finance lease, or a reasonable approximation thereto.
14.16 Unearned finance income is the difference between
(a)
the gross investment in the lease, and
(b)
the net investment in the lease.
14.17 Rental income from an operating lease shall be
recognised on a straight-line basis over the period of the lease, even if
the payments are not made on such a basis, unless another systematic
and rational basis is more appropriate.
14.18 An asset held for use in operating leases by a lessor shall
be recorded and accounted for as property, plant and equipment in
accordance with Section 7, or as investment property in accordance
with Section 8, or as an intangible asset in accordance with Section 11,
of these Principles according to the nature of the asset.
14.19 A manufacturer or dealer lessor shall not recognise a
selling profit under an operating lease. The selling profit under a
finance lease shall be restricted to the excess of the fair value of the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
asset over the manufacturer’s or dealer’s cost less any grants
receivable by the manufacturer or dealer towards the purchase,
construction or use of the asset.
Sale and leaseback transactions – accounting by the seller/
lessee
14.20 In a sale and leaseback transaction that results in a
finance lease, any apparent profit or loss (i.e. the difference between
the sale price and the previous carrying value) shall be deferred and
amortised in the financial statements of the seller/lessee over the
shorter of the lease term and the useful life of the asset.
14.21 In a sale and leaseback transaction that results in an
operating lease
(a)
any profit or loss shall be recognised immediately,
provided it is clear that the transaction is established at fair
value;
(b)
if the sale price is below fair value any profit or
loss shall be recognised immediately, except that if the apparent
loss is compensated for by future rentals at below market price
it shall to that extent be deferred and amortised over the
remainder of the lease term (or, if shorter, the period during
which the reduced rentals are chargeable); or
(c)
if the sale price is above fair value, the excess
over fair value shall be deferred and amortised over the shorter
of the remainder of the lease term and the period to the next rent
review (if any).
Sale and leaseback transactions – accounting by the buyer/
lessor
14.22 A buyer/lessor shall account for a sale and leaseback in
the same way as other leases are accounted for, i.e. using the methods
set out in paragraphs 14.13 – 14.19.
Disclosure by lessees
14.23 In respect of operating leases, the lessee shall disclose
the total of future minimum lease payments that it is committed to
make.
14.24 Disclosure shall also be made of
(a)
either
(i)
for each class of asset, the gross amounts
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
of assets that are held under finance leases together with
the related accumulated depreciation; or
(ii)
alternatively to being shown separately
from that in respect of owned assets, the information in
(i) above may be integrated with it, such that the totals of
gross amount, accumulated depreciation, net carrying
amount and depreciation allocated for the period for each
class of asset held under finance leases are included with
similar amounts for owned assets. Where this alternative
treatment is adopted, the net amount of assets held under
finance leases and the amount of depreciation allocated
for the period in respect of assets under finance leases
included in the overall total shall be disclosed separately;
and
(b)
the amounts of obligations related to finance
leases (net of finance charges allocated to future periods).
These shall be disclosed separately from other obligations and
liabilities, either on the face of the balance sheet or in the notes.
14.25 In addition to the disclosure required in paragraph 14.23
in respect of operating leases, a lessee that is an entity shall analyse the
total of future minimum lease payments that it is committed to make,
into those in which the commitment expires within that year, those
expiring in the second to fifth years inclusive, and those expiring over
five years from the balance sheet date.
Disclosure by lessors
14.26 Disclosure shall be made of
(a)
the gross amounts of assets held for use in
operating leases and the related accumulated depreciation
charges;
(b)
the cost of assets acquired, whether by purchase
or finance lease, for the purpose of letting under finance leases;
and
(c)
the net investment in(i) finance leases and (ii) hire
purchase contracts at each balance sheet date.
Section 15: Inventories
15.1
Inventories are assets
(a)
held for sale in the ordinary course of business;
(b)
in the process of production for such sale; or
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(c)
in the form of materials or supplies to be
consumed in the production process or in the rendering of
services.
Measurement of inventories
15.2 Inventories shall be measured at the lower of cost and net
realisable value. Net realisable value is the estimated selling price in
the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
15.3 The cost of inventories shall comprise all costs of
purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
15.4 The costs of purchase of inventories comprise the
purchase price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing authorities),
and transport, handling and other costs directly attributable to the
acquisition of finished goods, materials and services. Trade discounts,
rebates and other similar items are deducted in determining the costs
of purchase.
15.5 The cost of a self-constructed inventory item is its cost at
the date when the construction or development is complete. Until that
date an entity shall apply Section 7 of these Principles. The costs of
conversion of inventories include costs directly related to the units of
production, such as direct labour. They also include a systematic
allocation of fixed and variable production overheads that are incurred
in converting materials into finished goods. An entity shall allocate
fixed production overheads to the costs of conversion based on the
normal capacity of the production facilities.
15.6 Examples of costs excluded from the cost of inventories
and recognised as expenses in the period in which they are incurred
are
(a)
abnormal amounts of wasted materials, labour or
other production costs;
(b)
storage costs, unless those costs are necessary in
the production process before a further production stage;
(c)
administrative overheads that do not contribute to
bringing inventories to their present location and condition; and
(d)
selling costs.
15.7 To the extent that service providers have inventories,
they measure them at the cost of their production. These costs consist
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
primarily of the labour and other costs of personnel directly engaged in
providing the service and attributable overheads. Labour and other
costs relating to sales and general administrative personnel shall not be
included. The cost of inventories of a service provider does not include
profit margins or non-attributable overheads that are often factored
into prices charged by service providers.
15.8 The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and segregated for
specific projects shall be assigned by using specific identification of
their individual costs. The cost of other inventories shall be assigned
by using the first-in, first-out (FIFO), weighted average cost formula
or a method reflecting generally accepted best practice. An entity shall
use the same cost formula for all inventories having a similar nature
and use to the entity.
15.9 Where inventories are constantly being replaced and
their value is not material to assessing the company’s state of affairs
and their quantity, value and composition are not subject to material
variation, they may be included at a fixed quantity and value.
Recognition as an expense
15.10 When inventories are sold, the carrying amount of those
inventories shall be recognised as an expense in the period in which
the related revenue is recognised. The amount of any write-down of
inventories to net realisable value and all losses of inventories shall be
recognised as an expense in the period the write-down or loss occurs.
The amount of any reversal of any write-down of inventories, arising
from an increase in net realisable value, shall be recognised as a
reduction in the amount of inventories recognised as an expense in the
period in which the reversal occurs.
15.11 Some inventories may be allocated to other asset
accounts, for example, inventory used as a component of self-
constructed property, plant or equipment. Inventories allocated to
another asset in this way are recognised as an expense during the
useful life of that asset.
Disclosures
15.12 An entity shall disclose the accounting policy adopted in
measuring inventories.
15.13 The following shall also be disclosed
(a)
the total carrying amount of inventories and the
carrying amount in classifications appropriate to the entity;
(b)
the amount of any write-downs to net realisable
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
value recognised as an expense in the period; and
(c)
the amount of any reversal of any write-downs to
net realisable value recognised in the period, and a description
of the circumstances or events that led to such reversal.
Section 16: Income taxes
16.1 Accounting profit is profit or loss for a period before
deducting tax expense.
16.2
profit (tax loss) is the profit (loss) for a period,
determined in accordance with the rules established by the taxation
authorities, upon which income taxes are payable (recoverable).
16.3 Tax expense (tax income) comprises current tax expense
(current tax income) and deferred tax expense (deferred tax income).
16.4 Current tax is the amount of income taxes payable
(recoverable) in respect of the taxable profit (tax loss) for a period.
Deferred tax expense (income) is the amount of tax expense (income)
included in the determination of profit or loss for the period in respect
of changes in deferred tax assets and deferred tax liabilities during the
period.
16.5 Deferred tax liabilities are the amounts of income taxes
payable in future periods in respect of taxable temporary differences.
16.6 Deferred tax assets are the amounts of income taxes
recoverable in future periods in respect of
(a)
deductible temporary differences;
(b)
the carry forward of unused tax losses; and
(c)
the carry forward of unused tax credits.
16.7 Temporary differences are differences between the
carrying amount of an asset or liability in the balance sheet and its tax
base. Temporary differences may be either
(a)
taxable temporary differences, which are
temporary differences that will result in taxable amounts in
determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled;
or
(b)
deductible temporary differences, which are
temporary differences that will result in amounts that are
deductible in determining taxable profit (tax loss) of future
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
periods when the carrying amount of the asset or liability is
recovered or settled.
16.8 The tax base of an asset or liability is the amount
attributed to that asset or liability for tax purposes.
Recognition of deferred tax liabilities, deferred tax assets and
deferred tax
16.9 An entity shall recognise a deferred tax liability for all
taxable temporary differences, except to the extent that the deferred
tax liability arises from
(a)
the initial recognition of goodwill; or
(b)
the initial recognition of an asset or liability
which
(i)
is not a business combination; and
(ii)
at the time of the transaction, affects
neither accounting profit nor taxable profit (loss).
However, for all taxable temporary differences associated with
investments in subsidiaries and associates, and interests in joint
ventures, a deferred tax liability shall be recognised, except to the
extent that both the following conditions are satisfied
(a)
the parent, investor or venturer is able to control
the timing of the reversal of the temporary difference; and
(b)
it is probable that the temporary difference will
not reverse in the foreseeable future.
16.10 An entity shall recognise a deferred tax asset for all
deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary
differences can be utilised, unless the deferred tax asset arises from the
initial recognition of an asset or liability in a transaction that
(a)
is not a business combination; and
(b)
at the time of the transaction, affects neither
accounting profit nor taxable profit (loss).
However, for all deductible temporary differences associated
with investments in subsidiaries and associates, and interest in joint
ventures an entity shall recognise a deferred tax asset to the extent that,
and only to the extent that, it is probable that
(a)
the temporary difference will reverse in the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
foreseeable future; and
(b)
taxable profit will be available against which the
temporary difference can be utilised.
16.11 An entity shall recognise a deferred tax asset for the
carry forward of unused tax losses and unused tax credits to the extent
that it is probable that future taxable profit will be available against
which the unused tax losses and unused tax credits can be utilised.
16.12 At each balance sheet date an entity shall re-assess any
unrecognised deferred tax assets, and shall recognise a previously
unrecognised deferred tax asset only to the extent that it has become
probable that future taxable profit will allow the deferred tax asset to
be recovered.
16.13 An entity shall recognise deferred tax as income or an
expense and include it in profit or loss for the period, except to the
extent that the tax arises from
(a)
a transaction or event which is recognised, in the
same or a different period, directly in equity, in which case the
deferred tax shall be charged or credited directly to equity; or
(b)
a business combination (see paragraph 16.14 –
16.18).
Deferred tax arising from a business combination and the
resulting effect on goodwill
16.14 The cost of a business combination is allocated by
recognising the identifiable assets acquired and liabilities and
contingent liabilities assumed at their fair values at the acquisition
date. Temporary differences arise when the tax bases of the
identifiable assets acquired and liabilities and contingent liabilities
assumed are not affected by the business combination or are affected
differently. For example, when the carrying amount of an asset is
increased to fair value but the tax base of the asset remains at cost to
the previous owner, a taxable temporary difference arises which results
in a deferred tax liability. The resulting deferred tax liability affects
goodwill (see paragraph 16.15).
16.15 In accordance with Section 21, an entity recognises any
deferred tax assets (to the extent that they meet the recognition criteria
in paragraph 16.10) or deferred tax liabilities resulting from a business
combination as identifiable assets and liabilities at the acquisition date.
Consequently, those deferred tax assets and liabilities affect goodwill
or the amount of any excess of the acquirer’s interest in the net fair
value of the acquiree’s identifiable assets, liabilities and contingent
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
liabilities over the cost of the combination (sometimes referred to as
‘negative goodwill’). However, in accordance with paragraph 16.9(a),
an entity does not recognise deferred tax liabilities arising from the
initial recognition of goodwill.
16.16 Goodwill arising in a business combination is measured
as the excess of the cost of the business combination over the
acquirer’s interest in the net fair value of the acquiree’s identifiable
assets, liabilities and contingent liabilities, in accordance with
paragraph 21.10 of these Principles. Very often, upon initial
recognition of goodwill, a taxable temporary difference arises. This
Section does not permit the recognition of the resulting deferred tax
liability because goodwill is measured as a residual and the
recognition of the deferred tax liability would increase the carrying
amount of goodwill. Similarly, subsequent reductions in that
unrecognised deferred tax liability are also regarded as arising from
the initial recognition of goodwill and are therefore not recognised as
required by paragraph 16.9(a).
16.17 As a result of a business combination, an acquirer may
consider it probable that it will recover its own deferred tax asset that
was not recognised before the business combination. For example, the
acquirer may be able to utilise the benefit of its unused tax losses
against the future taxable profit of the acquiree. In such cases, the
acquirer recognises a deferred tax asset, but does not include it as part
of the accounting for the business combination, and therefore does not
take it into account in determining the goodwill or the amount of any
excess of the acquirer’s interest in the net fair value of the acquiree’s
identifiable assets, liabilities and contingent liabilities over the cost of
the combination (sometimes referred to as ‘negative goodwill’).
16.18 The potential benefit of the acquiree’s income tax loss
carry forwards or other deferred tax assets might not satisfy the criteria
for separate recognition (under paragraph 21.7 of these Principles)
when a business combination is initially accounted for but might be
realised subsequently. An entity shall recognise acquired deferred tax
benefits as new information about facts and circumstances that existed
at the acquisition date become available and in no case later than
twelve months from the acquisition date. The entity shall recognise the
resulting deferred tax income in profit or loss. In addition, the acquirer
shall
(a)
reduce the carrying amount of goodwill to the
amount that would have been recognised if the deferred tax
asset had been recognised as an identifiable asset from the
acquisition date; and
(b)
recognises the reduction in the carrying amount of
goodwill as an expense.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
However, this procedure shall not result in the creation of
‘negative goodwill’, nor shall it increase the amount previously
recognised for any ‘negative goodwill’.
