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Insurance Contracts
IFRIC 12
REPORTING

May 2023 AFAR0714

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Contents
L E C T U R E N O T E S ............................................................................................................. 1
INSURANCE CONTRACTS...................................................................................................................... 1
Scope and applicability .................................................................................................................... 1
Definition of terms .......................................................................................................................... 1
Types of insurers ............................................................................................................................. 1
Examples of insurance contracts .................................................................................................... 2
Legal principle of insurance ............................................................................................................ 3
Classification of Insurance Contracts ............................................................................................. 3
Features of an Insurance Contracts................................................................................................ 3
Recognition ...................................................................................................................................... 4
Accounting Procedures ................................................................................................................... 4
Change in Accounting Policy ........................................................................................................... 5
IFRIC 12 – SERVICE CONCESSION ARRANGEMENTS ........................................................................... 6
Features of BOT ............................................................................................................................... 6
Scope ................................................................................................................................................ 6
Recognition under IFRIC 12............................................................................................................. 6
L E C T U R E P R O B L E M S ................................................................................................ 8
INSURANCE CONTRACTS...................................................................................................................... 8
Initial recognition............................................................................................................................. 8
24th Method .................................................................................................................................... 8
Deferred Acquisition Cost ............................................................................................................... 9
Marine Insurance Risks ................................................................................................................... 9
IFRIC 12 ............................................................................................................................................... 10
M U L T I P L E C H O I C E T H E O R Y ........................................................................ 11

PRIA-ARC CPA Review School, Inc.

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 Advanced Financial Accounting & Reporting
L E C T U R E N O T E S
INSURANCE CONTRACTS
Introduction
PRFS 17 Insurance Contracts superseded
PFRS 14 Insurance Contracts, an interim
standard, which allows insurance companies
improved their accounting and disclosures.
Scope and applicability
PFRS 17 applies to
a. insurance and reinsurance contracts by
an insurer.
b. reinsurance contracts held by an insurer;
and
c. investment contracts with discretionary
participation feature by an insurer.
Does not applies to:
• Contracts that are not insurance
contracts
• Financial guarantee
• Insurance policy whereby the entity is
the policyholder.
• Contracts that meet the definition of an
insurance contracts but have as their
primary purpose the provision of
services for a fixed fee are accounted
for under PFRS 15 instead of PFRS 17 if
the following conditions are met:
1. The price of the contract is not
affected by the risk.
2. The customer is compensated
through services rather than cash
payment.
3. Insurance risk arise from customers
use of services rather than from
uncertainty.
Josart B. Tubay, CPA, MBA
Definition of terms
• Insurer – the insurance company, the
party that has an obligation to
compensate the policyholders.
Types of insurers
1. Government insurance – e.i.
GSIS and SSS.
2. Propriety insurance – owned
by stockholders and operated
for profit.
3. Mutual insurance – owned by
policyholders themselves.
Examples are cooperatives.
• Insurance contracts – a contract under
which one party (the issuer) accept
significant insurance risk from another
party (the policyholder) by agreeing to
compensate the policyholder if a
specified uncertain future event (the
insured event) adversely affects the
policyholder.
Elements in the definition of insurance
contracts.
1. Transfer of significant
insurance risk
2. Payment from the insured
(premium)
3. Indemnification against loss –
generally this is in the form of
cash. However, some insurance
contracts permit payments in
kind such as:
a. Replacing the insured property
b. Providing services such as
medical and repair.
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 Insurance Contracts and IFRIC 12
Types of insurance contracts
1. Direct insurance contracts –
the insurer directly accepts risk
from the insured and assumed
the sole obligation to
compensate.
2. Reinsurance – an insurance
contract issues by an insurer
(reinsurer) to compensate
another insurer (cedant).
3. Retrocession – reinsurance of a
reinsurance where the risk
transferred in called the
retrocession and the insurer is
called the retrocessioner.
Separating the components of an
insurance contracts
• PFRS 9 is applied to separate the
embedded derivative or distinct
investment component
(bifurcation) and applies PFRS 15 to
separate components.
• Risk – (uncertainty) an essential element
of an insurance contracts. They can be
speculative or pure risk. At least one of
the following is uncertain at the date of
inception of the insurance contracts:
1. Occurrence of an insured event.
2. Timing of the event
3. Amount of payment when the
insured event occurs.
• Insurance risk – risk, other than financial
risk, transferred from the holder of a
contract to the issuer. It is significant if
an insured event could cause an insurer
to pay significant additional benefits. A
contract that transfers in insignificant
event is NOT an insurance contract.
May 2023
• Financial risk – risk of possible future
change in one or more of a specified
interest rate, financial instrument price,
commodity price, foreign exchange rate
or other variable. The existence of
insurance risk is not an insurance
contracts.
• Lapse or persistency risk – the risk that
the policyholder will cancel the
contract. This is not an insurance risk.
• Expense risk – the risk of unexpected
increases in the administrative costs
associated with the servicing of a
contract. This is also not an insurance
risk.
• Policyholder – a party that has a right to
compensation.
• Insured event – uncertain future event
that is covered by an insurance contract
and creates insurance risk.
Examples of insurance contracts
a) Insurance against theft
b) Insurance against product liability,
professional liability, civil liability or legal
expenses.
c) Life insurance and prepaid funeral plans
d) Life-contingent annuities and pension.
e) Disability and medical cover
f) Surety bonds, fidelity bonds,
performance bonds and bid bonds.
g) Product warranties issued by another
party for goods sold by a manufacturer,
dealer or retailer.
h) Title insurance
i) Travel insurance
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 Advanced Financial Accounting & Reporting

