As a globally acknowledged accounting criterion, IFRS 4 has significant importance in reporting. It offers guidelines or directions for the recognition, measurement, and disclosure of insurance contracts. This article seeks to explain the impact of IFRS 4 on financial reporting by exploring the relationship between insurance contracts and the presentation of financial information. Therefore, it is advisable for corporations to seek the services of Top Audit Firms in Dubai to effectively implement IFRS 4 standards in compliance with the statutory regulations.
What is the Objective of IFRS 4?
The primary objective of IFRS 4 is to offer temporary direction for insurance contracts until an inclusive standard is developed, especially for insurance contracts. This standard’s goal is to confirm that financial statements correctly reflect the following involved in insurance activities;
- Financial position
- Cash flows of entities
It offers direction on the presentation, recognition, measurement, and disclosure of insurance contracts, taking into account the exclusive features and risks related to such contracts.
Essential Concepts of IFRS 4
Some essential concepts of IFRS 4 include:
1-Insurance Contract Recognition
IFRS 4 states the standards for identifying insurance contracts in a unit’s financial statements. It stipulates the conditions that must be met for an insurance contract to be known as an asset or a liability.
2-Measurement of Insurance Contracts
IFRS 4 offers direction on the measurement of insurance contracts, with the use of different tactics such as;
- The Premium Allocation Tactic
- The Building Block Tactic
This marks how insurance liabilities and associated assets are valued and reported in the financial statements.
3-Presentation of Insurance Contracts
IFRS 4 needs explicit presentation layouts for insurance contracts in the financial statements. It differentiates between;
- Insurance revenue
- Insurance service expenses
- Other sources of revenue and expenses
They ensure transparency in financial reporting.
IFRS 4 obligates thorough disclosures associated with insurance contracts. This contains information about;
- Significant assumptions
- Sensitivity of insurance liabilities to changes in crucial variables
These disclosures offer users of financial statements valued visions into the nature and extent of a unit’s insurance activities.
5-Implications for Financial Institutions in Dubai
IFRS 4 has a noteworthy influence on financial institutions, mainly insurance companies, working in Dubai. Obedience to IFRS 4 is important to ensure precise and transparent financial reporting, which in turn aids stakeholders make conversant decisions regarding insurance contracts.
What are the variations Introduced by IFRS 4 in Dubai?
The variations introduced by IFRS 4 in Dubai mainly turn around the recognition, measurement, and presentation of insurance contracts in the financial statements of insurance firms. Some major changes are;
1-Introduction of a Momentary Standard
IFRS 4 itself is a momentary standard that offers temporary guidance until a complete standard explicitly for insurance contracts (IFRS 17) is applied. This transitory standard permits insurers in Dubai to continue using their current accounting strategies for insurance contracts.
2-Improved Disclosure Requirements
IFRS 4 places augmented prominence on disclosure requirements for insurance contracts. Insurers in Dubai are now obligated to deliver more comprehensive information regarding the nature and extent of insurance actions, noteworthy assumptions and judgments made, and the sensitivity of insurance liabilities to changes in main variables.
3-Fair Value Measurement
IFRS 4 presents the idea of fair value measurement for insurance contracts. It requires insurers to assess the fair value of insurance liabilities, including the present value of probable future cash flows and appropriate risk modifications.
4-Impact on Financial Statements
The variations presented by IFRS 4 have an influence on the financial statements of insurance companies in Dubai. The classification, measurement, and presentation of insurance contracts are changed to bring them into line with the requirements of the criteria, augmenting transparency and comparability in financial reporting.
5-Compliance with International Standards
IFRS 4 ensures compliance with global accounting standards. The standard ensures that financial reporting practices are conducted in compliance with best practices.
Seek the Services of top Audit Firms in UAE
Compliance with IFRS 4 this standard ensures the correct and clear presentation of insurance contracts in the financial statements. Therefore, it is advisable for corporations to seek the services of Top Audit Firms in Dubai to effectively implement IFRS 4 standards in compliance with the statutory regulations.
Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.