Recognition of current tax liabilities, current tax assets and
current tax
16.19 An entity shall recognise any unpaid current tax for
current and prior periods as a liability.
16.20 An entity shall recognise as an asset any amount already
paid in respect of current and prior periods that exceeds the amount
due for those periods.
16.21 An entity shall recognise current tax as income or an
expense and include it in profit or loss for the period, except to the
extent that the tax arises from
(a)
a transaction or event which is recognised, in the
same or a different period, directly in equity, in which case the
current tax shall be charged or credited directly to equity; or
(b)
a business combination (see paragraphs 16.14 –
16.18).
16.22 When an entity pays dividends to its shareholders it may
be required to pay a portion of the dividends to taxation authorities, in
the form of withholding tax, on behalf of shareholders. Such an
amount paid or payable to taxation authorities shall be recognised in
equity as part of the dividends.
Measurement
16.23 An entity shall measure current tax liabilities (assets) for
the current and prior periods, and related tax expense (income), at the
amount expected to be paid to (recovered from) the taxation
authorities, using the tax rates (and tax laws) that have been enacted or
substantively enacted by the reporting date.
16.24 An entity shall measure deferred tax assets and
liabilities, and related tax expense (income), at the tax rates that are
expected to apply to the period when the asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted by the reporting date.
16.25 The measurement of deferred tax liabilities and deferred
tax assets shall reflect the tax consequences that would follow from the
manner in which the entity expects, at the reporting date, to recover or
settle the carrying amounts of its assets and liabilities. For example, if
the temporary difference arises from an item of income that is
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
expected to be taxable as a capital gain in a future period, the deferred
tax liability is measured using the capital gain tax rate.
16.26 Deferred tax assets and deferred tax liabilities shall not
be discounted.
16.27 An entity shall review the carrying amount of a deferred
tax asset at each reporting date. An entity shall reduce the carrying
amount of a deferred tax asset and increase tax expense to the extent
that it is no longer probable that sufficient taxable profit will be
available to allow recovery of the deferred tax asset. The entity shall
reverse that reduction to the extent that it subsequently becomes
probable that sufficient taxable profit will be available.
Presentation
16.28 Deferred tax assets (liabilities) shall not be classified as
current assets (liabilities).
16.29 An entity shall offset current tax assets and current tax
liabilities if, and only if, the entity
(a)
has a legally enforceable right to set off the
recognised amounts; and
(b)
intends either to settle on a net basis, or to realise
the asset and settle the liability simultaneously.
16.30 An entity shall offset deferred tax assets and deferred tax
liabilities if, and only if
(a)
the entity has a legally enforceable right to set off
current tax assets against current tax liabilities; and
(b)
the deferred tax assets and the deferred tax
liabilities relate to income taxes levied by the same taxation
authority on either
(i)
the same taxable entity; or
(ii)
different taxable entities which intend
either to settle current tax liabilities and assets on a net
basis, or to realise the assets and settle the liabilities
simultaneously, in each future period in which significant
amounts of deferred tax liabilities or assets are expected
to be settled or recovered.
16.31 The tax expense (income) related to profit or loss shall
be presented on the face of the income statement.
Disclosures
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
16.32 An entity shall disclose the major components of tax
expense (income) separately.
16.33 The aggregate current and deferred tax relating to items
that are charged or credited to equity shall be disclosed separately.
16.34 An entity shall disclose a numerical reconciliation
between tax expense (income) and the product of accounting profit
multiplied by the applicable tax rate/s, disclosing also the basis on
which the applicable tax rate/s is computed.
16.35 An entity shall also disclose, in respect of each type of
temporary difference, and in respect of each type of unused tax losses
and unused tax credits
(a)
the amount of the deferred tax assets and
liabilities recognised in the balance sheet for each period
presented; and
(b)
the amount of the deferred tax income or expense
recognised in the income statement, if this is not apparent from
the changes in the amounts recognised in the balance sheet.
16.36 In respect of discontinued operations an entity shall
disclose the tax expense relating to
(a)
the gain or loss on discontinuance; and
(b)
the profit or loss from the discontinued operation
for the period, together with the corresponding amounts for
each prior period presented.
16.37 The following shall also be disclosed
(a)
the amount (and expiry date, if any) of deductible
temporary differences, unused tax losses, and unused tax credits
for which no deferred tax asset is recognised in the balance
sheet; and
(b)
the amount of a deferred tax asset and the nature
of the evidence supporting its recognition when
(i)
the utilisation of the deferred tax asset is
dependent on future taxable profits in excess of the
profits arising from the reversal of existing taxable
temporary differences; and
(ii)
the entity has suffered a loss in either the
current or preceding period in the tax jurisdiction to
which the deferred tax asset relates.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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Section 17: Provisions and contingencies
17.1
A provision is a liability of uncertain timing or amount.
17.2 A contingent asset is a possible asset that arises from past
events and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not wholly
within the control of the entity. Contingent assets occur where the
inflow of economic benefits is probable, but not virtually certain.
17.3
A contingent liability is
(a)
a possible obligation that arises from past events
and whose existence will be confirmed only by the occurrence
or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
(b)
an obligation at the balance sheet date that arises
from past events but is not recognised because
(i)
it is not probable that a transfer of
economic benefits will be required to settle the
obligation; or
(ii)
the amount of the obligation cannot be
measured with sufficient reliability.
17.4 This Section does not apply to deferred tax and leases,
which are covered by more specific requirements of GAPEE.
Recognition and measurement of provisions
17.5
An entity shall recognise a provision only when
(a)
the entity has a present obligation as a result of a
past event;
(b)
it is probable (i.e. more likely than not) that the
entity will be required to transfer economic benefits in
settlement; and
(c)
the amount of the obligation can be estimated
reliably.
17.6 The entity shall recognise the provision as a liability in
the balance sheet and shall recognise the amount of the provision as an
expense in profit or loss unless (a) it is part of the cost of producing
inventories (see paragraph 15.3) or (b) it is included in the cost of
property, plant and equipment in accordance with paragraph 7.4.
17.7
An entity shall measure a provision at the best estimate
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of the amount required to settle the obligation at the reporting date.
When the effect of the time value of money is material, the amount of
a provision shall be the present value of the amount expected to be
required to settle the obligation. The discount rate/s shall be a pre-tax
rate/s that reflects current market assessments of the time value of
money. The risks specific to the liability should be reflected either in
the discount rate or in the estimation of the amounts required to settle
the obligation, but not both. Gains from the expected disposal of assets
shall be excluded from the measurement of a provision. When a
provision is measured at the present value of the amount expected to
be required to settle the obligation, the unwinding of the discount shall
be recognised as finance cost. Provisions shall not be used to adjust the
value of assets.
17.8 Where some or all of the expenditure required to settle a
provision may be reimbursed by another party (e.g. through an
insurance claim), the reimbursement shall be recognised, as a separate
asset, only when it is virtually certain to be received if the entity settles
the obligation. In the income statement, the expense relating to the
provision may be presented net of the recovery.
17.9 An entity shall review provisions at each reporting date
and adjust them to reflect the current best estimate of the amount that
would be required to settle the obligation at that reporting date. Any
adjustments to the amounts previously recognised shall be recognised
in profit or loss unless the provision was originally recognised as part
of the cost of inventories or property, plant and equipment.
17.10 A provision shall be used only for expenditures for
which the provision was originally recognised.
Recognition and measurement of contingencies
17.11 Contingent liabilities and contingent assets shall not be
recognised. Nevertheless, paragraph 21.7(c) of these Principles
requires a contingent liability assumed in a business combination to be
recognised if its fair value can be measured reliably. The requirements
of this paragraph shall not prejudice the application of paragraph
7(c).
17.12 Contingent liabilities recognised separately as part of
allocating the cost of a business combination are excluded from the
scope of this Section. However, the acquirer shall disclose for those
contingent liabilities the information required to be disclosed by this
Section for each class of provision.
Disclosures
17.13
An entity shall disclose the aggregate amount of
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contingent liabilities (disclosing guarantees) as at the balance sheet
date. An entity shall disclose the nature and form of any valuable
security provided.
17.14 An entity shall disclose the aggregate amount of
financial commitments that are relevant to assessing the entity’s
financial position. Any commitments concerning pensions and group
entities or associates shall be disclosed separately.
17.15 The nature and business purpose of the entity's
arrangements that are not included in the balance sheet shall be
disclosed, provided that the risks or benefits arising from such
arrangements are material and in so far as the disclosure of such risks
or benefits is necessary for the purposes of assessing the financial
position of the entity.
17.16 Unless disclosed elsewhere as required by other Sections
of these Principles, an entity shall disclose, where practicable, the
following information
(a)
the existence of any restrictions on title and the
carrying amount of any assets that the entity has pledged as
collateral for liabilities or contingent liabilities;
(b)
the aggregate amount, or estimated amount, of
capital expenditure contracted but not provided for ; and
(c)
the aggregate amount, or estimated amount, of
capital expenditure authorised but not contracted.
17.17 For each class of provision, an entity shall disclose
(a)
a brief description of the nature of the obligation
and the expected timing of any resulting outflows of economic
benefits;
(b)
an indication of the uncertainties about the
amount and timing of those outflows; and
(c)
having regard to paragraph 4.8(f) of these
Principles, a reconciliation of the carrying amount at the
beginning and the end of the financial reporting period
showing;
(i)
additional provisions made in the period,
including increases to existing provisions;
(ii)
amounts used (i.e. incurred and charged
against the provision) during the period;
(iii)
unused
amounts
reversed
during
the
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period; and
(iv) the increase during the period in the
discounted amount arising from the passage of time and
the effect of any change in the discount rate.
17.18 Unless the possibility of any outflow of resources in
settlement is remote, an entity shall disclose for each class of
contingent liability at the balance sheet date
(a)
a brief description of the nature of the contingent
liability; and
(b)
where practicable
(i)
an estimate of its financial effect (if it is
impracticable to estimate the financial effect, that fact
shall be stated); and
(ii)
an indication of the uncertainties relating to
the amount or timing of any outflow.
17.19 In determining which provisions or contingent liabilities
may be aggregated to form a class, it is necessary to consider whether
the nature of the items is sufficiently similar for a single statement
about them to fulfil the requirements of sub-paragraphs 17.18(a),
17.18(b)(i) and 17.18(b)(ii).
17.20 Where an inflow of economic benefits is probable, an
entity shall disclose a brief description of the nature of the contingent
assets at the balance sheet date, and, where practicable, an estimate of
their financial effect. If it is impracticable to estimate the financial
effect, that fact shall be stated.
17.21 In addition to the disclosure required in paragraph 17.16,
an entity shall also disclose the financial impact of the entity's
arrangements that are not included in the balance sheet, provided that
the risks or benefits arising from such arrangements are material and in
so far as the disclosure of such risks or benefits is necessary for the
purposes of assessing the financial position of the entity.
17.22 In extremely rare cases, disclosure of some or all of the
information required by paragraphs 17.18 – 17.22 can be expected to
prejudice seriously the position of the entity in a dispute with other
parties on the subject matter of the provision, contingent liability or
contingent asset. In such cases, an entity need not disclose the
information, but shall disclose the general nature of the dispute,
together with the fact that, and reason why, the information has not
been disclosed.
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Section 18: Foreign currency translation
18.1 An entity’s functional currency is the currency of the
primary economic environment in which the entity operates and
generates net cash flows. A foreign currency is any currency that is not
the functional currency.
18.2 An entity’s presentation currency is the currency in
which its financial statements are presented, which may be regulated
by relevant legislation where applicable.
18.3 Monetary items are money held and assets and liabilities
to be received or paid in a fixed or determinable amount of money.
Determining the functional currency
18.4
An entity shall identify its functional currency.
18.5 The primary economic environment in which an entity
operates is normally the one in which it primarily generates and
expends cash. The following are the most important factors an entity
considers in determining its functional currency
(a)
the currency
(i)
that mainly influences sales prices for
goods and services (this will often be the currency in
which sales prices for its goods and services are
denominated and settled); and
(ii)
of the country whose competitive forces
and regulations mainly determine the sales prices of its
goods and services.
(b)
the currency that mainly influences labour,
material and other costs of providing goods or services (this
will often be the currency in which such costs are denominated
and settled).
18.6 The following factors may also provide evidence of an
entity’s functional currency
(a)
the currency in which funds from financing
activities (i.e. issuing debt and equity instruments) are
generated.
(b)
the currency in which receipts from operating
activities are usually retained.
18.7 The following additional factors are considered in
determining the functional currency of a foreign operation, and
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whether its functional currency is the same as that of the reporting
entity (the reporting entity, in this context, being the entity that has the
foreign operation as its subsidiary, branch, associate or joint venture)
(a)
whether the activities of the foreign operation are
carried out as an extension of the reporting entity, rather than
being carried out with a significant degree of autonomy. An
example of the former is when the foreign operation only sells
goods imported from the reporting entity and remits the
proceeds to it. An example of the latter is when the operation
accumulates cash and other monetary items, incurs expenses,
generates income and arranges borrowings, all substantially in
its local currency.
(b)
whether transactions with the reporting entity are
a high or a low proportion of the foreign operation’s activities.
(c)
whether cash flows from the activities of the
foreign operation directly affect the cash flows of the reporting
entity and are readily available for remittance to it.
(d)
whether cash flows from the activities of the
foreign operation are sufficient to service existing and normally
expected debt obligations without funds being made available
by the reporting entity.