j) Catastrophe bonds that provide for Classification of Insurance Contracts

reduced payments of principal and 1. NON-LIFE
interest if a specified event affects the a. Marine insurance
issuer of the bonds. b. Fire insurance – building, contents
k) Insurance swaps or both
c. Casualty insurance
Examples of NOT insurance contracts i. Motor insurance – property
a) Investment contract that have a legal and liability
form of an insurance contracts. ii. Personal accident insurance
b) Self-insurance iii. Travel insurance
c) Gambling contracts iv. Burglar and theft
d) Derivatives v. Health insurance
e) Credit-related guarantee d. Surety – fidelity bonds

Legal principle of insurance 2. LIFE INSURANCE

1. Principle of Insurable Interest – the
insured must have an insurable interest
in the property or life insured.
2. Principle of Utmost Good Faith – all
insurance should be negotiated with
utmost honesty and fairness.
3. Principle of Indemnity – the insured is
compensated for the loss and revert
back to his previous financial condition.
This does not apply to life insurance.
4. Principle of Contribution – this is the
consequence of the principle of
indemnity.
5. Principle of Subrogation – this principle
is an extension and another
consequence of the principle of
indemnity.
6. Principle of Loss minimization – in case
of sudden loss event, the insured should
try his best to minimize the loss.
7. Principle of Proximate Cause – when a
loss caused by more than one loss
event, the closest cause is taken into
consideration.
a. Term life insurance – for a definite
premium period and definite period
for vesting of benefits.
b. Permanent life insurance
i. Whole life coverage
ii. Universal life coverage
iii. Limited pay
iv. Endowments
Features of an Insurance Contracts
Contracts with discretionary participation
feature (DPF) – contracts that has contractual
rights to receive additional benefits that:
• Is significant portion of the contract
benefits
• the amount or timing is at the discretion
of the issuer.
• Is usually based on
o Performance of a specified proof of
contracts
o Realized/unrealized investment
returns on proof of contracts
o Profit/loss of the company
• Includes guaranteed benefits that:
o Is the payment or other benefits

