Accounting Standard AASB 2022-9 Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector (Cth)

AASB Standard

AASB 2022-9

December 2022

Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector

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ISSN 1036-4803

Contents

PREFACE

ACCOUNTING STANDARD

AASB 2022-9 AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS – INSURANCE CONTRACTS IN THE PUBLIC SECTOR

from paragraph

OBJECTIVE   1

APPLICATION   3

AMENDMENTS TO AASB 17   6

AMENDMENTS TO AASB 1050   16

REVERSAL OF TEMPORARY CONSEQUENTIAL AMENDMENTS SET OUT IN AASB 2022-8               17

COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT   21

APPENDIX

E  Australian implementation guidance for public sector entities

BASIS FOR CONCLUSIONS

Australian Accounting Standard AASB 2022-9 Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector is set out in paragraphs 1 – 21.  All the paragraphs have equal authority.

Preface

Standards amended by AASB 2022-9

This Standard makes amendments to AASB 17 Insurance Contracts (July 2017), AASB 1050 Administered Items (December 2007) and the other Standards listed in paragraph 2 of the Standard.

Main features of this Standard

Main requirements

This Standard amends AASB 17 to include modifications that apply to public sector entities. Those modifications relate to providing public sector entities with:

(a)pre-requisites, indicators and other considerations that need to be judged to identify arrangements that fall within the scope of AASB 17 in a public sector context;

(b)an exemption from sub-grouping onerous versus non-onerous contracts at initial recognition;

(c)an exemption from sub-grouping contracts issued no more than a year apart;

(d)an amendment to the initial recognition requirements so that they do not depend on when contracts become onerous;

(e)guidance on coverage periods in a public sector context, which has consequences for determining the cash flows used to measure insurance liabilities and the pattern of revenue recognition;

(f)an accounting policy choice to measure liabilities for remaining coverage applying the premium allocation approach; and

(g)a transition requirement grandfathering the existing classification of arrangements constituting a liability for settlement of claims incurred before the liability was acquired in a transfer as either a liability for incurred claims within the scope of AASB 17 or a provision within the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets.

This Standard also amends AASB 1050 to provide an accounting policy choice for government departments to apply either AASB 17 or AASB 137 in determining the information to be disclosed about administered captive insurer activities.

Because AASB 17 applies to all entities for annual periods beginning on or after 1 July 2026, this Standard also:

(a)repeals AASB 4 Insurance Contracts and AASB 1023 General Insurance Contracts; and

(b)reverses the temporary consequential amendments set out in AASB 2022-8 Amendments to Australian Accounting Standards – Insurance Contracts: Consequential Amendments that amended various Standards to permit public sector entities to continue applying AASB 4 and AASB 1023 to annual periods beginning on or after 1 January 2023 but before 1 July 2026.

Application date

This Standard applies to annual reporting periods beginning on or after 1 July 2026. Earlier application is permitted.

Accounting Standard AASB 2022-9

The Australian Accounting Standards Board makes Accounting Standard AASB 2022-9 Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector under section 334 of the Corporations Act 2001.

Keith Kendall

Dated 15 December 2022   Chair – AASB

Accounting Standard AASB 2022-9

Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector

Objective

1. This Standard amends AASB 17 Insurance Contracts (July 2017) and AASB 1050 Administered Items (December 2007) to include modifications related to the application of AASB 17 by public sector entities.

1. This Standard also amends the following Standards to remove the temporary consequential amendments set out in AASB 2022-8 Amendments to Australian Accounting Standards – Insurance Contracts: Consequential Amendments since AASB 4 Insurance Contracts (August 2015) and AASB 1023 General Insurance Contracts (July 2004) do not apply to public sector entities for periods beginning on or after 1 July 2026:

(a)AASB 1 First-time Adoption of Australian Accounting Standards (July 2015);

(b)AASB 3 Business Combinations (August 2015);

(c)AASB 5 Non-current Assets Held for Sale and Discontinued Operations (August 2015);

(d)AASB 7 Financial Instruments: Disclosures (August 2015);

(e)AASB 9 Financial Instruments (December 2014);

(f)AASB 15 Revenue from Contracts with Customers (December 2014);

(g)AASB 119 Employee Benefits (August 2015);

(h)AASB 132 Financial Instruments: Presentation (August 2015);

(i)AASB 136 Impairment of Assets (August 2015);

(j)AASB 137 Provisions, Contingent Liabilities and Contingent Assets (August 2015);

(k)AASB 138 Intangible Assets (August 2015);

(l)AASB 1057 Application of Australian Accounting Standards (July 2015); and

(m)AASB 1058 Income of Not-for-Profit Entities (December 2016).

Application

1. The amendments set out in this Standard apply to entities and financial statements in accordance with the application of the other Standards set out in AASB 1057 Application of Australian Accounting Standards.

1. This Standard applies to annual periods beginning on or after 1 July 2026. This Standard may be applied to annual periods beginning before 1 July 2026.

1. This Standard uses underlining, striking out and other typographical material to identify some of the amendments to a Standard, in order to make the amendments more understandable. However, the amendments made by this Standard do not include that underlining, striking out or other typographical material. Amended paragraphs are shown with deleted text struck through and new text underlined. New paragraphs may also be underlined. Ellipses (…) are used to help provide the context within which amendments are made and also to indicate text that is not amended.

Amendments to AASB 17 Insurance Contracts

1. Paragraph Aus2.1 is added. Paragraph 2 is not amended but is included for reference.

Objective

…

2               An entity shall consider its substantive rights and obligations, whether they arise from a contract, law or regulation, when applying AASB 17. A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral or implied by an entity’s customary business practices. Contractual terms include all terms in a contract, explicit or implied, but an entity shall disregard terms that have no commercial substance (ie no discernible effect on the economics of the contract). Implied terms in a contract include those imposed by law or regulation. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries and entities. In addition, they may vary within an entity (for example, they may depend on the class of customer or the nature of the promised goods or services).

Aus2.1For a public sector entity to determine whether, in substance, there is a contract, it is necessary to identify all the relevant sources of the terms of an arrangement, whether they arise from a contract, law or regulation. In a public sector context, a contract may exist by virtue of some or all of the substantive rights and obligations for an insurance arrangement being set out in law or regulation. In some cases, there may also be separate contracts between the public sector entity and individual policyholders or a policyholder group. In other cases, there may be little or no separate documentation between the public sector entity and an individual policyholder or policyholder group.

1. Paragraphs Aus6.1 and Aus6.2 are added. Paragraphs 3–6 are not amended but are included for reference.

Scope

3               An entity shall apply AASB 17 to:

(a)            insurance contracts, including reinsurance contracts, it issues;

(b)            reinsurance contracts it holds; and

(c)             investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.

4               All references in AASB 17 to insurance contracts also apply to:

(a)            reinsurance contracts held, except:

(i)              for references to insurance contracts issued; and

(ii)             as described in paragraphs 60–70A.

(b)            investment contracts with discretionary participation features as set out in paragraph 3(c), except for the reference to insurance contracts in paragraph 3(c) and as described in paragraph 71.

5               All references in AASB 17 to insurance contracts issued also apply to insurance contracts acquired by the entity in a transfer of insurance contracts or a business combination other than reinsurance contracts held.

6               Appendix A defines an insurance contract and paragraphs B2–B30 of Appendix B provide guidance on the definition of an insurance contract.

Aus6.1In addition to considering the Appendix A definition of an insurance contract and paragraphs B2–B30, a public sector entity shall apply AASB 17 to an arrangement if, and only if, the arrangement is judged to:

(a)be enforceable;

(b)have an identifiable coverage period; and

(c)give rise to insurance contracts based on the indicators in paragraph Aus6.2(a) and the other considerations in paragraph Aus6.2(b).

Paragraphs E9–E17 of Appendix E provide guidance for determining whether an arrangement is enforceable and has an identifiable coverage period, which are pre-requisites for applying AASB 17. When an arrangement is not enforceable or does not have an identifiable coverage period, the arrangement is outside the scope of AASB 17.

Aus6.2When a public sector entity arrangement is enforceable and has an identifiable coverage period, subject to paragraphs 8 and 8A the entity shall:

(a)apply the following indicators on a collective basis to judge whether the arrangement gives rise to insurance contracts that fall within the scope of AASB 17:

(i)the source and extent of funding – refer to guidance in paragraphs E18–E22; and

(ii)the similarity of risks covered and benefits provided – refer to guidance in paragraphs E23–E30; and

(b)in the event that the indicators in (a) are not definitive, apply the following other considerations on a collective basis to judge whether the arrangement gives rise to insurance contracts that fall within the scope of AASB 17:

(i)the management practices and assessment of financial performance applied – refer to guidance in paragraphs E31–E33; and

(ii)whether there are assets held to meet benefits – refer to guidance in paragraphs E34–E36.

1. Paragraphs Aus14.1, Aus16.1 and Aus22.1 are added. Paragraphs 14, 16 and 22 are not amended but are included for reference.

Level of aggregation of insurance contracts

14             An entity shall identify portfolios of insurance contracts. A portfolio comprises contracts subject to similar risks and managed together. Contracts within a product line would be expected to have similar risks and hence would be expected to be in the same portfolio if they are managed together. Contracts in different product lines (for example single premium fixed annuities compared with regular term life assurance) would not be expected to have similar risks and hence would be expected to be in different portfolios.

Aus14.1For a public sector entity applying the modifications in paragraphs Aus16.1 and Aus22.1, a portfolio of insurance contracts would be the main unit of account, not groups of insurance contracts.

…

16An entity shall divide a portfolio of insurance contracts issued into a minimum of:

(a)            a group of contracts that are onerous at initial recognition, if any;

(b)            a group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any; and

(c)             a group of the remaining contracts in the portfolio, if any.