18.8 As noted in paragraph 18.1, the functional currency of an
entity reflects the underlying transactions, events and conditions that
are relevant to the entity. Accordingly, once the functional currency is
determined, it can be changed only if there is a change to those
underlying transactions, events and conditions, such as a change in the
currency in which those underlying transactions, events and conditions
are denominated.
18.9 When there is a change in an entity’s functional currency,
the entity shall account for the effect of the change in functional
currency prospectively from the date of the change. In other words, an
entity translates all items into the new functional currency using the
exchange rate at the date of the change. The resulting translated
amounts for non-monetary items are treated as their historical cost.
Reporting foreign currency transactions in the functional
currency
18.10 When a transaction qualifies for recognition in
accordance with these Principles, and such a transaction is
denominated in a foreign currency, an entity shall record it by applying
to the foreign currency amount the spot exchange rate, between the
functional currency and the currency in which the transaction is
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denominated, at the date on which the transaction first qualifies for
recognition. For practical reasons, unless the relevant exchange rate or
rates fluctuate significantly, a rate that approximates the actual rate at
the date of the transaction is often used, for example, an average rate
for a week or a month may be used for all transactions in each foreign
currency occurring during that period.
18.11 At each balance sheet date, an entity shall
(a)
translate foreign currency monetary items using
the closing rate;
(b)
translate non-monetary items that are measured in
terms of historical cost in a foreign currency using the exchange
rate at the date of the transaction; and
(c)
translate non-monetary items that are measured at
fair value in a foreign currency using the exchange rate at the
date when the fair value was determined.
18.12 Except as described in paragraph 18.14, an entity shall
recognise, in profit or loss in the period in which they arise, exchange
differences arising on the settlement of monetary items or on
translating monetary items at rates different from those at which they
were translated on initial recognition during the period or in previous
financial statements.
18.13 When a gain or loss on a non-monetary item is
recognised directly in equity, an entity shall recognise any exchange
component of that gain or loss directly in equity. Conversely, when a
gain or loss on a non-monetary item is recognised in profit or loss, an
entity shall recognise any exchange component of that gain or loss in
profit or loss.
Net investment in a foreign operation
18.14 An entity may have a monetary item that is receivable
from or payable to a foreign operation. An item for which settlement is
neither planned nor likely to occur in the foreseeable future is, in
substance, a part of the entity’s net investment in that foreign
operation, and is accounted for in accordance with paragraph 18.15.
Such monetary items may include long-term receivables or loans.
They do not include trade receivables or trade payables.
18.15 Exchange differences arising on a monetary item that
forms part of a reporting entity’s net investment in a foreign operation
(see paragraph 18.14) shall be recognised in profit or loss in the
individual financial statements of the reporting entity or the individual
financial statements of the foreign operation, as appropriate. In the
financial statements that include the foreign operation and the
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reporting entity (for example, consolidated financial statements when
the foreign operation is a subsidiary), such exchange differences shall
be recognised initially in a separate component of equity and
recognised in profit or loss on disposal of the net investment in
accordance with paragraph 18.19.
Use of a presentation currency other than the functional
currency
18.16 If an entity’s presentation currency differs from its
functional currency, that entity shall translate its results and financial
position into the presentation currency, using the following
procedures
(a)
assets and liabilities for each balance sheet
presented (i.e. including comparatives) shall be translated at the
closing rate at the date of that balance sheet;
(b)
income and expenses for each income statement
(i.e. including comparatives) shall be translated at exchange
rates at the dates of the transactions. If exchange rates between
the functional and presentation currencies do not fluctuate
significantly, an entity may use a rate that approximates the
exchange rates at the dates of the transactions, for example an
average rate for the period; and
(c)
all resulting exchange differences shall be
recognised as a separate component of equity.
Translation of a foreign operation into the investor’s
presentation currency
18.17 In incorporating the results and financial position of a
foreign operation with those of the reporting entity (for example by
consolidation or the equity method), the entity shall translate the
results and financial position of the foreign operation into the reporting
entity’s presentation currency by applying the requirements of
paragraph 18.16 of these Principles. Where the foreign operation is to
be consolidated, the reporting entity shall subsequently follow normal
consolidation procedures, such as the elimination of intragroup
balances and intragroup transactions of a subsidiary (see Section 22
Consolidated Financial Statements). However, an intragroup monetary
asset (or liability), whether short-term or long-term, cannot be
eliminated against the corresponding intragroup liability (or asset)
without showing the results of currency fluctuations in the
consolidated financial statements. This is because the monetary item
represents a commitment to convert one currency into another and
exposes the reporting entity to a gain or loss through currency
fluctuations. Accordingly, in the consolidated financial statements of
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the reporting entity, an entity continues to recognise such an exchange
difference in profit or loss or, if it arises from the circumstances
described in paragraph 18.15, the entity shall classify it as equity until
the disposal of the foreign operation.
18.18 Any goodwill arising on the acquisition of a foreign
operation and any fair value adjustments to the carrying amounts of
assets and liabilities arising on the acquisition of that foreign operation
shall be treated as assets and liabilities of the foreign operation. Thus,
they shall be expressed in the functional currency of the foreign
operation and shall be translated at the closing rate in accordance with
paragraph 18.16(a).
18.19 On the disposal of a foreign operation, the cumulative
amount of the exchange differences deferred in the separate
component of equity relating to that foreign operation shall be
recognised in profit or loss when the gain or loss on disposal is
recognised.
Disclosures
18.20 For items included in the financial statements which are
or were originally denominated in a foreign currency, an entity shall
disclose the bases of conversion used to express them in the functional
currency.
18.21 An entity shall disclose the currency in which the
financial statements are presented. When the presentation currency is
different from the functional currency, an entity shall state that fact
and shall disclose the functional currency and the reason for using a
different presentation currency.
18.22 When there is a change in the entity’s functional
currency the entity shall disclose that fact and the reason for the
change in functional currency.
Disclosures
18.23 An entity shall also disclose
(a)
the amount of exchange differences recognised in
profit or loss; and
(b)
net exchange differences classified in a separate
component of equity, for instance in accordance with paragraph
18.13, and a reconciliation of the amount of such exchange
differences at the beginning and end of the period.
Section 19: Post balance sheet events
19.1
Post balance sheet events are those events, favourable
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and unfavourable, that occur between the balance sheet date and the
date when the financial statements are authorised for issue. There are
two types of events
(a)
Adjusting events are those that provide evidence
of conditions that existed at the balance sheet date; and
(b)
Non-adjusting events are those that are indicative
of conditions that arose after the balance sheet date.
Recognition and Measurement
19.2 An entity shall adjust the amounts recognised in its
financial statements, including related disclosures, to reflect adjusting
events after the balance sheet date. When adjusting the amounts
recognised in the financial statements, an entity shall have regard to
the recognition, measurement and disclosure requirements in the
relevant sections of these Principles. Examples of adjusting events are
(a)
the settlement, after the balance sheet date, of a
court case that confirms that the entity had a present obligation
at the balance sheet date, in which case an entity shall recognise
a corresponding liability and shall adjust the amount previously
recognised as provisions in accordance with Section 17 of these
Principles; and
(b)
the receipt of evidence after the balance sheet date
that indicates that an asset was impaired at the balance sheet
date, such as a customer being declared bankrupt or inventories
being sold at an amount that is lower than their previously
recognised net realisable value. In such case an entity shall
recognise an impairment loss, or adjust a previously recognised
impairment loss, in accordance with Sections 12 and 15 of these
Principles.
19.3 An entity shall not adjust the amounts recognised in its
financial statements to reflect non-adjusting events after the balance
sheet date. Nevertheless, if non-adjusting events after the balance
sheet date are material, non-disclosure could influence the economic
decisions of users taken on the basis of the financial statements hence
disclosures may need to be given in accordance with this section.
Examples of non-adjusting events are a decline in market value of
investments between the balance sheet date and the date when the
financial statements are authorised for issue, or an entity declaring
dividends to holders of equity instruments after the balance sheet date.
Disclosure
19.4
An entity shall disclose the following for each material
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category of non-adjusting event after the balance sheet date
(a)
the nature of the event; and
(b)
an estimate of its financial effect, or a statement
that such an estimate cannot be made.
19.5 An entity shall disclose the date on which the financial
statements were authorised for issue and who gave that authorisation.
Section 20: Related party disclosures
20.1 A related party is a person or entity that is related to the
entity that is preparing its financial statements (referred to as the
‘reporting entity’).
(a)
A person or a close member of that person’s
family is related to a reporting entity if that person
(i)
has control or joint control of the reporting
entity;
(ii)
has significant influence over the reporting
entity; or
(iii) is a member of the key management
personnel of the reporting entity or of a parent of the
reporting entity.
(b)
An entity is related to a reporting entity if any of
the following conditions applies
(i)
The entity and the reporting entity are
members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the
others).
(ii)
One entity is an associate or joint venture
of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a
member).
(iii)
Both entities are joint ventures of the same
third party.
(iv) One entity is a joint venture of a third
entity and the other entity is an associate of the third
entity.
(v)
The entity is a post-employment benefit
plan for the benefit of employees of either the reporting
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entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring
employers are also related to the reporting entity.
(vi) The entity is controlled
or
jointly
controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant
influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the
entity).
20.2 For the purposes of the paragraph 20.1 the relevant terms
shall have the following meaning
(a)
key management personnel shall mean those
persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or
indirectly, including any director (whether executive or
otherwise) of that entity;
(b)
post-employment benefit plans are formal or
informal arrangements under which an entity provides post-
employment benefits for one or more employees;
(c)
close members of the family of a person are those
family members who may be expected to influence, or be
influenced by, that person in their dealings with the entity and
include
(i)
that person’s children and spouse or
domestic partner;
(ii)
children
of
that
person’s
spouse
or
domestic partner; and
(iii) dependants of that person or that person’s
spouse or domestic partner.
(d)
Control, joint control and significant influence
shall have the meaning assigned to them in Section 10 of these
Principles.
20.3
The following are not necessarily related parties
(a)
two entities simply because they have a director in
common;
(b)
two venturers simply because they share joint
control over a joint venture;
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(c)
any of the following simply by virtue of their
normal dealings with an entity (even though they may affect the
freedom of action of an entity or participate in its decision
making process)
(i)
providers of finance,
(ii)
trade unions,
(iii)
public utilities, and
(iv)
government departments and agencies,
(d)
a customer, supplier, franchisor, distributor or
general agent with whom an entity transacts a significant
volume of business, merely by virtue of the resulting economic
dependence.
20.4 A related party transaction is a transfer of resources,
services or obligations between related parties, regardless of whether a
Disclosure
20.5 An entity shall disclose the name and registered office of
that entity which draws up the consolidated financial statements of the
smallest body of entities of which it forms part as a subsidiary.
20.6 An entity shall disclose the following in relation to
members of the entity’s board of directors and other members of its
administrative, managerial and supervisory bodies
(a)
the amount of advances and credits granted with
indications of the interest rates, main conditions and any
amounts repaid or written off or waived; and
(b)
any commitments entered into on their behalf by
way of guarantees of any kind with an indication of the total for
each category.
20.7 Without prejudice to paragraph 20.8, if an entity enters
into transactions with specific categories of related parties, the entity
shall disclose the amount of the transactions, the nature of the related
party relationships and other information about the transactions and
outstanding balances necessary for an understanding of the financial
position of the entity. These specific categories shall include parties
having control, joint control or significant influence over the entity,
subsidiaries, associates and jointly controlled entities of the entity and
members of the reporting entity’s board of directors. Such disclosures
may include for example
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(a)
the amount of the transactions in aggregate for
each significant category of transactions, except when separate
disclosure is necessary for an understanding of the effects of
related party transactions on the financial position of the entity;
(b)
the amount of outstanding balances in aggregate
and: (i) their terms and conditions, including whether they are
secured, and the nature of the consideration to be provided in
settlement; and (ii) details of any guarantees given or received;
(c)
provisions for doubtful debts related to the
amount of outstanding balances; and
(d)
the expense recognised during the period in
respect of bad or doubtful debts due from related parties.
20.8 An entity is exempt from disclosing related party
transactions between members of a group, provided that subsidiaries
which are party to the transactions are wholly owned by a member of
the group.
20.9 An entity shall always disclose, where applicable, the
name and registered office of the ultimate parent, if different from the
immediate parent, together with the name and registered office of the
entity which draws up the consolidated financial statements of the
largest body of entities of which it forms part as a subsidiary entity. An
entity shall disclose the place where copies of the consolidated
financial statements referred to in this Paragraph and Paragraph 20.5
may be obtained, provided that they are available.
20.10 An entity shall also disclose the following in relation to
members of the entity’s board of directors and other members of its
administrative, managerial and supervisory bodies
(a)
the amount of the emoluments granted in respect
of, the financial year by reason of their responsibilities; and
(b)
any commitments arising or entered into in
respect of retirement pensions of former members of the
entity’s board of directors;
20.11 The disclosures required by paragraph 20.7 shall be
made by an entity in respect of all related parties. Information about
individual transactions may be aggregated according to their nature
except where separate information is necessary for an understanding
of the effects of related party transactions on the financial position of
the entity.
Section 21: Business combinations and goodwill
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21.1 This Section shall be applied by a parent in accounting
for its investments in subsidiaries in the consolidated financial
statements, if any, that present the financial results of the parent and its
subsidiaries as those of a single economic entity in accordance with
Section 22 of these Principles. This Section shall also be applied to
any transaction or other event that meets the definition of a business
combination. This Section shall not be applied by an investor in
accounting for its investments in subsidiaries in its individual financial
statements (as defined in paragraph 10.1), the accounting for which is
specifically covered in Section 10 of GAPEE.
