Page 189 - IC46 addendum

Indian Accounting Standards

The measurements of the assets and the liability both reflect changes in
interest rates, but the measurement of the liability does not depend directly
on the carrying amount of the assets held. Therefore, shadow accounting is
not applicable and changes in the carrying amount of the liability are
recognised in profit or loss because Ind AS 1 Presentation of Financial
Statements requires all items of income or expense to be recognised in
profit or loss unless an Indian Accounting Standard requires otherwise.

IG10 Shadow accounting may be relevant if there is a contractual link
between payments to policyholders and the carrying amount of, or returns
from, owner-occupied property. If an entity uses the revaluation model in
Ind AS 16 Property, Plant and Equipment, it recognises changes in the
carrying amount of the owner-occupied property in revaluation surplus. If it
also elects to use shadow accounting, the changes in the measurement of
the insurance liability resulting from revaluations of the property are also
recognised in revaluation surplus.

IG Example 4: Shadow accounting

Background

Under some jurisdictions, for some insurance contracts, deferred acquisition
costs (DAC) are amortised over the life of the contract as a constant
proportion of estimated gross profits (EGP). EGP includes investment
returns, including realised (but not unrealised) gains and losses. Interest
is applied to both DAC and EGP, to preserve present value relationships.
For simplicity, this example ignores interest and ignores re-estimation of
EGP.

At the inception of a contract, insurer A has DAC of Rs 20 relating to that
contract and the present value, at inception, of EGP is Rs 100. In other
words, DAC is 20 per cent of EGP at inception. Thus, for each Re 1 of
realised gross profits, insurer A amortises DAC by Rs 0.20. For example,
if insurer A sells assets and recognises a gain of Rs 10, insurer A amortises
DAC by Rs 2 (20 per cent of Rs 10).

Before adopting Indian Accounting Standards for the first time in 20X1,
insurer A measured financial assets on a cost basis. (Therefore, EGP under
those national requirements considers only realised gains and losses.)

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