Aus16.1Notwithstanding paragraph 16, a public sector entity is not required to divide a portfolio of insurance contracts based on the minimum groups identified in paragraph 16.

…

22             An entity shall not include contracts issued more than one year apart in the same group. To achieve this the entity shall, if necessary, further divide the groups described in paragraphs 16–21.

Aus22.1Notwithstanding paragraph 22, a public sector entity is not required to divide a portfolio of insurance contracts based on when they are issued.

1. Paragraph Aus25.1 is added. Paragraph 25 is not amended but is included for reference.

Recognition

25             An entity shall recognise a group of insurance contracts it issues from the earliest of the following:

(a)            the beginning of the coverage period of the group of contracts;

(b)            the date when the first payment from a policyholder in the group becomes due; and

(c)             for a group of onerous contracts, when the group becomes onerous.

Aus25.1Notwithstanding paragraph 25, a public sector entity shall recognise insurance contracts it issues from the earliest of the following:

(a)the beginning of the coverage period of an insurance contract; and

(b)the date when the first payment from a policyholder of an insurance contract becomes due.

1. Paragraphs Aus34.1–Aus34.4 are added. Paragraph 34 is not amended but is included for reference.

Measurement (paragraphs B36–B119F)

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Estimates of future cash flows (paragraphs B36–B71)

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34             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 entity can compel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with insurance contract services (see paragraphs B61–B71). A substantive obligation to provide insurance contract services ends when:

(a)            the 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:

(i)              the 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

(ii)             the pricing of the premiums up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date.

Aus34.1In respect of paragraphs 34(a) and 34(b)(i):

(a)assessing a public sector entity’s practical ability to fully price for risks or benefits would include assessing the ability of its controlling government, and any relevant Minister(s), to decide on pricing or benefits;

(b)a public sector entity’s monopoly position in providing coverage for risks in a particular community, of itself, would not affect the entity’s practical ability to fully price for risks or benefits; and

(c)any legislated obligation for a public sector entity to stand ready to insure future policyholders, of itself, is not an obligation that would affect the practical ability to fully price for risks or benefits.

Aus34.2Notwithstanding paragraph 34(b)(ii), a public sector entity would not be regarded as failing to meet the criterion in paragraph 34(b)(ii) simply because its premium pricing for coverage up to the date when the risks are reassessed takes into account the risks that relate to periods after the reassessment date, due to having a policy of determining prices and benefits based on a medium- to long-term view.

Aus34.3Public sector entities may have an established system of, or regulatory requirement for, periodic pricing and benefit reviews, for example once every three years. However, in many cases, this is effectively a minimum frequency for review and it would be feasible for an entity to respond to current experience and events outside this process. In these cases, the established system does not remove the practical ability for the entity to change prices and benefits on a more frequent basis, for example annually. In addition, a public sector entity’s established system for setting prices and benefits may ordinarily take many months to complete, but may not in fact remove the practical ability in the context of paragraph 34(b)(i) to set prices and benefits on a more timely basis.

Aus34.4A public sector entity shall disclose:

(a)timeframes for which pricing and benefits are typically determined; and

(b)the titles of the relevant laws or regulations under which prices and benefits are set.

1. Paragraphs Aus53.1 and Aus69.1 are added. Paragraphs 53 and 69 are not amended but are included for reference.

Measurement (paragraphs B36–B119F)

…

Premium allocation approach

53             An entity may simplify the measurement of a group of insurance contracts using the premium allocation approach set out in paragraphs 55–59 if, and only if, at the inception of the group:

(a)            the entity reasonably expects that such simplification would produce a measurement of the liability for remaining coverage for the group that would not differ materially from the one that would be produced applying the requirements in paragraphs 32–52; or

(b)            the coverage period of each contract in the group (including insurance contract services arising from all premiums within the contract boundary determined at that date applying paragraph 34) is one year or less.

Aus53.1Notwithstanding paragraph 53, a public sector entity may choose to apply the premium allocation approach to insurance contracts issued.

…

Premium allocation approach for reinsurance contracts held

69             An entity may use the premium allocation approach set out in paragraphs 55–56 and 59 (adapted to reflect the features of reinsurance contracts held that differ from insurance contracts issued, for example the generation of expenses or reduction in expenses rather than revenue) to simplify the measurement of a group of reinsurance contracts held, if at the inception of the group:

(a)            the entity reasonably expects the resulting measurement would not differ materially from the result of applying the requirements in paragraphs 63–68; or

(b)            the coverage period of each contract in the group of reinsurance contracts held (including insurance coverage from all premiums within the contract boundary determined at that date applying paragraph 34) is one year or less.

Aus69.1Notwithstanding paragraph 69, a public sector entity may choose to apply the premium allocation approach to reinsurance contracts held.

1. Paragraphs AusB64.1 and AusB121.1 are added to Appendix B Application guidance. Paragraphs B64 and B121 are not amended but are included for reference.

Measurement (paragraphs 29-71)

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Cash flows within the contract boundary (paragraph 34)

…

B64          Paragraph 34 refers to an entity’s practical ability to set a price at a future date (a renewal date) that fully reflects the risks in the contract from that date. An entity has that practical ability in the absence of constraints that prevent the entity from setting the same price it would for a new contract with the same characteristics as the existing contract issued on that date, or if it can amend the benefits to be consistent with the price it will charge. Similarly, an entity has that practical ability to set a price when it can reprice an existing contract so that the price reflects overall changes in the risks in a portfolio of insurance contracts, even if the price set for each individual policyholder does not reflect the change in risk for that specific policyholder. When assessing whether the entity has the practical ability to set a price that fully reflects the risks in the contract or portfolio, it shall consider all the risks that it would consider when underwriting equivalent contracts on the renewal date for the remaining service. In determining the estimates of future cash flows at the end of a reporting period, an entity shall reassess the boundary of an insurance contract to include the effect of changes in circumstances on the entity’s substantive rights and obligations.

AusB64.1Public sector entities often operate within a broad government policy framework that takes into account general economic circumstances and community needs and not only the circumstances specific to the entity and its policyholders. For example, there may be cases when the entity’s management, including relevant government Minister(s), deliberately phase in price increases or decreases or benefit adjustments over a long period to help individuals or businesses manage through an economic cycle. Although the phasing-in process might notionally take into account risks relating to a number of coverage periods, this is not the motivating factor. The broader policy objectives are the motivating factor. Therefore, in the context of AASB 17 paragraph 34(b)(ii), the public sector entity would not be regarded as taking into account the risks that relate to periods after the reassessment date due to broader policy objectives influencing the phasing in of price increases or decreases or benefit adjustments.

…

Insurance revenue (paragraphs 83 and 85)

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B121       Paragraph 83 requires the amount of insurance revenue recognised in a period to depict the transfer of promised services at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services. The total consideration for a group of contracts covers the following amounts:

(a)            amounts related to the provision of services, comprising:

(i)              insurance service expenses, excluding any amounts relating to the risk adjustment for non-financial risk included in (ii) and any amounts allocated to the loss component of the liability for remaining coverage;

(ia)            amounts related to income tax that are specifically chargeable to the policyholder;

(ii)             the risk adjustment for non-financial risk, excluding any amounts allocated to the loss component of the liability for remaining coverage; and

(iii)            the contractual service margin.

(b)            amounts related to insurance acquisition cash flows.

AusB121.1For a public sector entity, consistent with paragraph 83 and the guidance on identifying coverage periods in paragraphs E13–E17, revenue collected to provide insurance coverage is recognised over the relevant coverage periods. For example:

(a)when coverage is determinable from the period(s) over which coverage is provided under insurance contracts issued by private sector insurers, the public sector entity recognises insurance revenue based on the coverage period determined from the private sector insurance contracts. If the public sector entity does not have a detailed knowledge from the private sector insurers about the coverage periods, those periods would need to be estimated from the available information; and

(b)when a coverage period coincides with the public sector entity’s annual reporting period, revenue is recognised over the annual reporting period. This may be the case, for example, when arrangements are funded from a levy on the insurance contracts issued by private sector insurers in a particular period and the levy is intended to meet claims for benefits arising from events during the reporting period, rather than from events during the private sector insurance contract coverage periods. In this example, the period over which levies are collected would not necessarily need to be the same as the coverage period.

All the revenue collected to provide insurance coverage is recognised over the relevant coverage period, which may sometimes include funds from sources other than premiums or levies received from participants, for example, top-up funding from sources such as general taxation received from time to time.

1. Paragraph AusC9A.1 is added to Appendix C Effective date and transition. Paragraph C9A is not amended but is included for reference.

Transition

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Assessments at inception or initial recognition

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C9A         To the extent permitted by paragraph C8, an entity shall classify as a liability for incurred claims a liability for settlement of claims incurred before an insurance contract was acquired in a transfer of insurance contracts that do not form a business or in a business combination within the scope of AASB 3.

AusC9A.1Notwithstanding paragraph C9A, a public sector entity with an arrangement constituting a liability for settlement of claims incurred before the liability was acquired in a transfer shall:

(a)classify the liability as a liability for incurred claims and apply AASB 17 when the entity has previously asserted explicitly that it regards the liability as an insurance liability; and

(b)classify the liability as a provision and apply AASB 137 when the entity has not previously asserted explicitly that it regards the liability as an insurance liability.

1. Paragraph AusC34.3 is added. Paragraphs AusC34.1 and AusC34.2 are not amended but are included for reference.

Withdrawal of AASB pronouncements

AusC34.1                 This Standard repeals AASB 1038 Life Insurance Contracts issued in July 2004. Despite the repeal, after the time this Standard starts to apply under section 334 of the Corporations Act (either generally or in relation to an individual entity), the repealed Standard continues to apply in relation to any period ending before that time as if the repeal had not occurred.