21.2 A business is an integrated set of activities and assets that
is capable of being conducted and managed for the purpose of
providing goods or services to customers, generating investment
income (such as dividends or interest) or generating other income from
ordinary activities. A business combination is the bringing together of
separate entities or businesses into one reporting entity. The result of
nearly all business combinations is that one entity, the acquirer, obtains
control of one or more other separate businesses, individually referred
to as ‘the acquiree’. The acquisition date is the date on which the
acquirer effectively obtains control of the acquiree. Control is defined
in paragraph 10.3 of these Principles.
21.3 The acquirer is the combining entity that obtains control
of the other combining entities or businesses.
Method of accounting
21.4 Save as provided for in paragraph 21.18, all business
combinations shall be accounted for by applying the purchase method.
Applying the purchase method involves the following steps
(a)
identifying an acquirer;
(b)
measuring the cost of the business combination;
and
(c)
allocating, at the acquisition date, the cost of the
business combination to the assets acquired and liabilities and
contingent liabilities assumed.
21.5 The acquirer shall measure the cost of a business
combination as the aggregate of
(a)
the fair values, at the date of exchange, of assets
given, liabilities incurred or assumed, and equity instruments
issued by the acquirer, in exchange for control of the acquiree;
plus
(b)
any costs directly attributable to the business
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
combination.
21.6 The acquirer shall, at the acquisition date, allocate the
cost of a business combination by recognising the acquiree’s
identifiable assets and liabilities and those contingent liabilities that
satisfy the recognition criteria at their fair values at that date, except
for non-current assets (or disposal groups) that are classified as held
for sale, which shall be recognised at fair value less costs to sell. Any
difference between the cost of the business combination and the
acquirer’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities so recognised shall be accounted
for in accordance with paragraphs 21.9 – 21.17.
21.7 The acquirer shall recognise separately the acquiree’s
identifiable assets, liabilities and contingent liabilities at the
acquisition date only if they existed at that date and if they satisfy the
following criteria at that date
(a)
in the case of an asset other than an intangible
asset, it is probable that any associated future economic benefits
will flow to the acquirer, and its fair value can be measured
reliably;
(b)
in the case of a liability other than a contingent
liability, it is probable that an outflow of resources will be
required to settle the obligation, and its fair value can be
measured reliably; and
(c)
in the case of an intangible asset or a contingent
liability, its fair value can be measured reliably.
21.8 The acquirer’s income statement shall incorporate the
acquiree’s profits and losses after the acquisition date by including the
acquiree’s income and expenses based on the cost of the business
combination to the acquirer. For example, depreciation expense
included after the acquisition date in the acquirer’s income statement
that relates to the acquiree’s depreciable assets shall be based on the
fair values of those depreciable assets at the acquisition date, i.e. their
cost to the acquirer.
Goodwill – Recognition and Measurement at recognition
21.9
Internally generated goodwill shall not be recognised.
21.10
The acquirer shall, at the date of acquisition of a
business
(a)
recognise goodwill acquired in a business
combination as an asset; and
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(b)
initially measure that goodwill at its cost, being
the excess of the cost of the business combination over the
acquirer’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities recognised in accordance
with paragraph 21.7.
21.11 If the acquirer’s interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities recognised in
accordance with paragraph 21.7 exceeds the cost of the business
combination (sometimes referred to as ‘negative goodwill’), the
acquirer shall
(a)
reassess the identification and measurement of the
acquiree’s identifiable assets, liabilities and contingent
liabilities and the measurement of the cost of the combination;
and
(b)
recognise immediately in profit or loss any excess
remaining after that reassessment.
Goodwill – Measurement after recognition
21.12 After initial recognition, goodwill shall be carried at its
cost less any accumulated amortisation and any accumulated
impairment losses. To determine whether goodwill is impaired, an
entity applies Section 12 of these Principles. That Section explains
how an entity reviews the carrying amount of its assets, how it
determines the recoverable amount of an asset, and when it recognises,
or reverses the recognition of, an impairment loss. Because goodwill
does not generate cash flows independently of other assets or groups
of assets, it is necessary to allocate goodwill to the group (groups) of
assets that is (are) expected to benefit from the synergies of the
business combination for the purpose of estimating its recoverable
amount. Any resulting impairment losses shall be recognised in
accordance with paragraphs 12.11 – 12.13 of these Principles.
21.13 The residual value assigned to goodwill shall be zero.
21.14 An entity shall amortise goodwill on a straight-line basis
over its useful life, which shall not exceed 20 years. In exceptional
cases where the useful life of goodwill cannot be reliably estimated, it
shall be written off over a maximum period of 10 years. The
amortisation charge for each period shall be recognised in profit or
loss.
21.15 The useful life of goodwill shall be reviewed regularly
and revised if necessary, subject to the constraint that the revised
useful life shall not exceed 20 years or 10 years as applicable, from the
date of acquisition. The carrying amount at the date of revision shall
be amortised over the revised estimate of remaining useful life. Such a
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
change shall be accounted for as a change in an accounting estimate in
accordance with Section 5 of these Principles.
21.16 Goodwill shall not be revalued.
21.17 An impairment loss recognised for goodwill shall not be
reversed in a subsequent period.
Business combinations
21.18 The book values of shares held in the capital of an entity
included in the consolidation may be set off against the corresponding
percentage of capital of the acquiree, provided that the entities in the
business combination are ultimately controlled by the same party both
before and after the business combination, and that control is not
transitory.
Provided that the requirements in paragraphs 21.18 and
21.19, shall also apply in the case of a combination of businesses
under common control.
Provided further that if the business combination under
common control has not resulted in the acquirer holding shares in the
capital of an entity, the acquirer may apply paragraph 21.18 in its
financial statements and
(a)
the consideration paid shall be used as a
substitute for the book values of shares held in the capital
of the acquiree, and
(b)
the percentage ownership of net assets
shall be used as a substitute for the percentage of capital.
Provided further that entities electing to apply paragraph
21.18 to business combinations under common control, shall not apply
paragraph 21.4 to such business combinations.
21.19 Any difference arising under paragraph 21.18 shall be
added to or deducted from consolidated reserves, as appropriate. For
the avoidance of doubt, the terms consolidated reserves and equity are
interchangeable in this respect.
Disclosure
21.20 For each business combination (or group of individually
immaterial business combinations) that was (were) effected during the
period, the acquirer shall disclose the following in the consolidated
financial statements
(a)
the names and descriptions of the combining
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
entities or businesses;
(b)
the acquisition date;
(c)
the percentage of voting equity instruments
acquired;
(d)
the cost of the combination and a description of
the components of that cost, including any costs directly
attributable to the combination. When equity instruments are
issued or issuable as part of the cost, the following shall also be
disclosed
(i)
the number of equity instruments issued or
issuable; and
(ii)
the fair value of those instruments and the
basis for determining that fair value;
(e)
details of any operations the entity has decided to
dispose of as a result of the combination;
(f)
the amounts recognised at the acquisition date for
each class of the acquiree’s assets, liabilities and contingent
liabilities, including goodwill;
(g)
the methods used to calculate the value of
goodwill and any significant changes in value in relation to the
preceding financial year;
(h)
a description of the factors that contributed to the
recognition of goodwill, and an explanation of the period over
which goodwill is amortised;
(i)
a description of each intangible asset that was not
recognised separately from goodwill and an explanation of why
the intangible asset’s fair value could not be measured reliably
(see paragraph 11.3 of these Principles);
(j)
the amount of any excess recognised in profit or
loss and the line item in the income statement in which the
excess is recognised, together with a description of the nature of
any excess recognised in profit or loss in accordance with
paragraph 21.11; and
(k)
the amount of the acquiree’s profit or loss since
the acquisition date included in the acquirer’s profit or loss for
the period, unless disclosure would be impracticable. If such
disclosure would be impracticable, that fact shall be disclosed,
together with an explanation of why this is the case.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
21.21 For each business combination effected after the end of
the reporting period but before the financial statements are authorised
for issue, the acquirer shall make the disclosures required by paragraph
21.20 unless such disclosure would be impracticable. If disclosure of
any of that information would be impracticable, that fact shall be
disclosed, together with an explanation of why this is the case.
21.22 Having regard to paragraph 4.8(c) of these Principles, in
respect of all business combinations, an acquirer shall disclose a
reconciliation of the carrying amount of goodwill at the beginning and
end of the reporting period, showing separately
(a)
the gross amount and accumulated amortisation
and impairment losses at the beginning of the period;
(b)
changes arising from new business combinations,
amortisation, impairment losses, disposals of previously
acquired businesses, and other changes; and
(c)
the gross amount and accumulated amortisation
and impairment losses at the end of the period.
21.23 When an entity applies the method described in
paragraph 21.18, the resulting movement in reserves and the names
and registered offices of the entities concerned shall be disclosed in the
notes to the consolidated financial statements.
Section 22: Consolidated financial statements
1 Consolidated financial statements are the financial
statements of a group presented as those of a single economic entity.
(a)
If, in certain circumstances, one or more of the
subsidiaries to be consolidated are prohibited from applying
GAPEE in the preparation of their individual financial
statements, the group’s consolidated financial statements may
nevertheless be prepared in accordance with this Section
(subject to the definition included in paragraph 4.1 of the
"insurance and/or reinsurance parent undertaking") provided
that the following information is disclosed in the consolidated
financial statements: the fact that a subsidiary/ies has prepared
financial statements in accordance with a financial reporting
framework other than GAPEE;
(b)
the name/s of the relevant subsidiary/ies; and
(c)
the financial reporting framework under which
those financial statements have been prepared.
Consolidation procedures
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
22.2 The consolidated financial statements present financial
information about the group as a single economic entity. In preparing
consolidated financial statements, an entity shall
(a)
combine the financial statements of the parent and
its subsidiaries line by line by adding together like items of
assets, liabilities, equity, income and expenses;
(b)
eliminate the carrying amount of the parent’s
investment in each subsidiary and the parent’s portion of equity
of each subsidiary;
(c)
measure minority interests in the profit or loss of
consolidated subsidiaries for the reporting period separately
from the parent shareholders’ interest; and
(d)
measure minority interests in the net assets of
consolidated subsidiaries separately from the parent
shareholders’ equity in them. Minority interests in the net assets
consist of
(i)
the amount of those minority interests at
the date of the original combination; and
(ii)
the minority’s share of changes in equity
since the date of the combination.
22.3 When potential voting rights exist (such as voting rights
that would result from exercise of share options or warrants or from
conversion of convertible securities), the proportions of profit or loss
and changes in equity allocated to the parent and minority interests are
determined on the basis of existing ownership interests and do not
reflect the possible exercise or conversion of potential voting rights.
22.4 Intragroup balances and transactions, including income,
expenses and dividends, are eliminated in full. Profits and losses
resulting from intragroup transactions that are recognised in assets,
such as inventory and fixed assets, are eliminated in full. Intragroup
losses may indicate an impairment that requires recognition in the
consolidated financial statements.
22.5 The financial statements of the parent and its subsidiaries
used in the preparation of the consolidated financial statements shall
be prepared as of the same reporting date.
22.6 Consolidated financial statements shall be prepared using
uniform accounting policies for like transactions and other events and
conditions in similar circumstances. If a member of the group uses
accounting policies other than those adopted in the consolidated
financial statements for like transactions and events in similar
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
circumstances, appropriate adjustments are made to its financial
statements in preparing the consolidated financial statements.
22.7 The income and expenses of a subsidiary are included in
the consolidated financial statements from the acquisition date. The
income and expenses of a subsidiary are included in the consolidated
financial statements until the date on which the parent ceases to
control the subsidiary. The difference between the proceeds from the
disposal of the subsidiary and the carrying amount of the interest in the
subsidiary as of the date of disposal, including the cumulative amount
of any exchange differences that relate to the subsidiary recognised in
equity in accordance with Section 18, is recognised in the consolidated
income statement as the gain or loss on the disposal of the subsidiary.
22.8 If an entity ceases to be a subsidiary but the investor
(former parent) continues to hold some equity shares, those shares
shall be accounted for in accordance with Section 9 of these Principles
from the date the entity ceases to be a subsidiary, provided that it does
not become an associate or a jointly controlled entity. The carrying
amount of the investment at the date that the entity ceases to be a
subsidiary shall be regarded as the cost on initial measurement of an
investment.
22.9 An entity shall present minority interest in the
consolidated balance sheet within equity, separately from the parent
shareholders’ equity.
22.10 An entity shall disclose minority interest in the profit or
loss of the group separately in the income statement, as required by
paragraph 4.23.
22.11 Losses applicable to the minority in a consolidated
subsidiary may exceed the minority interest in the subsidiary’s equity.
The excess, and any further losses applicable to the minority, are
allocated against the majority interest except to the extent that the
minority has a binding obligation and is able to make an additional
investment to cover the losses. If the subsidiary subsequently reports
profits, such profits are allocated to the majority interest until the
minority’s share of losses previously absorbed by the majority has
been recovered.
Accounting for investments in associates and jointly controlled
entities in the consolidated financial statements
22.12 When an entity prepares consolidated financial
statements it shall measure all its investments in associates and jointly
controlled entities in its consolidated financial statements in
accordance with the equity method in paragraphs 10.15 – 10.25, and
shall give the disclosures required by paragraph 10.32, of these
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
Principles. An entity shall account for its investments in jointly
controlled operations and jointly controlled assets in its consolidated
financial statements in accordance with paragraphs 10.26 and 10.27 of
these Principles.
Disclosure
22.13 An entity’s consolidated financial statements shall
include all the relevant disclosures required by the respective Sections
of these Principles, in a way which facilitates the assessment of the
financial position of the entities included in the consolidation taken as
a whole, taking account of the essential adjustments resulting from the
particular characteristics of consolidated financial statements as
compared to annual financial statements, including the following
(a)
in disclosing transactions between related parties,
transactions between related parties included in a consolidation
that are eliminated on consolidation shall not be included;
(b)
in disclosing the amounts of emoluments and
advances and credits granted to members of the
board, only amounts granted by the parent and its subsidiaries to
members of the board of the parent shall be disclosed.
