Guidance Notes: AASB 1023 Application
From 2005, insurance contracts issued by organisations registered under the National Health Act1953 as Registered Health Benefit Organisations (RHBOs), are required to be treated under Accounting Standard AASB 1023 General Insurance Contracts for the purposes of an entity’s financial report required by the Corporations Act or for the purposes of a general purpose financial report.
This guidance has been issued to assist RHBOs in applying AASB 1023 when preparing general purpose financial reports. It does not address all aspects of AASB 1023 and it should not be seen as a substitute for the Standard in the areas it does address. This guidance does not address any implications for reporting to PHIAC under PHIAC’s prudential standards.
AASB 1023 has been revised to incorporate the requirements of international accounting standard IFRS 4 Insurance Contracts. The previous version of the general insurance accounting standard, AASB 1023 Financial Reporting of General Insurance Activities, did not apply to medical benefits insurance. The revised version of AASB 1023 was issued in July 2004 and applies to annual reporting periods beginning on or after 1 January 2005. Any entity that issues an insurance contract is an insurer for the purposes of the Standard.
A key aspect of AASB 1023 is that it must be applied to all contracts that meet the definition of an insurance contract under the Standard. To meet the definition of an insurance contract a contract must transfer significant insurance risk. This test must be applied at the contract level. It is possible that there are certain products sold by RHBOs that will not meet the definition of an insurance contract. Where a contract does not meet the definition of an insurance contract it must be treated under AASB 139 Financial Instruments: Recognition and Measurement, to the extent that it gives rise to financial assets or financial liabilities, and under AASB 118 Revenue, to the extent that it represents a service contract. This guidance does not address such contracts.
This guidance addresses key steps an insurer will need to take in considering the accounting for insurance contracts:
- Is the contract an insurance contract or not? Whilst the test is applied at an individual contract level, the results of the test can be applied to groups of contracts that broadly have the same terms and conditions;
- What is the period of the contract over which premiums are to be recognised? and
- What is the expected pattern of the incidence of risk? Premiums must be recognised in accordance with this pattern.
The guidance also provides simple examples to clarify these steps and deals with specific issues such as periods of “free” cover and guidance on the standard specifically clarifies and standardised the following aspects of the accounting standard:
- Premium recognition
- Term of contract and what is a contract? How does the contract terminate?
- Prudential margins for sufficiency inside OSC Provisions
- Significant insurance risks and the standing of ancillary-only business (and bundling of products more generally)
- New business — waiting periods that exceed the prepaid period
- Reinsurance arrangements – a benefit item or a revenue item?
- Loyalty bonuses and programs
- Liability recognition
- Deferred acquisition costs
- Asset valuation
Critical to AASB 1023 is the manner in which premiums are recognised in the income statement. AASB 1023 requires premiums and acquisition costs to be recognised, over the contract period, in accordance with the expected pattern of the incidence of risk under the related insurance contracts. Claims costs are recognised when incurred. When claims are incurred in line with expectations, underwriting profit is earned in accordance with the pattern of risk; this is the underlying objective of the requirements.
Other aspects of RHBOs financial reports must be treated under the other applicable accounting standards; for example, investments in term deposits are to be treated under AASB 139. However, for assets that back general insurance liabilities, whilst they are treated under the applicable accounting standard, AASB 1023 restricts the measurement choices available under those standards. AASB 1023 requires all assets backing general insurance liabilities to be measured at fair value, where this is allowable under the applicable accounting standards.
The requirements of AASB 1023 apply to an RHBO’s financial report where information from their application is material in accordance with AASB 1031 Materiality. Note that materiality under Australian Auditing Standards may be lower than materiality defined by Accounting Standards.
This document has been prepared by the Finance and Audit Committee of the AHIA with input and guidance from the AHIA, PHIAC, the AASB, Ernst & Young, KPMG and PricewaterhouseCoopers.
While this guidance represents the consensus view of the members of the panel at the time of issue, it should not be regarded as representative of the official views of the AHIA, PHIAC, the AASB or of any of the members in isolations, nor of their respective employers.
This guidance has been prepared based on AIFRSs on issue as at 24th August 2005.
A full copy of the Guidance Notes can be found here