CA Anuj Agrawal
CA Anuj Agrawal

Since India is moving towards International Financial Reporting Standards gradually and financial service industry will be one of the major affected industries because there are many line items to be fair valued comparing to the current practices.

As per MCA notification, Insurance Companies are required to transit their financial statements into Ind-As starting from April 2018 with previous period comparatives. Since everyone is waiting for a comprehensive accounting standards i.e. IFRS-17 (which will eventually replace the existing IFRS-4/ Ind-As 104) which is likely to be issued by first half of the current year and will be effective from 1 January 2021 (effective date has already been finalized globally).

However still IFRS-4 (Ind-As -104) is applicable till 2021 hence our discussion will be focused on current standard only.

Insurance contracts might include some amount of deposit element which otherwise seems like an insurance product overall under the current accounting. However after the applicability of Ind-As , such Insurance products which contains deposits elements are required to be SEPARATED from the Insurance contract and such deposit will then be recognize as per Ind-As 109 – Financial Instruments.

Standard has specifically provides a guidance to segregate such deposits once it meets certain conditions as mentioned below –

Ind –As 104Insurance Contracts

Para -10Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components:

(a) unbundling is required if both the following conditions are met:

(i) the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component).

(ii) the insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.

(b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.

(c) unbundling is prohibited if an insurer cannot measure the deposit component separately as in (a)(i).

Let’s take an example to understand what exactly this concept all about and its practical utility while assessing such Insurance products for Un-bundling –


Company A issues a product in which it offers an amount of INR 1million as a debt for next 5 years to an Mr. X. The loan is repayable by the end of 5th year using a equated monthly balances (with interest). There is a clause in the contract which says in the event of death of Mr. X , all remaining amount of debt will be waived off. Analyze if Unbundling of a deposit is required as per Ind-As 104?

Suggested approach –

Let’s first look at the definition of Insurance contract as per Appendix A of Ind-As 104 as below –

Insurance contract –A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.”

To understand whether the product issued by Company A is an insurance product, let’s read some additional guidance from the relevant extracts from Appendix B of Ind-As 104

Para -B13-The definition of an insurance contract refers to an adverse effect on the policyholder. The definition does not limit the payment by the insurer to an amount equal to the financial impact of the adverse event. For example, the definition does not exclude ‘new-for-old’ coverage that pays the policyholder sufficient to permit replacement of a damaged old asset by a new asset. Similarly, the definition does not limit payment under a term life insurance contract to the financial loss suffered by the deceased’s dependants, nor does it preclude the payment of predetermined amounts to quantify the loss caused by death or an accident.”

Para – B14-“………………..Conversely, the definition of an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment. This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse effect, but permits the insurer to deny payment if it is not satisfied that the event caused an adverse effect.

Para -B18– “………….(c) life insurance and prepaid funeral plans (although death is certain, it is

uncertain when death will occur or, for some types of life insurance, whether death will occur within the period covered by the insurance).

After reading the relevant extract one can draws a conclusion that the product which has been issued by Company A is an Insurance contract (an event of death) which covers life Insurance, an Uncertain event, and it will adversely affect Mr. X (its survivors) and at the same time the amount of INR 1 M will be covered as deposit as per Ind-As 109 being a contractual right to receive cash by policy holder (cash amount to the extent of loan not paid) during the period of such loan in case an even of death occurred.

Standard mentioned that the deposit element to be segregated UNLESS the Entity follows an accounting policy where it captures all rights and obligation related to the product. To understand that what does it means, standard itself provided an example on this which covers in Para 11 of Ind-As 104

ExampleA cedant receives compensation for losses from a reinsurer, but the contract obliges the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedant’s accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required.

Since the deposit amount will be covered under the definition of Financial Instruments and hence accounting for such deposit will be covered as per the Ind-As 109 in which initial recognition will be at fair value and subsequent measurement will be at amortised value using effective interest rate or FVTPL (as the case may be). For more information about the accounting treatment of deposits please refer

Standard also clarifies that the Unbundling of deposits will be required only when it is reliably measured and can be segregated. It will actually be very difficult to justify for using this exemption as possibly the measurement of such unbundling will be available in almost all cases of such products (exceptions will br there)

The above difference will significantly change some of the significant line items of Insurance Industry where Unbundling of deposits is required and lots of changes into IT systems will be required accordingly.

Readers will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.

One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.

 (Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as an Independent IFRS Advisor & Corporate Trainer. He can be reached via email at or Whatsapp +91-9634706933)


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