[Note: When this Standard applies under section 334 of the Corporations Act (either generally or in relation to an individual entity), it supersedes the application of the repealed Standard.]

AusC34.2                 When applied or operative, this Standard supersedes Interpretation 1047 Professional Indemnity Claims Liabilities in Medical Defence Organisations.

AusC34.3This Standard (as amended by AASB 2022-9 Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector) repeals the following Standards:

(a)AASB 4 Insurance Contracts issued in August 2015; and

(b)AASB 1023 General Insurance Contracts issued in July 2004.

Despite the repeal, after the time this Standard (as amended) starts to apply under section 334 of the Corporations Act (either generally or in relation to an individual entity), the repealed Standards continue to apply in relation to any period ending before that time as if the repeal had not occurred.

[Note: When this Standard (as amended) applies under section 334 of the Corporations Act (either generally or in relation to an individual entity), it supersedes the application of the repealed Standards.]

1. Appendix E Australian implementation guidance for public sector entities is added as set out on pages 13–18 of this Standard.

Amendments to AASB 1050 Administered Items

1. Paragraphs 6A and 6B are added.

6AWhen a government department administers the activities of a captive insurer, the government department may elect to apply either AASB 17 Insurance Contracts or AASB 137 Provisions, Contingent Liabilities and Contingent Assets in determining the information to be disclosed about the administered captive insurer activities.

6BFor the purposes of paragraph 6A, a captive insurer is a public sector entity that conducts activities which, on a stand-alone basis, fall within the scope of AASB 17 and whose policyholders are part of the same whole of government as the entity.

Reversal of temporary consequential amendments set out in AASB 2022‑8

1. AASB 17 applies to all entities for annual periods beginning on or after 1 July 2026, including public sector entities. Therefore, the temporary consequential amendments set out in AASB 2022-8 Amendments to Australian Accounting Standards – Insurance Contracts: Consequential Amendments, which amended various Standards to permit public sector entities to continue applying AASB 4 Insurance Contracts and AASB 1023 General Insurance Contracts to annual periods beginning on or after 1 January 2023 but before 1 July 2026, are no longer required. The following paragraphs reverse or remove those amendments.

1. The following paragraphs or text added by AASB 2022‑8 to the various Standards are deleted:

Standard	Paragraphs/text
AASB 1	AusD4.1
AASB 3	Aus17.1 and AusB63.1
AASB 5	Aus5.1
AASB 7	Aus3.1 and Aus29.1
AASB 9	Aus2.1.2, AusB2.1.1 and AusB2.4.1
AASB 15	Aus5.3
AASB 119	Footnote Aus1 (in paragraph 8)
AASB 132	Aus4.1, Aus4.2 and AusAG8.1
AASB 136	Aus2.1
AASB 137	Aus5.1
AASB 138	Aus3.2
AASB 1058	Aus7.1

1. Paragraphs 5A and 11A in AASB 1057, which address the application of AASB 4 and AASB 1023, are deleted.

1. Paragraph 6A in AASB 1057 is amended.

Application of Australian Accounting Standards

…

6A            AASB 17 Insurance Contracts applies as set out in paragraph 5, except when the entity is:

(a)            a superannuation entity applying AASB 1056.; or

(b)            a public sector entity.

However, a public sector entity may elect to apply AASB 17 instead of both AASB 4 and AASB 1023 General Insurance Contracts.

Commencement of the legislative instrument

1. For legal purposes, this legislative instrument commences on 30 June 2026.

Appendix E [FOR AASB 17]

Australian implementation guidance for public sector entities

This appendix is an integral part of AASB 17 Insurance Contracts. It describes the application of paragraphs Aus6.1 and Aus6.2. The appendix applies only to public sector entities and does not affect the application of AASB 17 by private sector entities.

Introduction

E1AASB 17 Insurance Contracts incorporates International Financial Reporting Standard IFRS 17 Insurance Contracts, issued by the International Accounting Standards Board. Consequently, the text of AASB 17 is generally expressed from the perspective of private sector entities. The AASB prepared this Appendix to explain and illustrate the application of the principles of paragraphs Aus6.1 and Aus6.2 of the Standard by public sector entities in relation to identifying public sector arrangements that give rise to insurance contracts that fall within the scope of AASB 17.

E2Judgement needs to be exercised in applying the pre-requisites, indicators and other considerations based on each entity’s circumstances.

E3For the purposes of this Appendix, in some cases relatively generic terms are used, rather than the more specific defined terms in AASB 17, because the guidance is focused on identifying the public sector activities to which AASB 17 applies. For example, this Appendix uses the term:

(a)‘arrangement’ on the basis that some public sector arrangements will fall within the scope of AASB 17 and be insurance contracts, but some will not; and

(b)‘participant’ on the basis that participants in arrangements that are insurance contracts will be policyholders, but participants in public sector arrangements that do not will fall within the scope of AASB 17 will not be policyholders.

E4The guidance in paragraphs B7–B16 of Appendix B on distinguishing between insurance risks and other risks applies equally to public sector entities. However, because public sector entities often undertake a wider range of risk-bearing activities than private sector entities, additional guidance is needed to identify insurance contracts in a public sector context.

E5Governments often arrange to provide support as a result of events that affect individuals and communities. Some of these arrangements involve transactions that are best accounted for as insurance contracts, while many of these arrangements relate to a government’s role in providing services such as social benefits, universal health care and disaster relief. In determining which of these types of arrangements give rise to insurance contracts that fall within the scope of AASB 17, an entity considers the pre-requisites, indicators and the other considerations outlined in paragraphs E6–E36.

Identifying insurance contracts in a public sector context (paragraphs Aus6.1 and Aus6.2)

Applying the pre-requisites, indicators and other considerations

E6In accordance with paragraph Aus6.1, a public sector entity would need to consider whether AASB 17 applies to an arrangement if, and only if, both of the following pre-requisites are established:

(a)            the arrangement is enforceable – refer to guidance in paragraphs E9–E12; and

(b)            the arrangement has an identifiable coverage period – refer to guidance in paragraphs E13–E17.

E7When both of the pre-requisites in paragraph E6 are established in respect of an arrangement, subject to paragraphs 8 and 8A an entity applies the following indicators on a collective basis to determine whether the arrangement gives rise to insurance contracts that fall within the scope of AASB 17:

(a)            the source and extent of funding – refer to guidance in paragraphs E18–E22; and

(b)            the similarity of risks covered and benefits provided – refer to guidance in paragraphs E23–E30.

E8When applying the indicators in paragraph E7 does not definitively determine whether an arrangement gives rise to insurance contracts that fall within the scope of AASB 17, a public sector entity applies the following other considerations on a collective basis to determine whether the arrangement gives rise to insurance contracts that fall within the scope of AASB 17:

(a)            the management practices and assessment of financial performance applied – refer to guidance in paragraphs E31–E33; and

(b)the existence of a separate fund, or earmarked assets, that are restricted to being used to meet benefits – refer to guidance in paragraphs E34–E36.

Pre-requisite: Enforceable nature of arrangement

E9An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the insured) by agreeing to compensate the insured if a specified future event adversely affects the insured. Under Australian Accounting Standards, a contract is an agreement between two or more parties that creates enforceable rights and obligations. When there is not an enforceable contract in respect of a public sector arrangement, that arrangement is not within the scope of AASB 17.

E10In determining whether there is an enforceable contract, the following matters are relevant:

(a)            when a public sector entity or its controlling government does not have the practical ability under existing or substantively enacted legislation to deny or change promised benefits or amounts based on agreed parameters, it is indicative of an enforceable contract; and

(b)            when an individual or entity can identify promised amounts or amounts based on agreed parameters that they will receive from the public sector entity on the occurrence of specified events, it is indicative of an enforceable contract.

E11When a public sector entity or its controlling government has the practical ability under existing or substantively enacted legislation to retrospectively deny or substantively change promised benefits or compensation, the policyholder does not have enforceable rights under the arrangement and the public sector entity does not have enforceable obligations for promised amounts or for amounts based on agreed parameters. For example, if an entity can retrospectively make a substantive change to the amount of benefits, such as by curtailing compensation being paid to a beneficiary in relation to a past event under existing legislation, this indicates the arrangement is not enforceable.

E12An arrangement that involves a public sector entity issuing documentation to another party, similar to an insurance contract issued by a private sector insurer, would be indicative of an agreement that creates enforceable rights and obligations. However, having some or all of the substantive rights and obligations for an insurance arrangement being set out in law or regulation would not necessarily mean that the arrangement is unsuitable to be accounted for as an insurance contract. In common with the private sector, arrangements need to be interpreted within a regulatory framework and, consistent with paragraphs 2 and Aus2.1, an entity is required to consider its substantive rights and obligations, whether they arise from a contract, law or regulation.

Pre-requisite: Identifiable coverage period

E13An insurance contract has an identifiable coverage period – either the period during which insured events occur (losses-occurring coverage) or the period during which claims become known (claims-made coverage).

E14In determining whether there is an identifiable coverage period for a public sector arrangement, the following factors may be relevant:

(a)            there is documentation agreed between the public sector entity and a participant in an arrangement that identifies a period over which coverage is to be provided;

(b)            funding, for example from participant premiums or levies, is associated with coverage for an identifiable period that may, for example, be set out in law or regulation; and

(c)             a public sector arrangement is an adjunct, for example based on law or regulation, to an insurance contract issued by another entity (eg a private sector insurer) and a coverage period for the public sector arrangement can be determined by reference to the insurance contract of the other entity.

E15In relation to paragraph E14(b), in some circumstances a public sector entity may be able to determine coverage periods for its arrangements based on the coverage periods identified when it sets premiums and benefits. For example, an arrangement may have a coverage period aligned with the entity’s annual reporting period on the basis that it sets premiums and benefits with the objective of raising funds from the arrangements in place in that year that are estimated to be sufficient to meet all the benefits, including future benefits, expected to arise from events that occur in that year.