22.14 Where an entity included in a consolidation has an
associate, that associate shall be shown in the consolidated balance
sheet as a separate item with an appropriate heading.
Section 23: Discontinued operations and non-current assets
held for sale
1 A discontinued operation is a component of an entity that
either has been disposed of, or is classified as held for sale, and
(a)
represents a separate major line of business or
geographical area of operations;
(b)
is part of a single coordinated plan to dispose of a
separate major line of business or geographical area of
operations; or
(c)
is a subsidiary acquired exclusively with a view to
resale.
23.2 A disposal group is a group of assets to be disposed of,
by sale or otherwise, together as a group in a single transaction, and
liabilities directly associated with those assets that will be transferred
in the transaction.
Discontinued operations – Presentation and Disclosure
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
23.3 An entity shall disclose a single amount on the face of
the income statement comprising the total of
(a)
the post-tax profit or loss of discontinued
operations; and
(b)
the post-tax gain or loss recognised on the
measurement to fair value less costs to sell or on the disposal of
the assets or group/s of assets and liabilities constituting the
discontinued operation.
Discontinued operations –Presentation and Disclosure
23.4
An entity shall disclose
(a)
an analysis of the single amount mentioned in
paragraph 23.3 into
(i)
the revenue, expenses, pre-tax profit or loss
and income tax expense of discontinued operations; and
(ii)
the gain or loss recognised on the
measurement to fair value less costs to sell or on the
disposal of the assets or group/s of assets constituting the
discontinued operation and the related income tax
expense.
The analysis may be presented in the notes or on the face
of the income statement. If it is presented on the face of the
income statement it shall be presented in a section identified as
relating to discontinued operations, i.e. separately from
continuing operations; and
(b)
the net cash flows attributable to the operating,
investing and financing activities of discontinued operations.
These disclosures may be presented either in the notes or on the
face of the financial statements.
23.5 Unless impracticable, an entity shall restate the
disclosures in the preceding paragraphs for prior periods presented in
the financial statements so that the disclosures relate to all operations
that have been discontinued by the end of the reporting period for the
latest period presented.
23.6 If an entity ceases to classify a component of an entity as
held for sale, the entity shall reclassify the results of operations of the
component previously presented in discontinued operations and shall
include them in income from continuing operations for all periods
presented. The amounts for prior periods shall be described as having
been restated.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
Non-current assets held for sale
23.7 An entity shall classify a non-current asset (including
property, plant and equipment, intangibles, and investments in
subsidiaries, associates and joint ventures) as held for sale if its
carrying amount will be recovered principally through a sale
transaction rather than through continuing use. For this to be the case,
the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary
for sales of such assets, its sale must be highly probable, and the entity
must expect to complete the sale within one year from the date of
classification as held for sale.
23.8 An entity shall measure a non-current asset (or disposal
group) classified as held for sale at the lower of its carrying amount
and fair value less costs to sell.
23.9 An entity shall not depreciate (or amortise) a non-current
asset while it is classified as held for sale or while it is part of a
disposal group classified as held for sale. Interest and other expenses
attributable to the liabilities of a disposal group classified as held for
sale shall continue to be recognised.
Non-current assets held for sale – Presentation
23.10 An entity shall present a non-current asset classified as
held for sale and the assets of a disposal group classified as held for
sale separately from other assets in the balance sheet. The liabilities of
a disposal group classified as held for sale shall be presented
separately from other liabilities in the balance sheet. Those assets and
liabilities shall not be offset and presented as a single amount.
23.11 An entity shall not reclassify or re-present amounts
presented for non-current assets (or for the assets and liabilities of
disposal groups) classified as held for sale in the balance sheets for
prior periods to reflect the classification in the balance sheet for the
latest period presented.
Non-current assets held for sale – Presentation and Disclosure
23.12 The major classes of assets and liabilities classified as
held for sale shall be separately disclosed either on the face of the
balance sheet or in the notes.
23.13 An entity shall present separately any cumulative
income or expense recognised directly in equity relating to a non-
current asset (or disposal group) classified as held for sale.
23.14 An entity shall disclose the following information in the
period in which non-current assets have been either classified as held
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
for sale or sold
(a)
a description of the asset or disposal group;
(b)
a description of the facts and circumstances of the
sale, or leading to the expected disposal, and the expected
manner and timing of that disposal; and
(c)
the gain or loss recognised, if not separately
presented on the face of the income statement.
Section 24: Adoption of GAPEE
1
An entity shall apply this Section upon
(a)
First-time adoption of GAPEE, i.e. when it
prepares financial statements that conform to these Principles in
which the entity makes an explicit and unreserved statement in
those financial statements of compliance with the General
Accounting Principles in respect of certain Eligible Entities
related to the business of Insurance (GAPEE), and any of the
following circumstances prevail
(i)
the entity did not
present
financial
statements for previous periods; or
(ii)
the entity presented all its previous
financial statements in conformity with a financial
reporting framework other than GAPEE.
(b)
Subsequent adoption of GAPEE, i.e. when the
entity applied these Principles in previous financial reporting
periods but presented its most recent previous financial
statements in conformity with a financial reporting framework
other than GAPEE. Typically this would apply when, as a result
of the occurrence of specific circumstances an entity is
disqualified from applying these Principles, but the entity is
subsequently eligible to re-apply GAPEE in accordance with
these regulations and the entity opts to re-apply these
Principles, thus preparing financial statements that conform to
these Principles.
First-time adoption
24.2 Paragraph 4.1 of these Principles defines a complete set
of financial statements.
24.3 Paragraph 4.7 of these Principles requires a complete set
of financial statements to show comparative amounts in respect of the
previous comparable period for every item presented in the financial
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
statements and notes thereto. An entity may present comparative
information in respect of more than one comparable prior period.
Therefore, the date of an entity’s transition to these Principles is the
beginning of the earliest period for which the entity presents full
comparative information in accordance with GAPEE in its first
financial statements that conform to these Principles.
24.4 An entity shall prepare an opening GAPEE balance sheet
at the date of the transition to GAPEE. This is the starting point for its
accounting under GAPEE.
24.5 An entity shall use the same accounting policies in its
opening GAPEE balance sheet and throughout all periods presented in
the financial statements to which paragraph 24.1 refers. Those
accounting policies shall comply with the relevant Sections of these
Principles.
24.6
An entity shall, in its opening balance sheet
(a)
recognise all assets and
liabilities
whose
recognition is required by these Principles;
(b)
not recognise items as assets or liabilities if these
Principles do not permit such recognition;
(c)
reclassify items that it recognised under its
previous financial reporting framework as one type of asset,
liability or component of equity, but are a different type of
asset, liability or component of equity under these Principles;
and
(d)
apply these Principles in measuring all recognised
assets and liabilities.
24.7 The accounting policies that an entity uses in its opening
balance sheet under these Principles may differ from those that it used
for the same date using its previous financial reporting framework.
The resulting adjustments arise from transactions, other events or
conditions before the date of transition to these Principles. Therefore,
an entity shall recognise those adjustments directly in retained
earnings (or, if appropriate, another category of equity) at the date of
transition to these Principles.
24.8 If it is impracticable for an entity to restate the opening
balance sheet at the date of transition in accordance with these
Principles, the entity shall apply paragraphs 24.4 – 24.7 in the earliest
period for which it is practicable to do so, and shall disclose the date of
transition and the fact that data presented for prior periods are not
comparable. If it is impracticable for an entity to provide any
disclosures required by these Principles for any period before the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
period in which it prepares its first financial statements that conform to
these Principles, the omission shall be disclosed.
Subsequent adoption
24.9 Upon subsequent adoption an entity shall apply
paragraphs 24.4 – 24.7, and the term opening balance sheet shall be
taken to refer to the balance sheet as at the beginning of the earliest
period for which the entity presents full comparative information in
accordance with these Principles in the financial statements that
conform to these Principles.
Presentation and disclosure
24.10 An entity shall disclose the date of the transition to
GAPEE, and shall explain whether it is a case of first-time adoption or
subsequent adoption of GAPEE. In the latter case, an entity shall also
disclose the date of the end of the latest financial reporting period for
which the entity had previously prepared its financial statements in
accordance with these Principles.
24.11 An entity shall explain how the transition from its
previous financial reporting framework to these Principles affected its
reported financial position and financial performance. In particular, an
entity’s financial statements to which paragraph 24.1 refers shall
include
(a)
reconciliations of its equity reported under its
previous financial reporting framework to its equity under these
Principles for both of the following dates
(i)
the date of transition to these Principles;
and
(ii)
the end of the latest period presented in the
entity’s most recent annual financial statements under its
previous financial reporting framework; and
(b)
a reconciliation of the profit or loss reported under
its previous financial reporting framework for the latest period
in the entity’s most recent annual financial statements to its
profit or loss under these Principles for the same period.
Section 25: Insurance contracts
Overview and introduction
1 This Section shall apply to all insurance contracts,
including reinsurance contracts, that an entity issues and to
reinsurance contracts that it holds, except for specified contracts
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
covered by other Sections. It shall not apply to other assets and
liabilities of an insurer, such as financial assets and financial
liabilities within the scope of o ther Sections. Furthermore, it shall
not address accounting by policyholders.
25.2 For the purposes of this Section, the following
definitions shall apply
(a)
"cedant"
means
the
policyholder
under
a
reinsurance contract;
(b)
"deposit component" means a contractual
component that is not accounted for as a derivative under
Section 9: Financial assets, financial liabilities and equity and
would be within the scope of Section 9 if it were a separate
instrument;
(c)
"direct insurance contract" means an insurance
contract that is not a reinsurance contract;
(d)
"financial guarantee contract" means a contract
that requires the issuer to make specified payments to reimburse
the holder for a loss it incurs because a specified debtor fails to
make payment when due in accordance with the original or
modified terms of a debt instrument;
(e)
"financial risk" means the risk of a possible future
change in one (1) or more of a specified interest rate, financial
instrument price, commodity price, foreign exchange rate,
index of prices or rates, credit rating or credit index or other
variable, provided in the case of a non-financial variable that
the variable is not specific to a party to the contract;
(f)
"guaranteed benefits" means payments or other
benefits to which a particular policyholder or investor has an
unconditional right that is not subject to the contractual
discretion of the issuer;
(g)
"insurance asset" means an
insurer's
net
contractual rights under an insurance contract;
(h)
"insurance contract" means 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. (See "Appendix to
Section 25: Guidance on the definition of an insurance contract"
for further guidance on this definition.);
(i)
"insurance liability" means an
insurer's net
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
contractual obligations under an insurance contract;
(j)
"insurance risk" means risk, other than financial
risk, transferred from the holder of a contract to the issuer;
(k)
"insured event" means an uncertain future event
that is covered by an insurance contract and creates insurance
risk;
(l)
"insurer" means the party that has an obligation
under an insurance contract to compensate a policyholder if an
insured event occurs;
(m) "liability adequacy test" means an assessment of
whether the carrying amount of an insurance liability needs to
be increased or the carrying amount of related deferred
acquisition costs or related intangible assets decreased, based on
a review of future cash flows;
(n)
"policyholder" means a party that has a right to
compensation under an insurance contract if an insured event
occurs;
(o)
"reinsurance assets" means a
cedant's
net
contractual rights under a reinsurance contract;
(p)
"reinsurance contract" means an insurance
contract issued by one insurer (the reinsurer) to compensate
another insurer (the cedant) for losses on one or more contracts
issued by the cedant;
(q)
"reinsurer" means the party that has an obligation
under a reinsurance contract to compensate a cedant if an
insured event occurs;
(r)
"unbundle" means account for the components of a
contract as if they were separate contracts.
25.3
This Section shall
(a)
prohibit provisions for possible claims under
contracts that are not in existence at the end of the reporting
period such as catastrophe and equalisation provisions;
(b)
require a test for the adequacy of recognised
insurance liabilities and an impairment test for reinsurance
assets;
(c)
require an insurer to keep insurance liabilities in
its statement of financial position until they are discharged or
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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cancelled, or expire, and to present insurance liabilities without
offsetting them against related reinsurance assets.
25.4 This Section shall permit an insurer to change its
accounting policies for insurance contracts only where, as a result, its
financial statements present information that is more relevant and no
less reliable, or more reliable and no less relevant. In particular, an
insurer shall not introduce any of the following practices, although it
may continue using accounting policies that involve them
(a)
measuring
insurance
liabilities
on
an
undiscounted basis;
(b)
measuring contractual rights to future investment
management fees at an amount that exceeds their fair value as
implied by a comparison with current fees charged by other
market participants for similar services;
(c)
using non-uniform accounting policies for the
insurance liabilities of subsidiaries.
25.5 This Section shall permit the introduction of an
accounting policy that involves remeasuring designated insurance
liabilities consistently in each period to reflect current market interest
rates, and where the insurer so elects, other current estimates and
assumptions. Without this permission, an insurer would have been
required to apply the change in accounting policies consistently to all
similar liabilities.
25.6 An insurer need not change its accounting policies for
insurance contracts to eliminate excessive prudence. However, where
an insurer already measures its insurance contracts with sufficient
prudence, it should not introduce additional prudence.
25.7 There is a rebuttable presumption that an insurer's
financial statements will become less relevant and reliable where it
introduces an accounting policy that reflects future investment margins
in the measurement of insurance contracts.
25.8 When an insurer changes its accounting policies for
insurance liabilities, it may reclassify some or all financial assets as 'at
fair value through profit or loss'.
25.9
This Section shall
(a)
require an insurer to unbundle, t h a t i s account
separately for, deposit components of some insurance
contracts, to avoid the omission of assets and liabilities from its
statement of financial position;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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(b)
clarify the applicability of the practice sometimes
known as "shadow accounting";
(c)
permit an expanded presentation for insurance
contracts acquired in a business combination or portfolio
transfer.