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 Insurance Contracts and IFRIC 12
o Policyholder has an unconditional
right
o Is not subject to contractual
discretion
Accounting for DPF
• Use existing company policy
• The guaranteed element is accounted
for separately that is the DPF is
classified as a liability or an equity,
otherwise, it is classified as equity.
• The DPF is subject to “liability adequacy
tests”
• The premiums may be recognized as
revenue without separating the equity
component form the DPF.
Unbundling of deposit component wherein
the deposit component is not a derivative but
a financial instrument. This happens when
the deposit component can be measured
separately and the issuer of the policy does
not require the recognition of deposit
component.
Unbundling is permitted but not required. It
is prohibited if cannot be measured
separately.
Recognition
PFRS 4 prescribes the following guidelines:
PROHIBITS THE:
• Provision for possible claims under
contracts that are not in existence at
the date of reporting. A.K.A.
Catastrophe Accounting.
• Off-setting of (a) reinsurance assets
against the related insurance liability;
and (b) income & expense from
reinsurance contracts against the
May 2023
expense & income from the related
insurance contracts.
REQUIRES THE:
• Liability tests
• use current estimates of future
cash flow
• any deficiency is recognized in
profit/loss (CA < current estimate =
P/L)
• if the company policy does not
requires, use PAS 37
• The retention of insurance liability
• Impairment test for reinsurance assets
The standard also prescribe the recognition
of:
1. insurance liability - insurer's net
contractual obligations
2. insurance asset - insurer's net
contractual rights
3. reinsurance assets - the cedant's net
contractual rights
4. insurance acquired under business
combination
a. may be recognize as an intangible
asset for the difference between
the fair value and carrying amount
of insurance liability.
b. This intangible asset is outside the
scope of PAS 36 and PAS 38
Accounting Procedures
Generally, PFRS 04 has allowed the insurance
companies to use their existing policy that is
the 24th method until the final phase of
standard development. The following are the
accounts used in accounting for insurance
contracts:
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 Advanced Financial Accounting & Reporting
1. Assets
a. Insurance receivables – due from
policyholders, agents and brokers.
Due from ceding company.
b. Deferred acquisition costs – direct
attributable cost related to the
insurance contracts such as
commissions. Amortized and
adjusted as of the end of the
reporting period using the 24th
method, except, marine cargo risks.
They are included in “liability
adequacy tests”
c. Reinsurance assets – due from
reinsurance companies wherein the
entity is the cedant.
2. Liability
a. Insurance contracts liability –
provision for unearned premium.
Recognized using 24th method by
way of adjusting entry at the
reporting date. Also include
provision for claims and provision
for premium adequacy.
b. Insurance payable – due to
reinsurers. Funds held to
reinsurers.
c. Deferred reinsurance commission –
direct cost of ceding a reinsurance
contracts.
3. Revenues
a. Gross premium – total premium
receivable. Recognized at inception
date then adjusted for the
unearned portion at the reporting
date using 24th method.
b. Premium ceded to reinsurers –
amount of gross premium ceded to
reinsurers.
Josart B. Tubay, CPA, MBA
c. Net premium – gross premium less
premiums ceded.
4. Expenses
a. Gross benefits and claims – paid or
unpaid benefits to policyholders.
b. Claims ceded to reinsurers –
amount paid or unpaid to cedant.
c. Net benefit and claims – gross
benefits and claims less claims
ceded to reinsurers.
Change in Accounting Policy
• Accounted for under PAS 08
• The following are specific issues to be
resolved under PFRS 04:
1. Current interest rates – irrevocable
until the settlement of the liability
2. Continuation of existing practice –
the standards permitted the
company to use the existing policy
they have been practicing but they
are prohibiting to introduce new
practices.
3. Prudence – change in policy (PAS 8)
is not allowed to eliminate
prudence.
4. Future investment margins –
recognized under existing
accounting policy shall be
eliminated using change in policy
(PAS 8).
5. Shadow accounting – permitted but
not required. The unrealized gains
and losses that are recognized in
OCI are reflected in the
measurement of insurance liability.
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 Insurance Contracts and IFRIC 12
IFRIC 12 – SERVICE CONCESSION
ARRANGEMENTS
These are infrastructure for public services
where in the private sector participate in the
development, financing, operations and
maintenance through “build-operate-
transfer” (BOT) arrangements. In BOT
arrangements, these infrastructures are
outsourced to private companies called the
operators through a competitive bidding or
direct negotiation.
BOT are also called “service concession
arrangements”, “rehabilitate-operate-
transfer”, public-to-private service
concession” and “private-public partnership”
(PPP).
Philippine BOT is governed by R.A. 7718 or
the Philippine BOT Law which amends the
certain sections of R.A. 6957.
Features of BOT
1. The service is of public service nature
and shall be performed for the public on
behalf of the public sector or
government.
2. The grantor of the BOT is a public sector
entity or the government.
3. The operator is responsible for at least
some of the management and related
services.
4. The contract sets the initial price to be
levied by the operator
5. The operator is obliged to hand over the
infrastructure to the grantor at a
specified condition at the end of the
arrangement.
May 2023
Scope
IFRIC 12 applied to both:
1. Infrastructure that the operator
construct or acquired for the purpose of
the service arrangement; and
2. Existing infrastructure to which the
grantor gives the operator access for
the purpose of service arrangements.
IFRIC 12 applies to BOT contracts if:
• The grantor (government) controls or
regulates
o What services the operator
provides
o To whom it must be provided
o At what price
• The grantor controls, through
ownership, beneficial entitlement or
any significant residual interest in the
infrastructure.
Outside the scope
1. Infrastructure recognized as PPE by the
operator before entering BOT contracts.
(PAS 16)
2. Outsourcing the operation of
governmental unit’s internal services.
3. Does not apply to accounting by
grantors.
Recognition under IFRIC 12
IFRIC 12 sets out the general principles on
recognizing and measuring the obligations
and related rights in service concession
arrangements as follows:
• Treatment of the operators rights – BOT
shall not be recognized as PPE of the
operator because the contractual rights
does not convey control to the use of
the public service infrastructure.
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 Advanced Financial Accounting & Reporting

• Recognition and measurement of the receive an intangible asset, shall be

arrangement – the operator acts as a capitalized.
service provider, such services are:
• Subsequent accounting treatment
Construction or upgrade services
The consideration given by the grantor • Items provided to the operator – shall
to the operator shall be recognized in not be recognized as PPE.
accordance with PFRS 15 that may be
rights to:
• Financial assets – where in the ******end of lecture notes******
operator has an unconditional right
to receive cash or another financial
asset, such as when the grantor
contractually guarantees to pay the
operator
o Specified or determinable
amount
o The shortfall, if any, between
amounts received from users
of public service and specified
or determinable amount.
• Intangible assets – if the operator
receives a right to charge the users
of public service.