E16In relation to paragraph E14(c), in some cases the period over which claims for benefits might arise under a public sector arrangement would be determinable from the period over which coverage is provided under an insurance contract issued by a private sector insurer. This may be the case when, for example, the public sector entity’s arrangements are funded from a levy on the insurance contracts issued by private sector insurers and the levy is intended to meet claims for benefits arising from events that occur during the private sector insurance contract coverage periods. In other cases, the period over which claims for benefits might arise under a public sector arrangement may not be determinable from the period over which coverage is provided under an insurance contract issued by a private sector insurer. This may be the case when, for example, the public sector entity’s arrangements are funded from a levy on the insurance contracts issued by private sector insurers in a particular period and the levy is intended to meet claims for benefits arising from events in that period, rather than from events during the private sector insurance contract coverage periods.

E17The following are examples of circumstances that would be indicative of an arrangement without an identifiable coverage period:

(a)            a public sector entity has an open-ended arrangement to provide benefits based on eligibility criteria that relate to an individual’s inherent status, for example, age or disability;

(b)            those who stand to benefit from an arrangement are eligible for compensation based only on suffering loss from a specified natural disaster; and

(c)             a public sector entity’s policy is to raise funds from levies or by other means to meet claims from current and/or prior periods on a pay-as-you-go basis. Entities operating on a pay-as-you-go basis are focused on meeting net cash outflows expected to occur in the current period, rather than on meeting net cash outflows related to events that arise in a particular coverage period that may involve fund outflows expected to occur in both the current and future periods.

Indicator: Source and extent of funding

E18Under an insurance contract, a policyholder usually pays premiums to an insurer. In most cases, the premiums are the primary source of funding the payment of any claims and the costs of operating the insurance business.

E19When a public sector entity receives premiums or levies under an arrangement in exchange for accepting risks from those who stand to benefit, it is an indication that an arrangement gives rise to insurance contracts within the scope of AASB 17. The greater the extent to which the participant who stands to benefit from an arrangement is providing the funding, the more indicative this would be of a policyholder–insurer relationship and an arrangement that gives rise to insurance contracts that fall within the scope of AASB 17.

E20The individual or entity from which the public sector entity receives premiums does not need to be a direct beneficiary of the arrangement. Instead, they may be an indirect beneficiary. For example, when a public sector entity receives levies from the participant for the purpose of compensating other parties that might be damaged by the participant’s actions, the benefit to the participant would often be that the damaged parties cannot seek additional compensation from them by other means.

E21When all of a public sector entity’s funding to meet benefits is received in exchange for accepting risks from those who stand to benefit, this is highly indicative of an arrangement that gives rise to insurance contracts that fall within the scope of AASB 17. The lower the proportion of a public sector entity’s funding to meet benefits in exchange for accepting risks from those who stand to benefit, the less likely it is that those arrangements would be accounted for as insurance contracts. For example, a co-payment from a beneficiary that is intended to help ration services and is not intended to fully fund services is unlikely to indicate an arrangement that gives rise to insurance contracts that fall within the scope of AASB 17. When a public sector entity receives a significant portion of funding from sources such as general taxation, this would indicate that an arrangement does not give rise to insurance contracts that fall within the scope of AASB 17.

E22Under most general insurance contracts issued by private sector insurers, in the event that a policyholder cancels its coverage prior to the end of the coverage period, the policyholder would ordinarily receive a pro rata premium refund, possibly adjusted for administrative costs. Although not all contracts issued by private sector insurers allow for refunds, the practice is indicative of insurance contracts. Accordingly, a public sector entity arrangement that allows for a refund of premium when the policyholder terminates the arrangement early is indicative of an arrangement that gives rise to insurance contracts that fall within the scope of AASB 17.

Indicator: Similarity of risks covered and benefits provided

E23Under an insurance contract, significant insurance risk is transferred from an insured to an insurer. Private sector insurers accept a wide range of risks. These include risks relating to, for example, property loss, loss of income, professional and trade indemnity, public and legal liability, medical costs, mortality and disability. In the event that an insured event occurs, to the extent required under a general insurance contract the insurer would typically provide a benefit commensurate with the loss.

E24It is an indicator that a public sector entity arrangement gives rise to insurance contracts within the scope of AASB 17 when it involves accepting risks and providing benefits that are the same as, or similar to, those offered by private sector insurers. In some cases, public sector entities operate alongside private sector insurers to accept risks and provide benefits that are the same, for example in respect of employer liability for workers’ compensation risks.

E25In some cases, public sector entities are monopolies in their jurisdictions and there are no relevant counterpart arrangements of private sector entities to consider. In these cases, consideration is given to whether a public sector entity’s arrangements involve accepting risks and providing benefits that are the same as, or are similar to, those offered by private sector insurers in other, similar jurisdictions. In relation to other jurisdictions, only information that is readily available need be considered. That is, public sector entities need not conduct an exhaustive search for counterpart arrangements.

E26The greater the level of similarity between the risks accepted and benefits provided by a public sector entity and those offered by any relevant counterpart private sector insurer, the more likely it would be that an arrangement gives rise to insurance contracts that fall within the scope of AASB 17.

E27In some cases, there will be a clear similarity between the risks being accepted and the benefits being provided by a public sector entity and private sector insurers, and this is highly indicative of an arrangement that gives rise to insurance contracts that fall within the scope of AASB 17.

E28Public sector entities often fill gaps in a market left by the private sector because they pose the greatest risks and might generally be unprofitable or unsustainable for the private sector to cover. Of itself, the level of riskiness generally is not relevant to determining whether there is similarity between the risks covered and the benefits provided by public sector entities and private sector insurers. The similarity of the nature of the risks covered and benefits provided is the key focus. Accordingly, the nature of a risk covered by a public sector entity and private sector insurers could be the same, even though the level of risk borne by the public sector entity is more extreme.

E29Many of the risks covered by private sector insurers are also the subject of social benefits provided by governments. Accordingly, while in some cases, the similarity of risks covered and benefits provided by a public sector arrangement to the risks and benefits under a social benefit program may help indicate whether that arrangement would be excluded from the scope of AASB 17, in many cases it may not.

E30It would be indicative of providing benefits that are the same as, or similar to, those offered by private sector insurers when an entity manages claims in order to provide benefits commensurate with participants’ losses, rather than simply dispensing a fixed amount of compensation based on participants meeting specified eligibility criteria.

Other consideration: Management practices and assessment of financial performance

E31Consideration is given to the extent to which a public sector entity has objectives, policies and processes for managing risks associated with its arrangements and has its financial performance assessed against those objectives and how successfully it applies those policies and processes in determining whether an arrangement gives rise to insurance contracts that fall within the scope of AASB 17. In that context, an entity that has insurance contracts would be expected to conduct the following activities (either itself or via outsourcing):

(a)            underwriting and risk assessment;

(b)            managing the entity’s capital based on the measurement of risks and uncertainties relating to coverage and incurred claims and their potential future impacts; and

(c)             fair and prudent claims management.

E32In general, any public sector entity that is responsible for dispensing compensation (as an insurer or non-insurer) would be expected to have sound practices in respect of risk assessment, managing capital and managing claims. However, these features of some public sector arrangements are still regarded as a relevant consideration, in conjunction with the indicators identified in paragraph E7 and the other consideration identified in paragraph E8(b), to determine whether an arrangement gives rise to insurance contracts that fall within the scope of AASB 17, when the indicators are not definitive.

E33In particular, it may imply that an arrangement gives rise to insurance contracts that fall within the scope of AASB 17 when an entity assesses the relative riskiness of participants and prices coverage based on those assessments. This does not mean an arrangement that involves an entity charging a standard amount to all participants, regardless of risk, is necessarily outside the scope of AASB 17, because some entities (even in the private sector) are subject to regulatory constraints on pricing (as acknowledged in paragraph 20), such as community-rated pricing.

Other consideration: Assets held to meet benefits

E34Consideration is given to whether there is a separate fund, or earmarked assets, that are restricted to being used to meet benefits in determining whether an arrangement gives rise to insurance contracts that fall within the scope of AASB 17.

E35The existence of a separate fund, or earmarked assets, that are restricted to being used to meet benefits is a feature of many types of public sector arrangements. However, the feature is still regarded as a relevant consideration, in conjunction with the indicators identified in paragraph E7 and the other consideration identified in paragraph E8(a), to determine whether an arrangement gives rise to insurance contracts that fall within the scope of AASB 17, when the indicators are not definitive.

E36To be relevant, the separate fund or earmarked assets need not be managed by the public sector entity itself. It is the existence of a separate fund or earmarked assets that is considered, not the performance of investing activities.

Diagram – Applying the pre-requisites, indicators and other considerations

E37The diagram below illustrates the application of paragraphs Aus6.1, Aus6.2 and E6–E8 relevant to public sector entities for identifying arrangements that give rise to insurance contracts that fall within the scope of AASB 17. The diagram should be read in conjunction with the guidance set out in paragraphs E9–E36, as referenced in the diagram.

Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, AASB 2022-9 Amendments to Australian Accounting Standards – Insurance Contracts in the Public Sector.

Introduction

BC1This Basis for Conclusions summarises the Australian Accounting Standards Board’s and the New Zealand Accounting Standards Board’s considerations in reaching the conclusions on public sector modifications to AASB 17 Insurance Contracts and PBE IFRS 17 Insurance Contracts. It sets out the reasons why the Boards developed the modifications, the approach taken to developing those modifications and the bases for the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.

Reasons for making public sector modifications

BC2AASB 17 and PBE IFRS 17, as first issued in 2017, have a mandatory application date of annual reporting periods beginning on or after 1 January 2023.