25.10
This Section shall require disclosure to help users
understand
(a)
the amounts in the insurer's financial statements
that arise from insurance contracts;
(b)
the nature and extent of risks arising from
insurance contracts and financial instruments.
Scope
25.11 An entity shall apply this Section to insurance contracts,
including reinsurance contracts, that it issues and reinsurance contracts
that it holds.
25.12 An entity shall not apply this Section to
(a)
product warranties issued directly by a
manufacturer, dealer or retailer in terms of Section 6 and
Section 17;
(b)
employers' assets and liabilities under employee
benefit plans and retirement benefit obligations reported by
defined benefit retirement plans;
(c)
contractual rights or contractual obligations that
are contingent on the future use of, or right to use, a non-
financial item, for example, some licence fees, royalties,
contingent lease payments and similar items, as well as a
lessee's residual value guarantee embedded in a finance lease in
terms of Section 14, Section 6, and Section 11;
(d)
financial guarantee contracts unless the issuer has
previously asserted explicitly that it regards such contracts as
insurance contracts and has used accounting applicable to
insurance contracts, in which case the issuer may elect to apply
this Section to such financial guarantee contracts. The issuer
may make that election contract by contract, but the election for
each contract is irrevocable;
(e)
contingent consideration payable or receivable in
a business combination in terms of Section 21;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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(f)
direct insurance contracts that the entity holds
t h a t i s direct insurance contracts in which the entity is
the policyholder. However, a cedant shall apply this Section to
reinsurance contracts that it holds.
25.13 This Section describes any entity that issues an
insurance contract as an insurer, whether or not the issuer is regarded
as an insurer for legal or supervisory purposes.
25.14 A reinsurance contract shall be a type of insurance
contract. Accordingly, all references in this Section to insurance
contracts shall also apply to reinsurance contracts.
Unbundling of deposit components
25.15 Some insurance contracts contain both an insurance
component and a deposit component. In some cases, an insurer shall be
required or permitted to unbundle those components
(a)
unbundling shall be required where both the
following conditions are met
(i)
the insurer can measure the deposit
component, including any embedded surrender options,
separately, that is without considering the insurance
component;
(ii)
the insurer's accounting policies do not
otherwise require it to recognise all obligations and
rights arising from the deposit component;
(b)
unbundling shall be permitted, but not required,
where the insurer can measure the deposit component
separately as in paragraph (a)(i) but its accounting policies
require it to recognise all obligations and rights arising from the
deposit component, regardless of the basis used to measure
those rights and obligations;
(c)
unbundling shall be prohibited where an insurer
cannot measure the deposit component separately as in
paragraph (a)(i).
25.16 The following shall serve as an example of a case when
an insurer's accounting policies do not require it to recognise all
obligations arising from a deposit component. A cedant receives
compensation for losses from a reinsurer, but the contract obliges the
cedant to repay the compensation in future years. That obligation
arises from a deposit component. Where the cedant's accounting
policies would otherwise permit it to recognise the compensation as
income without recognising the resulting obligation, unbundling shall
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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be required.
25.17 To unbundle a contract, an insurer shall
(a)
apply this Section to the insurance component;
(b)
apply Section 9 to the deposit component.
Recognition and measurement
Exemption from some requirements of other Sections
25.18 Items 5.4 to 5.5 shall specify criteria for an entity to use
in developing an accounting policy if no Section applies specifically
to an item. However, this Section shall exempt an insurer from
applying those criteria to its accounting policies for
(a)
insurance contracts that it issues, including
related acquisition costs and related intangible assets, such as
those described in items 25.34 and 25.35; and
(b)
reinsurance contracts that it holds.
25.19 Nevertheless, this Section shall not exempt an insurer
from some implications of the criteria in items 5.4 to 5.5. Specifically,
an insurer
(a)
shall not recognise as a liability any provisions for
possible future claims, where those claims arise under
insurance contracts that are not in existence at the end of the
reporting period such as catastrophe provisions and equalisation
provisions;
(b)
shall carry out the
liability adequacy test
described in items 25.20 to 25.24;
(c)
shall remove an insurance liability or a part of an
insurance liability from its statement of financial position
when, and only when, it is extinguished, that is when the
obligation specified in the contract is discharged or cancelled or
expires;
(d)
shall not offset
(i)
reinsurance assets against the related
insurance liabilities; or
(ii)
income or expense from reinsurance
contracts against the expense or income from the
related insurance contracts;
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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(e)
shall consider whether its reinsurance assets are
impaired in terms of item 25.25.
Liability adequacy test
25.20 An insurer shall assess at the end of each reporting
period whether its recognised insurance liabilities are adequate, using
current estimates of future cash flows under its insurance contracts.
Where that assessment shows that the carrying amount of its
insurance liabilities (less related deferred acquisition costs and
related intangible assets, such as those discussed in items 25.34 and
25.35) is inadequate in the light of the estimated future cash flows, the
entire deficiency shall be recognised in profit or loss.
25.21 Where an insurer applies a liability adequacy test that
meets specified minimum requirements, this Section shall not impose
further requirements. The minimum requirements shall be the
following
(a)
the test s h a l l consider current estimates of all
contractual cash flows, and of related cash flows such as
claims handling costs, as well as cash flows resulting from
embedded options and guarantees;
(b)
where the test shows that the liability is
inadequate, the entire deficiency shall be recognised in profit or
loss.
25.22 Where an insurer's accounting policies do not require a
liability adequacy test that meets the minimum requirements of item
25.21, the insurer shall
(a)
determine the carrying amount of the relevant
insurance liabilities * less the carrying amount of
(i)
any related deferred acquisition costs; and
(ii)
any related intangible assets, such as those
acquired in a business combination or portfolio transfer
in terms of items 25.34 and 25.35. However, related
reinsurance assets shall not considered because an
insurer accounts for them separately in terms of
paragraph 25.25.
(b)
determine whether the amount described in
paragraph (a) is less than the carrying amount that would be
* The relevant insurance liabilities are those insurance liabilities (and related
deferred acquisition costs and related intangible assets) for which the insurer's
accounting policies do not require a liability adequacy test that meets the
minimum requirements of item 25.21.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
required if the relevant insurance liabilities were within the
scope of Section 17. Where it is less, the insurer shall recognise
the entire difference in profit or loss and decrease the carrying
amount of the related deferred acquisition costs or related
intangible assets or increase the carrying amount of the relevant
insurance liabilities.
25.23 Where an insurer's liability adequacy test meets the
minimum requirements of item 25.21, the test shall be applied at the
level of aggregation specified in that test. Where its liability adequacy
test does not meet those minimum requirements, the comparison
described in item 25.22 shall be made at the level of a portfolio of
contracts that are subject to broadly similar risks and managed
together as a single portfolio.
25.24 The amount described in item 25.22(b) that is the result
of applying Section 17 shall reflect future investment margins in terms
of item 25.32 where the amount described in item 25.22(a) also
reflects those margins.
Impairment of reinsurance assets
25.25 Where a cedant's reinsurance asset is impaired, the
cedant shall reduce its carrying amount accordingly and recognise that
impairment loss in profit or loss. A reinsurance asset shall be impaired
where
(a)
there is objective evidence, as a result of an event
that occurred after initial recognition of the reinsurance asset,
that the cedant may not receive all amounts due to it under the
terms of the contract; and
(b)
that event has a reliably measurable impact on the
amounts that the cedant will receive from the reinsurer.
Changes in accounting policies
25.26 Items 25.27 to 25.33 shall apply both to changes made
by an insurer that already applies GAPEE and to changes made by an
insurer adopting GAPEE for the first time.
25.27 An insurer may change its accounting policies for
insurance contracts where the change makes the financial statements
more relevant to the economic decision-making needs of users and
no less reliable, or more reliable and no less relevant to those
needs. An insurer shall judge relevance and reliability by the
criteria in Section 5.
25.28 To justify changing its accounting policies for insurance
contracts, an insurer shall show that the change brings its financial
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statements closer to meeting the criteria in Section 5, but the change
need not achieve full compliance with those criteria. The following
specific issues are discussed below
(a)
current interest rates in item 25.29;
(b)
continuation of existing practices in item 25.30;
(c)
prudence in item 25.31;
(d)
future investment margins in item 25.32; and
(e)
shadow accounting in item 25.33.
25.29 Current market interest rates: An insurer shall be
permitted, but not required, to change its accounting policies so that it
remeasures designated insurance liabilities * to reflect current market
interest rates and recognises changes in those liabilities in profit or
loss. At that time, it may also introduce accounting policies that
require other current estimates and assumptions for the designated
liabilities. The election in this item shall permit an insurer to change its
accounting policies for designated liabilities, without applying those
policies consistently to all similar liabilities as Section 5 would
otherwise require. Where an insurer designates liabilities for this
election, it shall continue to apply current market interest rates, and,
where applicable, the other current estimates and assumptions,
consistently in all periods to all these liabilities until they are
extinguished.
25.30 Continuation of existing practices: An insurer may
continue the following practices, but the introduction of any of them
shall not satisfy the provisions of item 25.27
(a)
measuring
insurance
liabilities
on
an
undiscounted basis;
(b)
measuring contractual rights to future investment
management fees at an amount that exceeds their fair value as
implied by a comparison with current fees charged by other
market participants for similar services. It shall be likely that
the fair value at inception of those contractual rights equals the
origination costs paid, unless future investment management
fees and related costs are out of line with market comparables;
(c)
using non-uniform accounting policies for the
insurance contracts, and related deferred acquisition costs and
related intangible assets, if any, of subsidiaries, except as
permitted by item 25.29. Where those accounting policies are
* In this item, insurance liabilities include related deferred acquisition costs and
related intangible assets, such as those provided for in items 25.34 and 25.35.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
not uniform, an insurer may change them if the change does not
make the accounting policies more diverse and also satisfies
the other requirements in this Section.
25.31 Prudence: An insurer need not change its accounting
policies for insurance contracts to eliminate excessive prudence.
However, where an insurer already measures its insurance contracts
with sufficient prudence, it shall not introduce additional prudence.
25.32 Future investment margins: An insurer need not change
its accounting policies for insurance contracts to eliminate future
investment margins. However, there shall be a rebuttable
presumption that an insurer's financial statements will become less
relevant and reliable where it introduces an accounting policy that
reflects future investment margins in the measurement of insurance
contracts, unless those margins affect the contractual payments. Two
examples of accounting policies that reflect those margins are
(a)
using a discount rate that reflects the estimated
return on the insurer's assets; or
(b)
projecting the returns on those assets at an
estimated rate of return, discounting those projected returns at a
different rate and including the result in the measurement of the
liability.
An insurer may overcome the rebuttable presumption described
above where the other components of a change in accounting policies
increase the relevance and reliability of its financial statements
sufficiently to outweigh the decrease in relevance and reliability
caused by the inclusion of future investment margins. For example,
suppose that an insurer's existing accounting policies for insurance
contracts involve excessively prudent assumptions set at inception and
a discount rate prescribed by a regulator without direct reference to
market conditions, and ignore some embedded options and guarantees.
The insurer might make its financial statements more relevant and no
less reliable by switching to a comprehensive investor-oriented basis
of accounting that is widely used and involves
(a)
current estimates and assumptions;
(b)
a reasonable, but not excessively prudent,
adjustment to reflect risk and uncertainty;
(c)
measurements that reflect both the intrinsic value
and time value of embedded options and guarantees; and
(d)
a current market discount rate, even if that
discount rate reflects the estimated return on the insurer's assets.
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
In some measurement approaches, the discount rate shall be
used to determine the present value of a future profit margin. That
profit margin shall then be attributed to different periods using a
formula. In those approaches, the discount rate shall affect the
measurement of the liability only indirectly. In particular, the use of a
less appropriate discount rate shall have a limited or no effect on the
measurement of the liability at inception. However, in other
approaches, the discount rate shall determine the measurement of the
liability directly. In the latter case, because the introduction of an
asset-based discount rate has a more significant effect, it shall be
highly unlikely that an insurer could overcome the rebuttable
presumption described above.
25.33 Shadow accounting: In some accounting models,
realised gains or losses on an insurer's assets shall have a direct effect
on the measurement of some or all of
(a)
its insurance liabilities;
(b)
related deferred acquisition costs; and
(c)
related intangible assets, such as those described
in items 25.34 and 25.35.
An insurer shall be permitted, but not required, to change its
accounting policies so that a recognised but unrealised gain or loss on
an asset affects those measurements in the same way that a realised
gain or loss does. The related adjustment to the insurance liability or
deferred acquisition costs or intangible assets shall be recognised in
other comprehensive income where the unrealised gains or losses are
recognised in other comprehensive income. This practice shall
sometimes be described as "shadow accounting".
Insurance contracts acquired in a business combination or
portfolio transfer
25.34 To comply with Section 21 an insurer shall, at the
acquisition date, measure at fair value the insurance liabilities
assumed and insurance assets acquired in a business combination.
However, an insurer shall be permitted, but not required, to use an
expanded presentation that splits the fair value of acquired insurance
contracts into two components
(a)
a liability measured in accordance with the
insurer's accounting policies for insurance contracts that it
issues; and
(b)
an intangible asset, representing the difference
between
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(i)
the fair value of the contractual insurance
rights acquired and insurance obligations assumed; and
(ii)
the amount described in paragraph (a);
the subsequent measurement of this asset shall be
consistent with the measurement of the related insurance
liability.
25.35 An insurer acquiring a portfolio of insurance contracts
may use the expanded presentation described in item 25.34.
25.36 The intangible assets described in items 25.34 and 25.35
shall be excluded from the scope of Section 12 and Section 11.
However, Section 12 and Section 11 shall apply to customer lists and
customer relationships reflecting the expectation of future contracts
that are not part of the contractual insurance rights and contractual
insurance obligations that existed at the date of a business combination
or portfolio transfer.