If the consideration received is partly

financial asset and partly intangible
asset, each component shall be
accounted for separately.

Operation Services
Contractual obligation to restore an
infrastructure to a specified level
• To maintain the infrastructure
• To restore the infrastructure

• Borrowing costs – attributable to the

arrangement is recognized as an
expense in the period incurred unless
the operator has a contractual right to

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 Insurance Contracts and IFRIC 12

L E C T U R E P R O B L E M S

INSURANCE CONTRACTS
Initial recognition
1. On January 01, 20x1, LUIS, a broker, submitted to PRIA Insurance Co. a notification of sale of
a one-year fire insurance for a premium of P1,000. The broker’s commission is 10%. Ignoring
taxes and documentary stamp tax. Which of the following is false?
a. PRIA will debit Insurance Receivable, P900.
b. PRIA will debit Commission Expense, P100.
c. PRIA will credit Gross Premium Revenue, P1,000.
d. PRIA will credit Gross Premium Revenue, P900

2. On January 01, 20x1, PRIA Insurance, a reinsurer, received an insurance policy for MAPRE
Insurance, a cedent, for one year for P30,000. Broker’s commission is 10%. Ignoring taxes and
documentary stamp tax. In the books of the reinsurer (PRIA), which of the following is true?
a. DR. Due from ceding company, P27,000.
b. CR. Commission Income, P3,000.
c. CR. Premiums Liability, P30,000.
d. all of the above

24th Method
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
On January 01, 20x1, PRIA Insurance sold a fire insurance to Mr. SUNOG through a broker
amounting to P10,000 premium for a one-year insurance. The broker’s commission is 20%. On
the same date, PRIA ceded 80% of the contract to ABC Insurance. Commission earned on the
reinsurance is P700.

Required:
3. What amount should PRIA recognized as net premiums in its books?
4. What amount should ABC Insurance recognized as gross premiums?

THE NEXT ITEMS ARE BASED ON THE FOLLOWING

On March 01, 20x1, PRIA Insurance Inc. issued a one-year fire insurance contract for a total
premium of P12,000. The premium is payable in 12 monthly installments. The first installment is
made on March 01, 20x1. The entity is using PFRS 4. It has been the company policy to use the
24th method. (ignore tax and DST).

Required:
5. What amount of Gross Premiums should be recognized on March 01, 20x1?
6. On December 31, 20x1, what amount should be reported as Insurance Receivable?
7. What amount of Gross Premiums earned should be recognized on December 31, 20x1?

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 Insurance Contracts and IFRIC 12
Deferred Acquisition Cost
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
On July 01, 20x1, PRIA writes fire insurance policy for a total premium of P360,000 payable every
beginning of the month starting July 01. The commission expense on the direct insurance was
P12,000. On the same date, PRIA ceded P120,000 premiums to reinsurers. Gross benefits and
claims paid for the period amounted to P10,000. The company policy is to use the 24th method.
PRIA applies PFRS 4. (Ignore taxes and documentary stamp tax).

Required:
8. What amount should be reported as net income for 20x1?
9. What amount of total assets should be reported at the end of 20x1?
10. What amount of Provision for Unearned Premiums should be reported at the end 20x1?

11. During 20x1, PRIA Insurance have an outstanding fire insurance policy for a total premiums
of P10,000,000. Premiums ceded to reinsurers out of the outstanding premium amounted to
PP6,000,000. The following are the balances of the provision for unearned premiums:

Provision for Premiums ceded Provision for

unearned to reinsurers unearned
premiums premiums - net
Balance, Jan. 01 P4,000,000 P2,000,000 P2,000,000
Balance, Dec. 31 5,600,000 2,400,000 3,200,000

Required:
What amount should be reported as net premiums earned?

Marine Insurance Risks

12. On January 01, PRIA Insurance Corp. wrote an insurance policy for Aboitiz Express for a
marine cargo risk. The total premium of the one-year insurance was P120,000. On the same
date, PRIA ceded 80% of the total premium.

Required:
On December 31, what amount should be reported as Provision for the unearned premium?