BC3IFRS 17 Insurance Contracts, which is incorporated into AASB 17/PBE IFRS 17, has been developed largely for the for-profit private sector, and to a relevant extent for a mutual entity context [AASB 17.B16/ PBE IFRS 17.AG16]. IFRS 17 has not been designed to cater for the public sector context. Accordingly, the AASB and the NZASB undertook a joint project to consider the need for modifications in AASB 17/ PBE IFRS 17 to suit the public sector context in Australia and New Zealand.

BC4There are important differences between the public sector and private sector contexts that can affect the manner in which IFRS 17 applies.

BC5While mutual entities may be not-for-profit entities in the sense that members share in any surpluses, they nonetheless would typically need to build and maintain reserves to remain in business by generating surpluses. Accordingly, the users of financial statements of private sector entities (including mutual entities) when compared with public sector entities can have very different perspectives on the significance of onerous contracts, compensation needed for bearing risk, and the need to hold capital. Key drivers of these different perspectives in the public sector can include monopoly powers, access to government guarantees and taxpayer funding and a focus on public policy objectives.

BC6Accordingly, there is a strong conceptual underpinning for having modifications to AASB 17/PBE IFRS 17 that are applicable only to public sector entities.

BC7In addition, there may be existing inconsistencies in Australia in the application of Standards as some Australian public sector entities with similar arrangements have been applying AASB 1023 General Insurance Contracts and others have been applying AASB 137 Provisions, Contingent Liabilities and Contingent Assets. The project is intended to help achieve a greater level of consistency of reporting across the Australian public sector.

Joint project between the AASB and the NZASB

BC8In 2020, the AASB and the NZASB decided to work jointly to progress the project on insurance contracts in the public sector with the following background and objectives.[1]

[1]    At the time of undertaking the public sector modification project, the NZASB had already issued PBE IFRS 17 for not-for-profit public benefit entities. However, this Standard was not regarded as applying to arrangements of public sector public benefit entities.

BC9Both Boards maintain different tiers of reporting, which, among other things, use the ‘public accountability’ distinction developed by the IASB. Entities that hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses are identified as having public accountability. Both Boards generally regard entities engaged in insurance activities as having public accountability and needing to prepare Tier 1 general purpose financial statements.

BC10Some of the public sector entities in Australia that conduct insurance activities have self-identified as for-profit entities – most have self-identified as not-for-profit entities. In principle, Tier 1 for-profit public sector entities apply Australian Accounting Standards incorporating IFRS Standards without modification. The AASB Not-for-Profit Entity Standard-Setting Framework notes the Financial Reporting Council’s broad strategic direction that the AASB applies the principle of transaction neutrality (modified as necessary) in setting standards for not-for-profit and public sector entities. This Framework notes (emphasis added):

22             IFRS Standards (including Interpretations) are appropriate as a base for the following reasons: …

(d)            IFRS Standards can be modified appropriately for NFP-specific issues, as demonstrated by the International Public Sector Accounting Standards Board (IPSASB) using IFRS Standards as a base for their corresponding Standards, departing only to the extent appropriate for public sector issues.

BC11The following background applies for the NZASB.

(a)            The New Zealand Accounting Standards Framework notes (emphasis added):

28.            The accounting standards applying to the PBE tiers are as follows: …

•                PBE Tier 1: Tier 1 PBE Accounting Requirements – These are the requirements in the accounting standards (referred to as PBE Standards) and applicable authoritative notices.

They comprise International Public Sector Accounting Standards (IPSAS), modified as appropriate for New Zealand circumstances (for either public sector or NFP entities), together with additional standards as necessary and applicable authoritative notices.

(b)            Additional Accounting Standards for PBEs include IFRS Accounting Standards for which there is no equivalent IPSAS (for example, PBE IFRS 4) and domestic Accounting Standards.

(c)             In February 2018, the NZASB considered the application of the Policy Approach to Developing the Suite of PBE Standards (PBE Policy Approach) and decided to develop PBE IFRS 17. The trigger in the PBE Policy Approach for developing PBE IFRS 17 is the change to an IFRS Standard (IFRS 4 is superseded by IFRS 17) that has been used as the basis for a PBE Standard.

(d)            A further motivation for developing PBE IFRS 17 was to address arrangements that are eligible to apply the insurance approach as permitted under IPSAS 42 Social Benefits [PBE IFRS 17.BC5].[2] (The insurance approach would involve applying IFRS 17 [IPSAS 42.AG19].)

[2]      IPSAS 42 does not require an entity that meets the criteria to apply the insurance approach – only that the entity is eligible to apply that approach.

Consistency in financial reporting – within and between jurisdictions

BC12The proposals in AASB Discussion Paper Australian-specific Insurance Issues – Regulatory Disclosures and Public Sector Entities (2017) identified as an objective “to achieve greater consistency of financial reporting across the public sector among entities engaging in insurance activities for the benefit of users of that information” [page 6]. While the NZASB has fewer public sector stakeholders with arrangements that might be accounted for as insurance contracts, consistency remains a key issue.

BC13Although there is no binding agreement in place regarding public sector entities, to the extent feasible the Boards consider it would be desirable to have the same insurance Accounting Standards applying in Australia and New Zealand. This is because, for example, there can be useful benchmarking of financial position and performance of public sector entities between the two jurisdictions. Accordingly, the Boards consider that it is beneficial to have achieved a consistent outcome in the two jurisdictions such that AASB 17 and PBE IFRS 17 contain the same public sector modifications.

BC14The public sector modifications to AASB 17/PBE IFRS 17 resulted from a wide-ranging due process that included:

(a)            the AASB and NZASB issuing AASB ED 319 Insurance Contracts in the Public Sector and NZASB ED 2022-3 Insurance Contracts in the Public Sector in March 2022, which had the same technical content;

(b)            the AASB and NZASB issuing a Draft Standard of the amendments to AASB 17/PBE IFRS 17 (and, in the case of the AASB only, AASB 1050 Administered Items) in October 2022 for fatal flaw comment;

(c)             direct stakeholder outreach, including consulting the Public Sector Focus Group, a sub-group of the Transition Resource Group for AASB 17 Insurance Contracts, which includes members from both jurisdictions;

(d)            the AASB issuing Discussion Paper Australian-specific Insurance Issues – Regulatory Disclosures and Public Sector Entities in 2017; and

(e)             the NZASB issuing Exposure Draft ED 2018-7 PBE IFRS 17 Insurance Contracts in 2018.

Both Boards have considered respondents’ feedback from all of the above consultations.

BC15The main focus of this Basis for Conclusions is on the most recent due process. The AASB project summary contains a summary of the project history, including the earlier due process stages of the project.

BC16At the time of preparing this Basis for Conclusions, the IPSASB was not considering the development of an insurance Accounting Standard based on IFRS 17.

Sub-grouping of contracts (modifications to paragraphs 14, 16 and 22)

Requirements under (superseded) AASB 1023/PBE IFRS 4

BC17The Boards observed that, under AASB 1023/PBE IFRS 4, the liability for remaining coverage is measured as the amount of premium received and/or receivable for the contract period that remains unearned. An insurer is required to apply a Liability Adequacy Test to the carrying amount of the liability for remaining coverage (represented by ‘unearned premium’) when there is an indication that the liability may be inadequate [AASB 1023.9.1/PBE IFRS 4 (Appendix D.9.1)]. The Liability Adequacy Test is applied at a portfolio of contracts level. The Boards noted that, in the case of some public sector entities, there is only one portfolio of contracts and, for those entities, the Liability Adequacy Test is effectively conducted at the whole-of-entity level.

BC18The Liability Adequacy Test involves comparing:

(a)the amount of the liability for remaining coverage recognised on the statement of financial position; with

(b)current estimates of the present value of the expected future cash flows relating to future claims arising from existing insurance contracts, plus a risk margin that reflects the inherent uncertainty in the central estimate.

There is a deficiency if (a) is less than (b), in which case an additional ‘unexpired risk liability’ is recognised for the deficiency,[3] which is also recognised immediately as a loss.[4]

[3]    Because a deficiency is not represented by ‘unearned premium’ in the context of AASB 1023/PBE IFRS 4, the deficiency is separately recognised as an ‘unexpired risk liability’.

[4]      An entity with deferred acquisition costs and intangible assets related to insurance contracts would write those off before recognising any remaining deficiency [AASB 1023.9.1/PBE IFRS 4 (Appendix D.9.1)]; however, public sector entities do not ordinarily have material deferred acquisition costs or intangible assets.

Requirements in AASB 17/PBE IFRS 17: Sub-grouping of onerous versus non-onerous contracts

BC19AASB 17/PBE IFRS 17 has a much greater emphasis (than AASB 1023/PBE IFRS 4) on identifying onerous contracts and their identification has fundamental impacts on a wide range of accounting outcomes. In particular, at initial recognition, insurance contracts within each portfolio of contracts must be sub-grouped as:

(a)            contracts that are onerous at initial recognition, if any;

(b)            contracts that have no significant possibility of becoming onerous subsequently, if any; and

(c)             other (non-onerous) contracts [AASB 17/PBE IFRS 17.16].

BC20The Boards noted the following:

(a)            In the private for-profit sector,[5] the presumption is that insurers issue insurance contracts that are intended to be profitable. In practice, the profit component should act as a ‘buffer’ to any liability inadequacy and private for-profit sector insurers only occasionally need to test for liability inadequacy and few entities need to recognise an unexpired risk liability under AASB 1023/PBE IFRS 4.

[5]      As noted in paragraphs BC3 and BC5, this is also generally the case for mutual entities in the private sector.