Disclosure
Explanation of recognised amounts
25.37 An insurer shall disclose information that identifies
and explains the amounts in its financial statements arising from
insurance contracts.
25.38 To comply with item 25.37, an insurer shall disclose
(a)
its accounting policies for insurance contracts and
related assets, liabilities, income and expense;
(b)
the recognised assets, liabilities, income and
expense, and if it presents its statement of cash flows using the
direct method, cash flows, arising from insurance contracts.
Furthermore, where the insurer is a cedant, it shall disclose
(i)
gains and losses recognised in profit or loss
on buying reinsurance; and
(ii)
where the cedant defers and amortises
gains and losses arising on buying reinsurance, the
amortisation for the period and the amounts remaining
unamortised at the beginning and end of the period;
(c)
the process used to determine the assumptions
that have the greatest effect on the measurement of the
recognised amounts described in paragraph (b). When
practicable, an insurer shall also give quantified disclosure of
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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those assumptions;
(d)
the effect of changes in assumptions used to
measure insurance assets and insurance liabilities, showing
separately the effect of each change that has a material effect on
the financial statements;
(e)
reconciliations of changes in insurance liabilities,
reinsurance assets and, if any, related deferred acquisition costs.
Nature and extent of risks arising from insurance contracts
25.39 An insurer shall disclose information that enables users
of its financial statements to evaluate the nature and extent of risks
arising from insurance contracts.
25.40 To comply with item 25.39, an insurer shall disclose
(a)
its objectives, policies and processes for
managing risks arising from insurance contracts and the
methods used to manage those risks;
(b)
information about insurance risk, both before and
after risk mitigation by reinsurance, including information
about
(i)
sensitivity to insurance risk in terms of
item 25.41;
(ii)
concentrations of insurance risk, including
a description of how management determines
concentrations and a description of the shared
characteristic that identifies each concentration for
example the type of insured event, geographical area, or
currency;
(iii) actual claims compared with previous
estimates that is claims development. The disclosure
about claims development shall go back to the period
when the earliest material claim arose for which there is
still uncertainty about the amount and timing of the
claims payments, but need not go back more than ten
(10) years. An insurer need not disclose this information
for claims for which uncertainty about the amount and
timing of claims payments is typically resolved within
one (1) year;
(c)
information about credit risk, liquidity risk and
market risk that items 25.47 to 25.53 would require where the
insurance contracts were to be considered to fall within the
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
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scope of those items. However
(i)
an insurer need not provide the maturity
analyses required by paragraphs 25.50(a) and (b) where
it discloses information about the estimated timing of the
net cash outflows resulting from recognised insurance
liabilities instead. This may take the form of an analysis,
by estimated timing, of the amounts recognised in the
statement of financial position;
(ii)
where an insurer uses an alternative
method to manage sensitivity to market conditions, such
as an embedded value analysis, it may use that sensitivity
analysis to meet the requirement in paragraph 25.51(a).
Such an insurer shall also provide the disclosures
required by item 25.52.
25.41
To comply with item 25.40(c)(i), an insurer shall
disclose as follows
(a)
a sensitivity analysis that shows how profit or
loss and equity would have been affected where changes in the
relevant risk variable that were reasonably possible at the end of
the reporting period had occurred, the methods and assumptions
used in preparing the sensitivity analysis, and any changes from
the previous period in the methods and assumptions used.
However, where an insurer uses an alternative method to
manage sensitivity to market conditions, such as an embedded
value analysis, it may meet this requirement by disclosing that
alternative sensitivity analysis and the disclosures required by
item 25.52; or
(b)
qualitative information about sensitivity, and
information about those terms and conditions of insurance
contracts that have a material effect on the amount, timing and
uncertainty of the insurer's future cash flows.
Nature and extent of risks arising from financial instruments
25.42 An insurer shall disclose information that enables users
of its financial statements to evaluate the nature and extent of risks
arising from financial instruments to which the entity is exposed at the
end of the reporting period. As per item 25.43, an insurer shall also
disclose certain information about credit risk, liquidity risk and market
risk that items 25.44 to 25.53 below require for financial instruments
as if the insurance contracts it issues were to be considered as financial
instruments.
25.43 (1)
The disclosures required by items 25.44 to 25.53
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focus on the risks that arise from financial instruments and how they
have been managed. These risks typically include, but are not limited
to, credit risk, liquidity risk and market risk.
(2)
Providing qualitative disclosures in the context of
quantitative disclosures enables users to link related disclosures and
hence form an overall picture of the nature and extent of risks arising
from financial instruments. The interaction between qualitative and
quantitative disclosures contributes to disclosure of information in a
way that better enables users to evaluate an entity’s exposure to risks.
Qualitative disclosures
25.44 For each type of risk arising from financial instruments,
an entity shall disclose
(a)
the exposures to risk and how they arise;
(b)
its objectives, policies and processes for
managing the risk and the methods used to measure the risk;
and
(c)
any changes in paragraphs (a) or (b) from the
previous period.
Quantitative disclosures
25.45 For each type of risk arising from financial instruments,
an entity shall disclose
(a)
summary quantitative data about its exposure to
that risk at the end of the reporting period. This disclosure shall
be based on the information provided internally to key
management personnel of the entity, for example the entity's
board of directors or chief executive officer;
(b)
the disclosures required by items 25.47 to 25.53,
to the extent not provided in accordance with paragraph (a);
(c)
concentrations of risk if not apparent from the
disclosures made in accordance with paragraphs (a) and (b).
25.46 Where the quantitative data disclosed as at the end of the
reporting period are unrepresentative of an entity's exposure to risk
during the period, an entity shall provide further information that is
representative.
Credit risk
25.47 An entity shall disclose by class of financial instrument
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
(a)
the amount that best represents its maximum
exposure to credit risk at the end of the reporting period without
taking account of any collateral held or other credit
enhancements. This disclosure shall not be required for
financial instruments whose carrying amount best represents
the maximum exposure to credit risk;
(b)
a description of collateral held as security and
other credit enhancements, and their financial effect for
example quantification of the extent to which collateral and
other credit enhancements mitigate credit risk, in respect of the
amount that best represents the maximum exposure to credit
risk, whether disclosed in accordance with paragraph (a) or
represented by the carrying amount of a financial instrument;
(c)
information about the credit quality of financial
assets that are neither past due nor impaired; and
(d)
the carrying amount of financial assets that would
otherwise be past due or impaired whose terms have been
renegotiated.
25.48 An entity shall disclose by class of financial asset
(a)
an analysis of the age of financial assets that are
past due as at the reporting date but not impaired;
(b)
an analysis of financial assets that are individually
determined to be impaired as at the reporting date, including the
factors the entity considered in determining that they are
impaired; and
(c)
for the amounts disclosed in items 25.47(a) and
(b), a description of collateral held by the entity as security and
other credit enhancements and, unless impracticable, an
estimate of their fair value.
25.49 When an entity obtains financial or non-financial assets
during the period by taking possession of collateral it holds as security
or calling on other credit enhancements, for example guarantees), and
such assets meet the recognition criteria in other Sections, an entity
shall disclose for such assets held at the reporting date
(a)
the nature and carrying amount of the assets; and
(b)
when the assets are not readily convertible into
cash, its policies for disposing of such assets or for using them
in its operations.
Liquidity risk
PRINCIPLES IN RESPECT OF CERTAIN ELIGIBLE
ENTITIES RELATED TO THE BUSINESS OF INSURANCE)
25.50 An entity shall disclose
(a)
a maturity analysis for non-derivative financial
liabilities that shows the remaining contractual maturities;
(b)
a maturity analysis for derivative financial
liabilities. The maturity analysis shall include the remaining
contractual maturities for those derivative financial liabilities
for which contractual maturities are essential for an
understanding of the timing of the cash flows;
(c)
a description of how it manages the liquidity risk
inherent in paragraphs (a) and (b).
Market risk
Sensitivity analysis
25.51
Unless an entity complies with item 25.52, it shall
disclose
(a)
a sensitivity analysis for each type of market risk
to which the entity is exposed at the end of the reporting period,
showing how profit or loss and equity would have been affected
by changes in the relevant risk variable that were reasonably
possible at that date;
(b)
the methods and assumptions used in preparing
the sensitivity analysis; and
(c)
changes from the previous period in the methods
and assumptions used, and the reasons for such changes.
25.52 Where an entity prepares a sensitivity analysis, such as
value-at-risk, that reflects interdependencies between risk variables for
example interest rates and exchange rates and uses it to manage
financial risks, it may use that sensitivity analysis in place of the
analysis specified initem 25.51. The entity shall also disclose
(a)
an explanation of the method used in preparing
such a sensitivity analysis, and of the main parameters and
assumptions underlying the data provided; and
(b)
an explanation of the objective of the method used
and of limitations that may result in the information not fully
reflecting the fair value of the assets and liabilities involved.
Other market risk disclosures
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25.53 When the sensitivity analyses disclosed in accordance
with items 25.51 or 25.52 are unrepresentative of a risk inherent in a
financial instrument for example because the year-end exposure does
not reflect the exposure during the year, the entity shall disclose that
fact and the reason it believes the sensitivity analyses are
unrepresentative.
Re-designation of financial assets
25.54 When an insurer changes its accounting policies for
insurance liabilities, it shall be permitted, but not required, to
reclassify some or all of its financial assets so that they are measured
at fair value through profit or loss. This reclassification shall be
permitted where an insurer changes accounting policies when it first
applies this Section and where it makes a subsequent policy change
permitted by item 25.27. The reclassification is a change in accounting
policy and Section 5 shall apply.
Appendix to Section 25: Guidance on the definition of an
insurance contract
A1. This appendix shall provide guidance on the definition
of an insurance contract as provided for in Section 25.2. It addresses
the following issues
(a)
the term "uncertain future event" (in terms of
items A2 to A4);
(b)
payments in kind in terms of items A5 to A7;
(c)
insurance risk and other risks in terms of items A8
toA17;
(d)
examples of insurance contracts in terms of items
A18 toA21;
(e)
significant insurance risk in terms of items A22 to
A28; and
(f)
changes in the level of insurance risk in terms of
items A29 and A30.
Uncertain future event
A2. Uncertainty or risk shall be the essence of an insurance
contract. Accordingly, at least one of the following shall be uncertain
at the inception of an insurance contract
(a)
whether an insured event will occur;
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(b)
when it will occur; or
(c)
how much the insurer will need to pay if it occurs.
A3. In some insurance contracts, the insured event shall be
the discovery of a loss during the term of the contract, even where the
loss arises from an event that occurred before the inception of the
contract. In other insurance contracts, the insured event shall be an
event that occurs during the term of the contract, even where the
resulting loss is discovered after the end of the contract term.
A4. Some insurance contracts shall cover events that have
already occurred, but whose financial effect is still uncertain. An
example shall b e a reinsurance contract that covers the direct
insurer against adverse development of claims already reported by
policyholders. In such contracts, the insured event shall be the
discovery of the ultimate cost of those claims.
Payments in kind
A5. Some insurance contracts shall require or permit
payments to be made in kind. An example is when the insurer replaces
a stolen article directly, instead of reimbursing the policyholder.
Another example is when an insurer uses its own hospitals and medical
staff to provide medical services covered by the contracts.
A6. Some fixed-fee service contracts in which the level of
service depends on an uncertain event sh a l l meet the definition of an
insurance contract in this Section but shall not be regulated as
insurance contracts in some countries. One example is a maintenance
contract in which the service provider agrees to repair specified
equipment after a malfunction. The fixed service fee shall be based
on the expected number of malfunctions, but it is uncertain whether a
particular machine will break down. The malfunction of the
equipment adversely shall affect its owner and the contract
compensates the owner, in kind, rather than cash. Another example is
a contract for car breakdown services in which the provider agrees, for
a fixed annual fee, to provide roadside assistance or tow the car to a
nearby garage. The latter contract may meet the definition of an
insurance contract even where the provider does not agree to carry out
repairs or replace parts.
A7. Applying the Section to the contracts described in item
A6 is likely to be no more burdensome than applying the Section that
would be applicable if such contracts were outside the scope of this
Section
(a)
there are unlikely to be material liabilities for
malfunctions and breakdowns that have already occurred;
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(b)
where Section 6 is applied, the service provider
would recognise revenue when or as it transfers services to the
customer. That approach shall also be acceptable under this
Section, which permits the service provider
(i)
to continue its existing accounting policies for
these contracts unless they involve practices prohibited by item
25.19; and
(ii)
to improve its accounting policies if so permitted
by items 25.27 to 25.33;
(c)
the service provider considers whether the cost
of meeting its contractual obligation to provide services
exceeds the revenue received in advance. To do this, it s h a l l
apply the liability adequacy test described in items 25.20 to
25.24. Where this Section did not apply to these contracts, the
service provider shall apply Section 17 to determine whether
the contracts are onerous;
(d)
for these contracts, the disclosure requirements in
this Section are unlikely to add significantly to disclosures
required by other Sections.
Distinction between insurance risk and other risks
A8. The definition of an insurance contract shall refer to
insurance risk, which this Section defines as risk, other than financial
risk, transferred from the holder of a contract to the issuer. A contract
that exposes the issuer to financial risk without significant insurance
risk shall not be an insurance contract.
A9. The definition of financial risk in item 25.2 s h a l l
include a list of financial and non-financial variables. That list shall
include non-financial variables that are not specific to a party to the
contract, such as an index of earthquake losses in a particular region
or an index of temperatures in a particular city. It shall exclude non-
financial variables that are specific to a party to the contract, such as
the occurrence or non-occurrence of a fire that damages or destroys an
asset of that party. Furthermore, the risk of changes in the fair value of
a non-financial asset shall not be a financial risk where the fair value
reflects not only changes in market prices for such assets (a
financial variable) but also the condition of a specific non-financial
asset held by a party to a contract (a non-financial variable). For
example, where a guarantee of the residual value of a specific car
exposes the guarantor to the risk of changes in the car's physical
condition, that risk shall be an insurance risk, not a financial risk.