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 Insurance Contracts and IFRIC 12
IFRIC 12

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

PRIA Inc. won the competitive bidding to construct a road by the national government. The terms
of the arrangement require PRIA to:
• Construct a road for 2 years starting January 1, 20x1.
• Maintain and operate the road to a specified standard for 8 years after the
construction.
• The national government will pay P200 per year starting year 3 to 10.
• The effective rate on the financial asset is 6.18%.
• The effective rate on the loans is 6.7%

The following are information and estimates made by PRIA.

Year Contract Cost Stand-alone Price

Construction 1 500 525
Construction 2 500 525
Operation 3 10 12
Operation 4 10 12
Operation 5 10 12
Operation 6 10 12
Operation 7 10 12
Operation 8 10 12
Operation 9 10 12
Operation 10 10 12

Required:
13. What amount of financial asset should be presented at the end of year 2?
14. What amount of net income(loss) should be reported at the end of year 2?
15. What amount of borrowing cost should be charge as an expense at the end of year 3?
16. What amount of revenue should be recognized at the end of year 3?
17. What amount should be reported as net income(loss) at the end of year 3?
18. Using the previous information, assume that PRIA instead acquired the rights to charge the
users of public services. Thus, the arrangement was accounted as an intangible asset. What
amount of intangible asset should be presented at the end of year 2?
19. What amount of net income(loss) should be reported at the end of year 2?
20. What amount of borrowing cost should be charge as an expense at the end of year 3?
21. What amount of revenue should be recognized at the end of year 3?
22. What amount should be reported as net income(loss) at the end of year 3?

**end of Lecture Problems***

May 2023 Page 10

 Insurance Contracts and IFRIC 12
M U L T I P L E C H O I C E T H E O R Y

Insurance contracts
1. It is a contract under which one party (the insurer) accept significant insurance risk from
another party (policyholder) by agreeing to compensate the policyholder if a specified
uncertain future event (insured event) adversely affects the policyholder.
a. Insurance contracts c. Contract of loan
b. Contract of guarantee d. Contract of surety

THE NEXT ITEMS ARE BASED ON THE FOLLOWING

Pioneer Insurance Co. is concerned about the motor insurance contract with Mr. Paul. Thus,
Pioneer Insurance Co. obtains an insurance from Peoples Gen Insurance Co. for protection against
possible losses on the insurance contract with Mr. Paul. In case of accident, or physical damage,
Pioneer Insurance Co. shall compensate Mr. Paul. However, Peoples Gen Insurance Co. also
obtains insurance from Global Insurance Co. for protection against the reinsurance contract with
Pioneer Insurance Co.

2. Pioneer Insurance Co. is known as

a. Policyholder c. Reinsurer
b. Cedant d. Retrocessionaire
3. Peoples Gen Insurance Co. is known as
a. Policyholder c. Reinsurer
b. Cedant d. Retrocessionaire

4. Global Insurance Co. is known as

a. Policyholder c. Reinsurer
b. Cedant d. Retrocessionaire

5. The following are example of insurance contracts except

a. insurance against theft
b. insurance against damage to property
c. life insurance
d. catastrophe bonds that provide reduced payments of principal and interest or both,
based on climatic, geological and other physical variable that is not specific to a party to
the contract.

6. PFRS 4 was introduced principally for what reason?

a. to make limited improvements to the accounting for insurance accounting
b. to completely overhaul insurance accounting
c. as a response to recent scandals within the accounting industry
d. because of pressure from the financial services authorities in several countries

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 Insurance Contracts and IFRIC 12

7. Which of the following types of insurance contracts would probably not be covered by PFRS
4?
a. motor insurance c. medical insurance
b. life insurance d. pension plans

8. An insurance contract can contain both deposit and insurance elements. An example might
be a reinsurance contract where the cedant receives a repayment of the premiums at a future
time if there are no claims under the contract. Effectively this contributes a loan by the cedant
that will be repaid in the future. PFRS 4 requires that:
a. Each payment by the cedant is accounted for as a loan advance and as payment for
insurance cover.
b. the insurance premium is accounted for as a revenue item in the income statement.
c. The premium is accounted for under PAS 18.
d. The premium paid is treated purely as a loan and is accounted for under PAS 39

9. The following are examples of insurance contracts except:

a. product warranties issued by another party for goods sold by a manufacturer, dealer or
retailer
b. title insurance (insurance against discovery of defects in title to the land that were not
apparent when the insurance contract was written). In this case, the insured event is the
discovery of a defect in the title, not the defect itself.
c. travel insurance (compensation in cash or in kind to policyholders for losses suffered
while they were travelling.
d. credit related guarantee (or letter of credit, credit derivative default contract or credit
insurance contract) that requires payment even if the holder has not incurred a loss on
the failure of the debtor to make payments when due.