(b)            In contrast, for most public sector entities applying AASB 1023/PBE IFRS 4, the liability for remaining coverage based on unearned premium is routinely inadequate because they price to break even on a best-estimate basis after taking into account projected investment returns.[6] That is, the amounts collected in levies/premiums are typically inadequate to meet expected claims. Accordingly, many public sector entities routinely recognise unexpired risk liabilities under AASB 1023/PBE IFRS 4.

[6]    The expected investment returns are ordinarily higher than the discount rates (for time value) applied to measure insurance liabilities.

The Boards highlighted this as a key distinguishing factor among public sector entities compared with private sector for-profit entities.

BC21The Boards acknowledged that there are no public-sector-specific modifications to AASB 1023/PBE IFRS 4 based on this key distinguishing factor and that the routine recognition of unexpired risk liabilities, which are typically offset by investment income/gains, is an accepted practice. However, the Boards noted that the AASB 17/PBE IFRS 17 requirement to sub-group contracts based on whether they are onerous versus non-onerous raises further potential accounting complications. In particular, the Boards observed that:

(a)            accounting for a whole portfolio that is onerous is likely to be relatively simple compared with having to identify some (possibly) non-onerous contracts from within a largely onerous portfolio of contracts and account for them separately;

(b)            the level of interest among public sector entities and their users in knowing about profitable sub-groups of contracts that might exist within a wider loss-making portfolio, would be lower than the level of interest among private sector insurers and their users in knowing about loss-making sub-groups of contracts that might exist within a wider profitable portfolio; and

(c)             any interest among users of public sector entities’ financial statements in knowing about cross-subsidisation among different classes of policyholders would probably be best met through disclosures (rather than disaggregation that affects recognition and measurement).

Analysis on sub-grouping by onerous versus non-onerous contracts

BC22The Boards noted that:

(a)            there is no impact on the long-run overall results from taking different approaches to onerous contract units of account and annual cohorts of contracts versus a portfolio unit of account; and

(b)            the main impact of AASB 17/PBE IFRS 17 (relative to AASB 1023/PBE IFRS 4) would be to recognise losses up-front that would otherwise have been recognised over the coverage period. The Boards thought that, since most of the coverage periods are typically one year, the timing of loss recognition would typically not be very different as between AASB 17/PBE IFRS 17 and AASB 1023/PBE IFRS 4.

BC23The Boards observed that the IASB decided on the requirements in AASB 17/PBE IFRS 17.16 to divide each portfolio of contracts into sub-groups because it regards information about onerous contracts to be useful information about an entity’s decisions on pricing contracts and about future cash flows, and wants this information to be reported on a timely basis. The IASB does not want this information to be obscured by offsetting onerous contracts in one group with profitable contracts in another group [IFRS 17.BC119].[7] The Boards acknowledged that the up-front recognition of losses may be particularly useful in a private sector for-profit context.

[7]      The IASB chose groups of contracts as a way of striking a compromise between accounting on an in individual contract basis (that would be particularly burdensome) and accounting at the portfolio level of aggregation [IFRS 17.BC123 & BC124].

BC24The Boards observed that the impact of AASB 17/PBE IFRS 17 would depend on the nature of the arrangements and how they have been priced and they considered the following examples by way of illustration.

(a)            Worker’s compensation insurance contracts are typically priced for the expected actual risks by employer and/or industry. At initial recognition, unless a deliberate decision has been taken to under-price for risk on some contracts and over-price others, ordinarily there would not be onerous and non-onerous sub-groups. Typically, in a public sector context (of break-even pricing after taking into account investment earnings), the portfolio would be expected to comprise only one group of onerous contracts.

(b)            Transport accident insurance contracts are typically priced for the expected actual risks over the whole portfolio. However, the public sector entity might have relatively granular information available about policyholders by risk profile. For example, it may be known that drivers living in particular geographic regions are likely, on average, to give rise to fewer claims and are largely profitable. In such a case there may be onerous and non-onerous groups of contracts based on geographic regions.

BC25The Boards noted that AASB 17/PBE IFRS 17.20 provides relief from sub-grouping as onerous versus non-onerous contracts when contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity’s practical ability to set a different price or level of benefits for policyholders with different characteristics. Accordingly, in the transport accident case noted above, if the pricing constraints on the entity are the cause of overpricing for low-claim geographic regions, they need not be separately accounted for (as a non-onerous contract group). However, the Boards remained concerned that this relief may be difficult to apply in some cases due to possible ambiguity about where price/levy/benefit decision-making power may reside – with the entity itself, or with the government, for example, the relevant Minister(s).

BC26The Boards considered feedback received from stakeholders on sub-grouping of contracts in response to consultation that preceded AASB ED 319/NZASB ED 2022-3.

BC27NZASB ED 2018-7 proposed no changes to PBE IFRS 17 in respect of onerous contracts; however, it specifically sought feedback from stakeholders on the requirements in PBE IFRS 17.16. The responses to NZASB ED 2018-7 generally argued for public-sector-specific modifications based on a view that the requirements in PBE IFRS 17.16 are not relevant to the circumstances of public sector insurers in New Zealand. The responses included the following:

(a)            pricing decisions and the resulting onerous contracts will often be a consequence of broader policy decisions of government;

(b)            the level of aggregation should be the same as the level used for setting levies;

(c)             while for-profit insurers use granular information to improve profitability and avoid adverse selection by policyholders – this is not relevant to public sector entities, which typically deliberately cross-subsidise across communities;

(d)            public sector entities do not choose their customers or seek to market their services to particular customers, and risks are usually community rated – accordingly, grouping by onerous/non-onerous arrangements is not relevant.

BC28The AASB Discussion Paper (2017) did not specifically request input on this topic and there were no comments from stakeholders on onerous contract groups. However, the topic was raised in stakeholder outreach in Australia and New Zealand conducted in 2020-21 and the following matters were raised.

(a)            In any given year, all contracts in a portfolio are likely to be onerous at initial recognition because the entity relies on investment returns to break even. That is, amounts raised from the levies/premiums charged are inadequate relative to expected claims and there will be a negative insurance service result (negative underwriting result). Accordingly, unless there is sound evidence of a non-onerous group of contracts there would be no disaggregation of the portfolio under AASB 17/PBE IFRS 17.

(b)            Given that some entities do not price differentially based on policyholder-specific risks, they do not monitor (and may not possess) the information necessary to differentiate between onerous versus non-onerous contracts at initial recognition. For example, some entities are not permitted to hold information on gender or age; however, if available, gender and/or age-related information would enable the entity to identify onerous versus non-onerous contracts.

(c)             Ordinarily, all of a public sector entity’s onerous contracts and non-onerous contracts would be the result of regulatory impediments that are covered by the relief in AASB 17/PBE IFRS 17.20; however, there may be exceptions.

(d)            The entity takes a long-term view to avoid volatility in premiums/levies – periodically, there may be profitable or onerous contracts that depend on whether, for example, there are deficits to be ‘rectified’ or surpluses to be ‘used up’.

BC29The Boards considered a number of possible approaches to addressing the sub-grouping of contracts in a public sector context, including the following.

(a)            All public sector entities should be exempted from AASB 17/PBE IFRS 17.16, on the basis that:

(i)              timely information on profitability is not relevant to most public sector entities; and

(ii)             whether public sector entities have portfolios of onerous contracts and sub-groups of onerous contracts;

are not relevant. However, it was acknowledged that information on sub-groups of onerous contracts might be useful in helping to inform users about cross-subsidies between different classes of policyholders.

(b)            Only not-for-profit public sector entities (which is the majority of the relevant entities) should be exempted from AASB 17/PBE IFRS 17.16 for the reasons noted in (a) above.

(c)             All public sector entities should be exempted from AASB 17/PBE IFRS 17.16; however, require disclosure about the nature of the pricing process, including constraints under which an entity operates to cross-subsidise different policyholder cohorts, that can lead to some groups of contracts being onerous. This might provide additional relevant information about the impact of price constraints on each entity. However, it was acknowledged that the additional disclosure could be a burden and may already be readily available from other sources (although the burden might be mitigated by permitting disclosure by cross-reference).

(d)            AASB 17/PBE IFRS 17.16 should apply to public sector entities and guidance should be provided for the public sector context on the manner in which AASB 17/PBE IFRS 17.20 would provide relief from the need to sub-group contracts.

Sub-grouping onerous versus non-onerous contracts – proposals for AASB ED 319/NZASB ED 2022-3

BC30Based on the above deliberations, the Boards decided to propose an exemption for all public sector entities from applying the requirements in AASB 17/PBE IFRS 17.16. That is, public sector entities would not be required to sub-group contracts based on whether, at initial recognition, they are:

(a)            onerous;

(b)            have no significant possibility of becoming onerous subsequently, or

(c)             are neither (a) nor (b).

BC31The Boards consider this exemption is justified for the following reasons.

(a)            The motivation behind the AASB 17/PBE IFRS 17 requirements for information about onerous contracts is useful information about an entity’s decisions on pricing contracts, which is not as relevant in the public sector context (relative to the private sector). This is particularly the case for not-for-profit entities. However, even public sector entities that are identified as for-profit entities are typically not able to underwrite risks in the manner available to private sector insurers and, therefore, disaggregating onerous versus non-onerous contracts would not provide useful information for assessing a public sector entity’s financial position or performance.

(b)            Public sector entities’ information systems are often geared to identifying, at a broad level, high-risk groups of policyholders for strategic and government policy decision-making (for example, to conduct safety campaigns), but not necessarily for identifying separate groups of contracts that give rise to accounting profits or losses. The managements of public sector entities (whether for-profit or not-for-profit) typically do not seek to financially remediate groups of onerous contracts or seek to attract more profitable customers in the same manner as private sector insurers. And, unlike private sector insurers, public sector entities do not ordinarily choose the customers to which they market their products. Accordingly, the costs for public sector entities of disaggregating onerous versus non-onerous groups of contracts would exceed any likely benefits.