A10. Some contracts shall expose the issuer to financial risk,
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in addition to significant insurance risk. For example, many life
insurance contracts both guarantee a minimum rate of return to
policyholders, thus creating financial risk, and promise death benefits
that at some times significantly exceed the policyholder's account
balance, t hus creating insurance risk in the form of mortality risk.
Such contracts shall be insurance contracts.
A11. Under some contracts, an insured event shall trigger the
payment of an amount linked to a price index. Such contracts shall be
insurance contracts
Provided that the payment that is contingent on the
insured event can be significant. For example, a life-contingent
annuity linked to a cost-of-living index shall transfer insurance risk
because payment is triggered by an uncertain event, that is the survival
of the annuitant. The link to the price index shall be an embedded
derivative, but it shall also transfer insurance risk. Where the resulting
transfer of insurance risk is significant, the embedded derivative shall
meet the definition of an insurance contract, in which case it need not
be separated and measured at fair value.
A12. The definition of insurance risk shall refer to risk that the
insurer accepts from the policyholder. In other words, insurance risk
s ha l l b e a pre-existing risk transferred from the policyholder to the
insurer. Thus, a new risk created by the contract shall not be an
insurance risk.
A13. The definition of an insurance contract shall refer to an
adverse effect on the policyholder. The definition shall not limit the
payment by the insurer to an amount equal to the financial impact
of the adverse event. For example, the definition shall not exclude
'new-for-old' coverage that pays the policyholder sufficient to permit
replacement of a damaged old asset by a new asset. Similarly, the
definition shall not limit payment under a term life insurance
contract to the financial loss suffered by the deceased's dependants,
nor shall it preclude the payment of predetermined amounts to
quantify the loss caused by death or an accident.
A14. Some contracts shall require a payment when a specified
uncertain event occurs, but shall not require an adverse effect on the
policyholder as a precondition for payment. Such a contract shall not
be an insurance contract even when the holder uses the contract to
mitigate an underlying risk exposure. For example, when the holder
uses a derivative to hedge an underlying non-financial variable that is
correlated with cash flows from an asset of the entity, the derivative
shall not be an insurance contract because payment is not conditional
on whether the holder is adversely affected by a reduction in the cash
flows from the asset. Conversely, the definition of an insurance
contract shall refer to an uncertain event for which an adverse effect on
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the policyholder is a contractual precondition for payment. This
contractual precondition shall not require the insurer to investigate
whether the event actually caused an adverse effect, but shall permit
the insurer to deny payment where it is not satisfied that the event
caused an adverse effect.
A15. Lapse or persistency risk, that is the risk that the
counterparty will cancel the contract earlier or later than the issuer had
expected in pricing the contract, shall not be an insurance risk because
the payment to the counterparty is not contingent on an uncertain
future event that adversely affects the counterparty. Similarly, expense
risk, that is the risk of unexpected increases in the administrative costs
associated with the servicing of a contract, rather than in costs
associated with insured events, shall not be an insurance risk because
an unexpected increase in expenses does not adversely affect the
counterparty.
A16. Therefore, a contract that exposes the issuer to lapse risk,
persistency risk or expense risk shall not be an insurance contract
unless it also exposes the issuer to insurance risk. However, where the
issuer of that contract mitigates that risk by using a second contract to
transfer part of that risk to another party, the second contract shall
expose that other party to insurance risk.
A17. An insurer may accept significant insurance risk from
the policyholder only when the insurer is an entity separate from the
policyholder. In the case of a mutual insurer, the mutual shall accept
risk from each policyholder and pools that risk. Although
policyholders bear that pooled risk collectively in their capacity as
owners, the mutual shall still accept the risk that is the essence of an
insurance contract.
Examples of insurance contracts
A18. The following are examples of contracts that are
insurance contracts, when the transfer of insurance risk is significant
(a)
insurance against theft or damage to property;
(b)
insurance against product liability, professional
liability, civil liability or legal expenses;
(c)
life insurance and prepaid funeral plans, although
death is certain, it is uncertain when death will occur or, for
some types of life insurance, whether death will occur within
the period covered by the insurance;
(d)
life-contingent annuities and pensions, t h a t i s
contracts that provide compensation for the uncertain future
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event, that is the survival of the annuitant or pensioner, to assist
the annuitant or pensioner in maintaining a given standard of
living, which would otherwise be adversely affected by his or
her survival;
(e)
disability and medical cover;
(f)
surety bonds, fidelity bonds, performance bonds
and bid bonds, that is contracts that provide compensation
when another party fails to perform a contractual obligation, for
example an obligation to construct a building;
(g)
credit insurance that provides for specified
payments to be made to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due
under the original or modified terms of a debt instrument.
These contracts may have various legal forms, such as that of
a guarantee, some types of letter of credit, a credit derivative
default contract or an insurance contract. However, although
these contracts meet the definition of an insurance contract,
they shall not fall within the scope of this Section (see item
25.12(d)). Nevertheless, when an issuer of financial guarantee
contracts has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting
applicable to insurance contracts, the issuer may elect to apply
either another applicable relevant Section or this Section to
such financial guarantee contracts;
(h)
product warranties - product warranties issued by
another party for goods sold by a manufacturer, dealer or
retailer shall b e within the scope of this Section. However,
product warranties issued directly by a manufacturer, dealer or
retailer shall b e outside its scope, because they shall be within
the scope of Section 6 and Section 17;
(i)
title insurance, that is insurance against the
discovery of defects in title to land that were not apparent when
the insurance contract was written. In this case, the insured
event shall be the discovery of a defect in the title, not the
defect itself;
(j)
travel assistance, that is the compensation in cash
or in kind to policyholders for losses suffered while they are
travelling. Items A6 and A7 shall discuss some contracts of this
kind;
(k)
catastrophe bonds that provide for reduced
payments of principal, interest or both when a specified event
adversely affects the issuer of the bond, unless the specified
event does not create significant insurance risk, for example
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when the event is a change in an interest rate or foreign
exchange rate;
(l)
insurance swaps and other contracts that require a
payment based on changes in climatic, geological or other
physical variables that are specific to a party to the contract;
(m)
reinsurance contracts.
A19. The following shall be examples of items that are not
insurance contracts
(a)
investment contracts that have the legal form of
an insurance contract but do not expose the insurer to
significant insurance risk, for example life insurance
contracts in which the insurer bears no significant mortality
risk. Such contracts shall be non-insurance financial
instruments or service contracts, i n t e r m s o f i t e m s A20
and A21;
(b)
contracts that have the legal form of insurance,
but pass all significant insurance risk back to the policyholder
through non-cancellable and enforceable mechanisms that
adjust future payments by the policyholder as a direct result
of insured losses, for example some financial reinsurance
contracts or some group contracts. Such contracts are normally
non-insurance financial instruments or service contracts in
terms of items A20 and A21;
(c)
self-insurance, in other words retaining a risk that
could have been covered by insurance such that there is no
insurance contract because there is no agreement with another
party;
(d)
contracts such as gambling contracts that require
a payment when a specified uncertain future event occurs, but
do not require, as a contractual precondition for payment, that
the event adversely affects the policyholder. However, this does
not preclude the specification of a predetermined payout to
quantify the loss caused by a specified event such as death or an
accident (see also paragraph A13);
(e)
derivatives that expose one ( 1 ) party to
financial risk but not insurance risk, because they require that
party to make payment based solely on changes in one(1) or
more of a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index or other variable, provided in
the case of a non-financial variable that the variable is not
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specific to a party to the contract;
(f)
a credit-related guarantee, or letter of credit, credit
derivative default contract or credit insurance contract, that
requires payments even where the holder has not incurred a loss
on the failure of the debtor to make payments when due;
(g)
contracts that require a payment based on a
climatic, geological or other physical variable that is not
specific to a party to the contract, which are commonly
described as weather derivatives;
(h)
catastrophe bonds that provide for reduced
payments of principal, interest or both, based on a climatic,
geological or other physical variable that is not specific to a
party to the contract.
A20. When the contracts described in item A19 create
financial assets or financial liabilities, they shall be within the scope of
Section 9. Among other things, this means that the parties to the
contract use what is sometimes called deposit accounting, which shall
involve the following
(a)
one (1) party recognises the consideration
received as a financial liability, rather than as revenue; and
(b)
the other party recognises the consideration paid
as a financial asset, rather than as an expense.
A21. When the contracts described in item A19 do not create
financial assets or financial liabilities, Section 6 shall apply.
Significant insurance risk
A22. A contract shall be an insurance contract only when it
transfers significant insurance risk. Items A8 to A21 discuss
insurance risk. The following paragraphs discuss the assessment of
whether insurance risk is significant.
A23. Insurance risk shall be significant only w h e n an
insured event could cause an insurer to pay significant additional
benefits in any scenario, excluding scenarios that lack commercial
substance, such that they have no discernible effect on the economics
of the transaction. When significant additional benefits would be
payable in scenarios that have commercial substance, the condition in
the previous sentence may be met even when the insured event is
extremely unlikely or even when the expected, that is the probability-
weighted, present value of contingent cash flows is a small proportion
of the expected present value of all the remaining contractual cash
flows.
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A24. The additional benefits described in item A23 shall refer
to amounts that exceed those that would be payable when no insured
event occurred, t h a t i s excluding scenarios that lack commercial
substance. Those additional amounts shall include claims handling
and claims assessment costs, but shall exclude
(a)
the loss of the ability to charge the policyholder
for future services. For example, in an investment-linked life
insurance contract, the death of the policyholder shall mean that
the insurer can no longer perform investment management
services and collect a fee for doing so. However, this economic
loss for the insurer shall not reflect insurance risk, just as a
mutual fund manager shall not take on insurance risk in relation
to the possible death of the client. Therefore, the potential loss
of future investment management fees shall not be relevant in
assessing how much insurance risk is transferred by a contract;
(b)
waiver on death of charges that would be made on
cancellation or surrender. Because the contract brought those
charges into existence, the waiver of these charges shall not
compensate the policyholder for a pre-existing risk.
Hence, they shall not be relevant in assessing how much
insurance risk is transferred by a contract;
(c)
a payment conditional on an event that does not
cause a significant loss to the holder of the contract. For
example, consider a contract that requires the issuer to pay
one million ( 1 , 0 0 0 , 0 0 0 ) currency units when an asset
suffers physical damage causing an insignificant economic loss
of one (1) currency unit to the holder. In this contract, the
holder transfers to the insurer the insignificant risk of losing
one (1) currency unit. At the same time, the contract creates
non-insurance risk that the issuer will need to pay nine hundred
ninety-nine thousand, nine hundred ninety-nine (999,999)
currency units when the specified event occurs. Because the
issuer does not accept significant insurance risk from the
holder, this contract shall not be an insurance contract;
(d)
possible reinsurance recoveries. The insurer shall
account for these separately.
A25. An insurer shall assess the significance of insurance risk
contract by contract, rather than by reference to materiality to the
financial statements * .Thus, insurance risk may be significant even
where there is a minimal probability of material losses for a whole
* For this purpose, contracts entered into simultaneously with a single
counterparty (or contracts that are otherwise interdependent) form a single
contract.
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book of contracts. This contract-by-contract assessment makes it
easier to classify a contract as an insurance contract. However, where
a relatively homogeneous book of small contracts is known to
consist of contracts that all transfer insurance risk, an insurer need not
examine each contract within that book to identify a few non-
derivative contracts that transfer insignificant insurance risk.
A26. It follows from items A23 to A25 that when a contract
pays a death benefit exceeding the amount payable on survival, the
contract shall be an insurance contract unless the additional death
benefit is insignificant (judged by reference to the contract rather than
to an entire book of contracts). As noted in item A24(b), the waiver on
death of cancellation or surrender charges shall not be included in
this assessment when this waiver does not compensate the
policyholder for a pre-existing risk. Similarly, an annuity contract that
pays out regular sums for the rest of a policyholder's life shall be an
insurance contract, unless the aggregate life-contingent payments are
insignificant.
A27. Item A23 s h a l l refer to additional benefits. These
additional benefits may include a requirement to pay benefits earlier
when the insured event occurs earlier and the payment is not adjusted
for the time value of money. An example is whole life insurance for a
fixed amount, in other words, insurance that provides a fixed death
benefit whenever the policyholder dies, with no expiry date for the
cover. It is certain that the policyholder will die, but the date of death is
uncertain. The insurer will suffer a loss on those individual contracts
for which policyholders die early, even when there is no overall loss
on the whole book of contracts.
A28. Where an insurance contract is unbundled into a deposit
component and an insurance component, the significance of insurance
risk transfer shall be assessed by reference to the insurance
component. The significance of insurance risk transferred by an
embedded derivative shall be assessed by reference to the embedded
derivative.
Changes in the level of insurance risk
A29. Some contracts do not transfer any insurance risk to the
issuer at inception, although they do transfer insurance risk at a later
time. For example, consider a contract that provides a specified
investment return and includes an option for the policyholder to use
the proceeds of the investment on maturity to buy a life-contingent
annuity at the current annuity rates charged by the insurer to other new
annuitants when the policyholder exercises the option. The contract
transfers no insurance risk to the issuer until the option is exercised,
because the insurer remains free to price the annuity on a basis that
reflects the insurance risk transferred to the insurer at that time.
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However, if the contract specifies the annuity rates (or a basis for
setting the annuity rates), the contract transfers insurance risk to the
issuer at inception.
A30. A contract that qualifies as an insurance contract s h a l l
remain an insurance contract until all rights and obligations are
extinguished or expire.