10. Uncertainty is the essence of the insurance contracts. Which of the following is uncertain at
the inception of the contract?
a. The occurrence of an insured event
b. The amount the insurer will need to pay if the event occurs
c. The timing of the event
d. All of the above

11. It refers to the practice by an insurer to change its accounting policies so that a recognized
but unrealized gain or loss on an asset affects those measurements in the same way that a
realized gain or loss does. This is permitted but not required by PFRS 4.
a. secret reserves accounting c. cookie jar accounting
b. watering stocks accounting d. shadow accounting

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 Insurance Contracts and IFRIC 12
12. Which PFRS would apply to those contracts that principally transfer financial risk, such as
credit derivatives?
a. PAS 23 c. PAS 39
b. PAS 28 d. PFRS 4

13. The party that has an obligation under reinsurance contracts to compensate a cedant if an
insured event occurs.
a. Reinsurer c. Cedant
b. Insurer d. Policyholder

14. An insurer’s net contractual rights under an insurance contract

a. insurance liability c. intangible assets
b. insurance assets d. reinsurance assets

15. PFRS 4 expressly

a. requires a liability adequacy tests
b. prohibits the offsetting of reinsurance assets against related insurance liabilities or
income and expense from reinsurance contracts against the expense and income from
the related insurance contracts.
c. prohibits provision for possible claims under contracts that are not in existence at the
reporting date (referred to as catastrophe provision)
d. requires the retention of insurance liability in the statement of financial position until
the obligation is extinguish
e. All of the above

16. An uncertain future event that is covered by an insurance contract and creates an insurance
risk
a. fortuitous event c. adverse event
b. insured event d. none of the choices

17. A cedant’s net contractual rights under reinsurance contract.

a. insurance liability c. insurance assets
b. guaranteed rights d. reinsurance assets

18. If an entity gives a product warranty that has been issued directly by a manufacturer, dealer
or retailer, which International Financial Reporting Standards is likely to cover this warranty?
a. PFRS 4 c. PAS 18 and PAS 37
b. PAS 39 d. PAS 32

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 Insurance Contracts and IFRIC 12
19. PFRS 4 says that insurance contracts should
a. generally continue to be subject to existing insurance policy during phase one
b. comply with IFRS framework document
c. comply with all existing IFRS
d. be covered by IAS 32 and IAS 39 only

20. An entity should apply PFRS 4 Insurance Contracts to which of the following?
a. Product warranties issued directly by a manufacturer, dealer or retailer
b. Contingent consideration payable or receivable in a business combination
c. direct insurance contracts in which the entity is the policyholder.
d. reinsurance contracts issued by the entity

21. Which of the following contracts practices is prohibited by PFRS 4?

a. shadow accounting
b. catastrophe accounting
c. a test for the adequacy of recognized insurance liability
d. an impairment test for reinsurance assets

22. It refers to the party that has a right to compensation under an insurance contract if an
insured event occurs
a. policyholder c. retrocessionaire
b. insurer d. reinsurer

23. Various type of insurance include

a. fire insurance
b. life insurance
c. sickness and accident insurance
d. All of these

24. Fire insurance is designed

a. to indemnify a person with an interest in property from loss of the property as a result
of fire
b. to protect against unintentional loss due to fire.
c. to prevent fire loss
d. to protect against arson

25. Life insurance

a. is payable upon the death of an insured person
b. may be either term or special purpose
c. incorporates the application for insurance into the policy of insurance
d. all of these

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 Insurance Contracts and IFRIC 12
26. An insurance contract is a contract of utmost good faith. This expression means
a. an insured is required to disclose all information requested by an insurer.
b. an insured must disclose only information which the insured considers relevant to the
insurance coverage
c. An insured is required to disclose information relating to his or her death
d. An insured is required to disclose information supporting the application for insurance

27. The term “rider” in an insurance contract means

a. the inclusion of another driver on a contract for automobile insurance
b. an additional clause attached to the insurance contracts that amends or alters the
contract.
c. is the same as endorsement
d. all of these

28. The doctrine of subrogation

a. is used by insurance companies to avoid payment of claims
b. requires that a person who is injured or suffers loss by the negligence of another person
to sue that person directly
c. refers to the right of an insurer to recover from another person the loss which it pays to
its insured.
d. requires that insured parties sue for their losses privately rather than making a claim
under an insurance policy

29. PFRS 4 requires an insurer to perform a liability adequacy test which is an assessment of
whether the carrying amount of an insurance liability need to be increased (or the carrying
amount of related deferred acquisition costs or related intangible assets decreased), based
on a review of future cash flows. If that assessment shows that the carrying amount of its
insurance liabilities (less related deferred acquisition costs and related intangible assets) is
inadequate in the light of the estimated future cash flows, the entire deficiency shall be
recognized as
a. profit or loss
b. other comprehensive income
c. charged directly to retained earnings
d. share premium