(c)             If public sector entities are subject to AASB 17/PBE IFRS 17.16, it would be necessary to explain how the relief in AASB 17/PBE IFRS 17.20 could be applied in a public sector context. That would mean explaining whether the constraints identified in AASB 17/PBE IFRS 17.20 would be constraints imposed only on the entity itself or on the entity and its controlling government, including any relevant Minister(s). In the context of AASB 17/PBE IFRS 17, there is the potential for ambiguity in considering whether:

(i)              a public sector entity’s practical ability to fully price for risks or benefits includes the ability of its controlling government, and any relevant Minister(s), to decide on pricing or benefits in their capacity as managers of the public sector entity; versus

(ii)             overall pricing constraints relevant to AASB 17/PBE IFRS 17.20 in respect of government policy more broadly.

BC32The Boards also considered that the differences (from the private sector) in the accountability/regulatory, governance and financial management frameworks in general among public sector insurers might also justify an exemption for all public sector entities from applying the requirements in AASB 17/PBE IFRS 17.16.[8]

[8]      In that context, the Boards noted: paragraph 30(g) of the AASB Not-for-Profit Entity Standard-Setting Framework; and, to some extent, paragraph 62 of the New Zealand Accounting Standards Framework.

BC33The Boards decided to propose requiring additional disclosures about the nature of the pricing process; including information about the manner in which pricing/benefits are determined, the timeframes for which they are typically determined, and any other relevant constraints under which an entity operates that result in, for example, cross-subsidising different classes of policyholders. The Boards noted that this information may already be publicly available from other sources and that the proposed requirement could be met by cross-reference to relevant authoritative sources available to users of the financial statements on the same terms as the financial statements and at the same time.

BC34The Boards acknowledged that, in general, Accounting Standards do not require disclosures around pricing decisions and whether they involve cross-subsidisation among customers. However, the Boards considered proposing this additional disclosure is justified due to the likely significance of the manner in which pricing/benefits are determined on the performance and financial position of public sector entities that bear insurance risk.

Sub-grouping of contracts issued no more than a year apart

BC35The Boards observed that portfolios of contracts might include contracts entered into over successive years, and that AASB 17/PBE IFRS 17 requires entities to divide each portfolio of contracts into sub-groups of contracts issued no more than a year apart [AASB 17/PBE IFRS 17.22]. The effect of this requirement is to reveal cases of onerous contracts issued in a particular year without them being obscured by profitable contracts issued in other years. This is mainly an issue when there are contracts with multi-year coverage periods.

(a)road safety campaigns;

(b)research into medical practices in public hospitals; and/or

(c)research into rehabilitation techniques to improve return to work experience.

BC311The Boards noted that, compared with AASB 1023/PBE IFRS 4, AASB 17/PBE IFRS 17 has more specific requirements around the types of costs that are to be accounted for as a part of insurance contract liabilities and more specific presentation requirements around the income statement line items that make up the ‘insurance service result’. In particular, they noted that costs which might currently be accounted for as a part of the ‘underwriting result’ under AASB 1023/PBE IFRS 4 may not be sufficiently attributable to the fulfilment of particular groups of contracts to be accounted for within the ‘insurance service result’ under AASB 17/PBE IFRS 17.

BC312This led the Boards to consider whether there is a need for public-sector-specific modifications in respect of costs associated with risk mitigation activities that might not be attributable to particular groups of contracts. This is particularly since these costs may be more significant in a public sector context (compared with private sector for-profit entities).

BC313The Boards noted the following feedback received from stakeholder outreach conducted in 2020-21.

(a)            Some public sector entities that provide risk coverage for policyholders also have a separate (sometimes legislated) objective of educating communities about safety or investing in infrastructure that promotes safe outcomes.

(b)            Public sector entities are typically separately accountable for costs associated with risk mitigation and they are usually readily identifiable.

Boards’ position on risk mitigation program and other similar costs in AASB ED 319/NZASB ED 2022

BC314Based on the above considerations, the Boards decided that there is no need to propose any public sector modifications in respect of risk mitigation program and other similar costs.

BC315The Boards considered that:

(a)            public sector entities would have little difficulty identifying risk mitigation program costs and classifying them in accordance with AASB 17/PBE IFRS 17; and

(b)            presenting these costs separately from the insurance service result would be useful in a public sector context since they usually relate to a separate and identifiable organisational objective.

Risk mitigation program and other similar costs – AASB ED 319/NZASB ED 2022-3 feedback and Boards’ conclusion

BC316There was no specific feedback from respondents to AASB ED 319/NZASB ED 2022-3 on risk mitigation program and other similar costs. The Boards concluded that it is not appropriate to have public sector modifications on the classification or presentation of risk mitigation program and other similar costs in the context of AASB 17/PBE IFRS 17.

Other matters raised in feedback on AASB ED 319/NZASB ED 2022-3

BC317Respondents to AASB ED 319/NZASB ED 2022-3, either in their formal submissions, or in follow-up discussions, raised the following matters:

(a)            accounting for insurance contracts that provide adverse development coverage; and

(b)            accounting for non-distinct investment components.

Adverse development coverage

BC318In respect of insurance contracts that provide adverse development coverage, the Boards noted that the coverage period relates to the time over which the amount of claims is expected to remain uncertain, which would often be up to the time of settlement, which is potentially a long period. Accordingly, the insurer would recognise any compensation received or receivable for accepting adverse development risk over that potentially long coverage period and may never recognise a liability for incurred claims, even though the liability is managed as a claims liability. The Boards considered whether public sector entities, in particular, might have insurance contracts that provide adverse development coverage and whether there are any public sector specific reasons for modifying AASB 17/PBE IFRS 17 in accounting for such coverage.

BC319The Boards concluded that there is no need for public sector modifications in respect of adverse development coverage on the basis that:

(a)            while a public sector entity might have contracts providing adverse development coverage that, for example, might arise from a government restructuring of administrative arrangements, that form of coverage is not expected to be common in the public sector and possibly less common than in the private sector;

(b)            while there may be concerns that the accounting does not reflect the manner in which the contracts are managed, the same issues arise in the private sector; and

(c)             the potentially long coverage period would not affect eligibility for applying the premium allocation approach given that the Boards concluded public sector entities would have an accounting policy choice to apply that approach.

BC320However, the Boards also noted that the transition provision in AASB 17.C9A/PBE IFRS 17. 132.9A applies to an entity using a modified retrospective approach in accordance with AASB 17.C8/PBE IFRS 17.132.8 and involves classifying as a liability for incurred claims a liability for settlement of claims incurred before an insurance contract was acquired in a transfer of insurance contracts. Such a transfer may not form a business or may be in a business combination within the scope of AASB 3 Business Combinations /PBE IPSAS 40 PBE Combinations. The Boards observed that there is an additional dimension to such transfers in a public sector context because some liabilities acquired by public sector entities in their claims settlement stage are being accounted for under AASB 137/PBE IPSAS 19. The existing AASB 17/PBE IFRS 17 transition provision requires the continued use of claims liability accounting under AASB 17/PBE IFRS 17, but would not enable the continued use of AASB 137/PBE IPSAS 19.

BC321Given that the arrangements concerned are in their settlement phase, the Boards considered that any benefit to users of a public sector entity changing its accounting to apply AASB 17/PBE IFRS 17 rather than AASB 137/PBE IPSAS 19 in the event that the relevant arrangement was within the scope of AASB 17/PBE IFRS 17[30] would be likely to be outweighed by the costs. Accordingly, the Boards concluded that, on transition to AASB 17/PBE IFRS 17, in respect of an arrangement that constitutes a liability for settlement of claims incurred before the liability was acquired in a transfer, a public sector entity would be required to:

[30]    Although there would be no current coverage, a past coverage period may be determinable in some cases.

(a)            classify the liability as a liability for incurred claims and apply AASB 17/PBE IFRS 17 when the entity has previously asserted explicitly that it regards the liability as an insurance liability; and

(b)            classify the liability as a provision and apply AASB 137/PBE IPSAS 19 when the entity has not previously asserted explicitly that it regards the liability as an insurance liability.

The Boards noted that supportive feedback was received for the above transition provision, which was included in the Draft Standard of the amendments to AASB 17/PBE IFRS 17 (and, in the case of the AASB only, AASB 1050 Administered Items) issued in October 2022 for fatal flaw comment.

Non-distinct investment components

BC322The Boards noted that non-distinct investment components arise when, in all circumstances, there is a return of premium/levies from the insurer to the policyholder and that this can arise, for example, when the final amount of premiums/levies depends on the extent of claims. They noted that this sometimes arises for Workers’ Compensation insurance, which is conducted by both private and public sector entities. The Boards considered whether there are any public sector specific reasons for modifying AASB 17/PBE IFRS 17 in accounting for non-distinct investment components.

BC323The Boards concluded that there is no need for public sector modifications in respect of non-distinct investment components on the basis that:

(a)            the nature of the non-distinct investment components that arise in the public sector appear to be no different from those that arise in the private sector; and

(b)            based on informal consultation with key stakeholders, the incidence of non-distinct investment components in the public sector is no more prevalent, and possibly less prevalent, than in the private sector.

Regulatory matters, including Government Finance Statistics (GFS) implications, raised in feedback on AASB ED 319

GFS-related matters

BC324Some respondents to AASB ED 319 raised the following GFS reporting issues:

(a)            possible scope differences between accounting practice and GFS, including that GFS refers to ‘premiums’ in respect of an ‘insurance corporation’, implying premiums are an essential feature of insurance, while AASB ED 319 referred to ‘source and extent of funding’ as one of six indicators; and

(b)            AASB 17 requires investment returns to be recognised, measured and presented separately, while GFS deems the income generated by the investment of reserves as an implicit premium supplement attributed to policyholders.

BC325The AASB identified that both the scope issue and investment returns issue can arise under the superseded AASB 1023/AASB 4 and concluded that these matters, at this stage, should be addressed through liaison between the AASB and the Australian Bureau of Statistics, rather than by modifying AASB 17. The AASB noted that a number of other potential issues also need to be discussed with the Australian Bureau of Statistics, including the AASB 17 classification of the impacts of: (i) changes in discount rates and inflation rates; and (ii) the unwinding of discounting and inflating cash flows, as a separate item ‘insurance finance income or expenses’.

Audit and assurance matters

BC326Some respondents identified a range of audit and assurance challenges under the AASB ED 319 proposals relating to the scope of AASB 17 that could increase audit and client costs including:

(a)            significant audit resources will be required to make judgments about which arrangements should be subject to the assessment process and to make the assessments based on the indicators;

(b)            a lack of clarity on the essence/focus of an insurance contract will be an audit challenge, including how coverage periods are intended to be determined where there is no contract;

(c)             any arrangements currently accounted for under AASB 137 that need to migrate to AASB 17 will pose a challenge since the proposals in their current form have not been tested; and

(d)            applying the notion that risk adjustments are based on compensation sought for bearing risk.

BC327The AASB noted that applying any new Accounting Standard would require an entity to incur costs and effort to ensure the new requirements are applied appropriately and concluded that each of the above matters, to some extent, are at least mitigated, based on the following:

(a)            the Boards’ decisions to identify two pre-requisites, two indicators and two other considerations and explain how they are applied should help to ease the auditing challenges around determining which arrangements fall within the scope of AASB 17;

(b)            the range of public sector modifications to AASB 17 should help minimise the costs of transitioning from AASB 1023/AASB 4 and, if relevant, from AASB 137; and

(c)             further reasoning is included in the Basis for Conclusions on risk adjustments.

Cost-benefit considerations

BC328Disparate views were expressed by some respondents in response to AASB ED 319 on the following matters that relate to whether the application of AASB 17 to the public sector is cost-beneficial:

(a)            the usefulness of the information that would be produced by public sector entities applying AASB 17;

(b)            greater consistency of accounting that could be achieved across entities;

(c)             costs associated with applying the indicators for determining whether an arrangement falls within the scope of AASB 17;

(d)            costs associated with liability measurement, including for actuarial services; and

(e)             costs associated with determining eligibility for the premium allocation approach and/or the costs of applying the general measurement model to determine liabilities for remaining coverage.

BC329The AASB concluded that acting on the matters raised would change the objective of the project and that the public sector modifications made to AASB 17 either fully address or substantially mitigate the concerns expressed, based on the following:

(a)            the Boards’ decisions on identifying two pre-requisites, two indicators and two other considerations and explaining how they are applied should help to reduce the costs of determining when arrangements fall within the scope of AASB 17, and this would be expected to be a ‘one-time’ determination; and

(b)            providing public sector entities with an accounting policy choice to apply the premium allocation approach.

Implications for AASB 4, AASB 1023 and AASB 1038

BC330The AASB noted that adopting IFRS 17 would supersede the following Standards and, therefore, change current accounting requirements for insurance contracts:

(a)            AASB 4 Insurance Contracts;

(b)            AASB 1023 General Insurance Contracts; and

(c)             AASB 1038 Life Insurance Contracts.

BC331The AASB acknowledged that doing so would improve financial reporting in some respects but not in other respects.

BC332Regarding the key aspects, the AASB noted that:

(a)            the main improvements include:

(i)              greater clarity around the accounting for acquisition costs, particularly for general insurance; and

(ii)             greater alignment with other industries of the basis for revenue recognition for insurance contracts with coverage periods greater than one year; and

(b)            the main areas of concern include:

(i)              use of historical (inception-date) discount rates in accounting for the contractual service margin under the general measurement model;

(ii)             use of ‘coverage period’ (rather than pattern of service provision) as the basis for recognising the contractual service margin in profit over the contract life; and

(iii)            the level of aggregation of contracts for accounting purposes.

BC333In weighing up these issues, the AASB also acknowledged the precedent it established when it decided not to adopt IAS 26 Accounting and Reporting by Retirement Benefit Plans in favour of retaining the Australian accounting requirements specified in AAS 25 Financial Reporting by Superannuation Plans. This decision was subsequently reconfirmed when the AASB issued AASB 1056 Superannuation Entities to supersede AAS 25.

BC334In considering the facts and circumstances surrounding the AASB’s decisions not to adopt IAS 26 (and thereby have an exception to its IFRS adoption policy), the AASB concluded that the legislative environment as well as tailored financial reporting requirements for superannuation entities (which were not adequately addressed in IAS 26) justified the need for a specific Australian pronouncement (see paragraphs BC7–BC11 of AASB 1056). In contrast, overall, the AASB concluded that IFRS 17 represents a comprehensive, internationally consistent, set of financial reporting requirements for Australian insurers, despite the issues noted in paragraph BC332(b).

BC335On balance, the AASB considered that the benefits arising from international harmonisation in relation to the accounting for insurance contracts, and the greater alignment of the basis for revenue recognition with other industries noted in paragraph BC332(a)(ii), outweighed the drawbacks noted in paragraph BC332(b).  Accordingly, the AASB decided to:

(a)            supersede AASB 4 and AASB 1023 for private sector entities when AASB 17 is applied to those entities, that is, for annual periods beginning on or after 1 January 2023;

(b)            repeal AASB 4 and AASB 1023 for annual periods beginning on or after 1 July 2026 when AASB 17 is applied to all entities, including public sector entities; and

(c)             repeal AASB 1038 and supersede Interpretation 1047 Professional Indemnity Claims Liabilities in Medical Defence Organisations (see paragraphs BC337–BC340) for annual periods beginning on or after 1 January 2023, on the basis that AASB 17 applies to those periods in respect of private sector entities and the pronouncements are not relevant to public sector entities.

BC336The AASB noted that a consequence of its decision to supersede AASB 1023 and AASB 1038 is that Australian specific disclosures (eg paragraphs 17.8 and 17.10(c) of AASB 1038 relating to regulatory capital disclosures and conformance with the Life Insurance Act 1995) are no longer required. The AASB is closely monitoring the response of the Australian Prudential Regulation Authority to the introduction of AASB 17. At this stage there are no plans for the AASB to include similar supplementary disclosures in AASB 17.

Implications for Interpretation 1047 Professional Indemnity Claims Liabilities in Medical Defence Organisations

BC337Interpretation 1047 was originally issued in June 2002 to address divergent views as to whether a Medical Defence Organisation (MDO) should recognise a liability for future claims arising from the medical indemnity insurance it offered, given the MDO had discretion as to whether to pay claims made by members. The Interpretation required that a MDO recognise its obligations in a manner consistent with the principles in AASB 1023.

BC338After 1 July 2003, the Medical Indemnity Act 2002 came into effect and regulatory arrangements allowed only authorised general insurers to offer medical indemnity insurance. In August 2016 the AASB noted feedback from staff outreach to industry stakeholders indicating that all medical indemnity insurance had, as of then, been transferred to authorised general insurers (or subsidiaries thereof).

BC339Also at its August 2016 meeting, the AASB noted that some business written by MDOs prior to 1 July 2003 could still be in existence, and therefore might still require the guidance of Interpretation 1047. However, on balance, based on the feedback from staff outreach to industry stakeholders, the AASB concluded that any such remaining business would be immaterial to the financial statements of the affected insurers.

BC340Accordingly, the AASB concluded that it would supersede Interpretation 1047 upon the adoption of IFRS 17 [as AASB 17] for private sector entities given it was no longer materially relevant, could result in a perceived ‘difference’ from IFRS Standards if retained and no longer reflected predominant current practice.

Implications for AASB 1056 Superannuation Entities

BC341The AASB issued Exposure Draft ED 223 Superannuation Entities (December 2011) proposing new accounting requirements for superannuation entities as part of the AASB’s comprehensive review of AAS 25.  ED 223 proposed that superannuation entities must measure any liabilities arising from insurance arrangements provided to members in accordance with the approach in AASB 119 Employee Benefits for defined benefit plans.

BC342The AASB issued AASB 1056 in June 2014 instead requiring that superannuation entities apply the defined benefit member liability measurement requirements of AASB 1056, as opposed to AASB 119, in response to feedback received on ED 223.

BC343When issuing AASB 17 the AASB was aware that a superannuation entity acting in the capacity of an insurer would apply the insurance requirements of AASB 1056 and not those of AASB 17 because AASB 1056 effectively overrides AASB 17 for a superannuation entity acting in the capacity of an insurer. The AASB noted this would mean superannuation entities could not claim compliance with IFRS Standards. However, the AASB noted that superannuation entities could not claim IFRS compliance anyway because AASB 1056 does not incorporate the corresponding IASB Standard. Accordingly, the AASB decided that no amendments were necessary to the insurance requirements of AASB 1056 as IFRS compliance is not an objective in this limited circumstance. For the avoidance of doubt, the AASB also decided to prevent superannuation entities from applying AASB 17 through an amendment to AASB 1057 Application of Australian Accounting Standards.  Consequently, the AASB deleted a cross-reference to IAS 26 from paragraph 7(b) of AASB 17 instead of replacing it with a cross-reference to AASB 1056.

BC344The AASB also considered groups where the consolidated financial statements of a superannuation entity include an insurance subsidiary that applies AASB 17. On this matter the AASB noted that no significant issues were brought to its attention during the development of either AASB 1056 or AASB 17, nor since.

BC345Accordingly, the AASB decided to issue AASB 17 without any consequential amendments to the insurance requirements of AASB 1056.