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 Insurance Contracts and IFRIC 12
IFRIC 12 SERVICE CONCESSION ARRANGEMENTS
30. The amount due from or at the direction of the grantor is accounted for by the operator from
the contract that is in the form of Financial Assets as:
a. Amortized cost
b. fair value through other comprehensive income
c. fair value through profit or loss
d. any of these

31. An operator under service concession arrangement will recognize borrowing costs during the
construction phase as:
a. assets c. liabilities
b. expenses d. any of these

32. An operator under service concession arrangement may capitalize borrowing costs during
the construction phase if
I. The operator has a contractual right to receive an intangible assets
II. The operator has a contractual right to receive cash of financial asset
a. I only c. Either I or II
b. II only d. Neither I nor II

33. The operator has an unconditional right to receive cash if the grantor contractually
guarantees to pay the operator
I. specified or determinable amounts
II. The shortfall, if any, between amounts received from users of the public service and
specified or determinable amounts, even if payment is contingent on the operator
ensuring that the infrastructure meets specified quality or efficiency requirements
a. I only c. Either I or II
b. II only d. Neither I nor II

34. Under PAS 23, an operator under service concession arrangement will recognize borrowing
cost attributable to the arrangement in the period in which they are incurred as
a. asset c. expense
b. liability d. receivable

35. If the operator receives a right or license to charge users of public service. Under service
concession arrangement the consideration received by the operator shall recognized as
I. Financial Assets
II. Intangible Assets
a. I only c. Either I or II
b. II only d. Both I and II

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 Insurance Contracts and IFRIC 12
36. If the operator receives a specific determinable amount from the grantor in exchange for the
services it renders. Under service concession arrangement the consideration received by the
operator shall recognized as
I. Financial Assets
II. Intangible Assets
a. I only c. Either I or II
b. II only d. Both I and II

37. This interpretation provides the accounting principles for recognizing and measuring the
obligations and related rights in service concession arrangements. The issues addressed are:
I. Recognition and measurement of arrangement consideration construction or upgrade
services
II. Treatment of the operator’s rights over the infrastructure
a. I only c. Either I or II
b. II only d. Both I and II

38. This interpretation provides the accounting principles for recognizing and measuring the
obligations and related rights in service concession arrangements. The issues addressed are:
I. Operating services
II. Borrowing cost
III. Subsequent accounting treatment of a financial asset and an intangible asset and items
provided to the operator by the grantor
a. I, II and III c. II and III
b. I and II d. I and III

39. The operator of the BOT arrangement shall recognize and measure revenue in accordance
with
a. PAS 11 c. PAS 11 and PAS 18
b. PAS 18 d. PFRS 15

40. The operator has unconditional right to receive cash if the grantor contractually guarantees
to pay the operator based on
a. NIL
b. current market value of the right
c. future value of the said unconditional right
d. specified or determinable amounts or the shortfall, if any, between amounts received
from users of the public service and specified or determinable amounts, even if payment
is contingent on the operator ensuring that the infrastructure meets specified quality or
efficiency requirements

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 Insurance Contracts and IFRIC 12

Suggested answers.
ABCDD, ADADD, DCABE, BDCAD, BBDAD, BBCAD, AACCB, ADADD,

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 Insurance Contracts and IFRIC 12
Advanced Financial Accounting and Reporting
AFAR0714 – Insurance Contracts and IFRIC 12
SUGGESTED SOLUTIONS
1. D
Journal Entry
*Insurance Receivable 900
Commission Expense 100
Gross Premium Revenue 1,000

*may use due from policyholder account

*the whole contract will be recorded in full at the inception date then will be adjusted at the reporting date using
24th method

2. A
Journal Entry
*Due from ceding company 27,000
Commission Expense 3,000
Gross Premium Revenue 30,000

Entry in the books of cedant

Premium ceded 30,000
Commission Income 3,000
Due to reinsurer 27,000

*may use Insurance Receivable account

3. D
PRIA Insurance
Gross premium revenue 10,000
Premiums ceded (10,000 x 80%) (8,000)
Net Premiums 2,000

4. B
ABC Insurance (reinsurer)
Gross premium (10,000 x 80%) 8,000

5. A
Journal Entry (March 1, 20x1)
Insurance Receivable 12,000
Gross Premium Revenue 12,000

6. C
Unpaid premiums
December 1, 20x1 1,000
November 1, 20x1 1,000
Insurance Receivable, 12/31 2,000

7. B

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 Insurance Contracts and IFRIC 12
Gross premium revenue 12,000
Earned portion 19/24
Gross premium earned 9,500

8. Gross Premium Earned (360,000 x 11/24) 165,000

Premium ceded (120,000 x 11/24) (55,000)
Net premium 110,000
Gross benefit claims (10,000)
Commission expense (12,000 x 11/24) (5,500)
Net income 94,500

9. Insurance receivable (360,000 x 6/12) 180,000

Deferred acquisition cost (12,000 x 13/24) 6,500
Total assets 186,500

10. Unearned Gross Premium (360,000 x 13/24) 195,000

Unearned Premium Ceded (120,000 x 13/24) (65,000)
Provision for Unearned Premiums 130,000

11. D
Gross premium revenue 10,000,000
Increase in provision for unearned premium
(5,600,000 - 4,000,000) (1,600,000) 8,400,000
Premiums ceded 6,000,000
Increase in premium ceded to reinsurer
(2,400,000 - 2,000,000) (400,000) (5,600,000)
Net Premiums 2,800,000

12. D
Gross premium for the last two months
(120,000 x 2/12) 20,000
Premium ceded (20,000 x 80%) (16,000)
Provision for unearned premium 4,000

13. B
AMORTIZATION FOR FINANCIAL ASSETS
Paid by Interest Amort. Financial Amort.
Date Grantor Income to Principal Asset Cost
A B C D E F
F x 6.18% B-C F+E-D
Year 1 - - 525 525
Year 2 32 (32) 525 1,082
Year 3 200 67 133 12 961
Year 4 200 59 141 12 833

AMORTIZATION FOR LOANS PAYABLE

Paid by Interest Amort. Loans Amort.

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 Insurance Contracts and IFRIC 12
Date Grantor Expense to Principal Payable Cost
A B C D E F
F x 6.7% B-C F+E-D
Year 1 - - 500 500
Year 2 34 (34) 500 1,034
Year 3 200 69 131 10 913
Year 4 200 61 139 10 784

Journal Entries
YEAR 1
Cash 500
Loans Payable 500

Cost of Construction 500

Cash 500

Contract Asset 525

Revenue 525

YEAR 2
Cash 500
Loans Payable 500

Cost of Construction 500

Cash 500

Contract Assets 525

Revenue 525

Contract Assets 32
Interest Income 32

Interest Expense 34
Accounts Payable 34

YEAR 3
Cash 200
Contract Asset 200

Accounts Payable 34
Loans Payable 166
Cash 200

Cash 10
Loans Payable 10

Contract Asset 12
Revenue 12

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 Insurance Contracts and IFRIC 12

Operating Expense 10
Cash 10

14. C
YEAR 1 YEAR 2 YEAR 3
Revenue 525 525 12
Cost of Construction (500) (500) (10)
Interest Income 32 67
Interest Expense (34) (69)
Net Income 25 23 -

15. A
AMORTIZATION FOR LOANS PAYABLE
Paid by Interest Amort. Loans Amort.
Date Grantor Expense to Principal Payable Cost
A B C D E F
F x 6.7% B-C F+E-D
Year 1 - - 500 500
Year 2 34 (34) 500 1,034
Year 3 200 69 131 10 913
Year 4 200 61 139 10 784

16. C
YEAR 1 YEAR 2 YEAR 3
Revenue 525 525 12
Cost of Construction (500) (500) (10)
Interest Income 32 67
Interest Expense (34) (69)
Net Income 25 23 -

17. D
YEAR 1 YEAR 2 YEAR 3
Revenue 525 525 12
Cost of Construction (500) (500) (10)
Interest Income 32 67
Interest Expense (34) (69)
Net Income 25 23 -

18. C
Journal Entry
YEAR 1
Intangible Asset 525
Revenue 525

YEAR 2
Intangible Asset 525
Revenue 525

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 Insurance Contracts and IFRIC 12

Intangible Asset 34
Accounts Payable 34

19. B
YEAR 1 YEAR 2 YEAR 3
Revenue 525 525 200
Cost of Construction (500) (500) (10)
Amortization (1,084/8) (136)
Interest Expense (69)
Net Income 25 25 (15)

20. D

21. A
YEAR 1 YEAR 2 YEAR 3
Revenue 525 525 200
Cost of Construction (500) (500) (10)
Amortization (1,084/8) (136)
Interest Expense (69)
Net Income 25 25 (15)

22. B
YEAR 1 YEAR 2 YEAR 3
Revenue 525 525 200
Cost of Construction (500) (500) (10)
Amortization (1,084/8) (136)
Interest Expense (69)
Net Income 25 25 (15)

Josart B. Tubay, CPA, MBA Page 23