An insurance contract is a "contract under which one party (the insurer) If a market for a financial instrument is not active,
ot active, an entity establishes fair
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.
Initial recognition
IAS 39 requires recognition of a financial asset or a financial liability when,
and only when, the entity becomes a party to the contractual provisions of
the instrument, subject to the following provisions in respect of regular way
purchases.
Initial measurement
Initially, financial assets and liabilities should be measured at fair value
(including transaction costs, for assets and liabilities not measured at fair
value through profit or loss). [IAS 39.43]
Measurement subsequent to initial recognition
Subsequently, financial assets and liabilities (including derivatives) should be
measured at fair value, with the following exceptions: [IAS 39.46-47]
Loans and receivables, held-to-maturity investments, and non-derivative
financial liabilities should be measured at amortised cost using the effective
interest method. Investments in equity instruments with no reliable fair
value measurement (and derivatives indexed to such equity instruments)
should be measured at cost. Financial assets and liabilities that are
designated as a hedged item or hedging instrument are subject to
measurement under the hedge accounting requirements of the IAS 39.
Financial liabilities that arise when a transfer of a financial asset does not
qualify for derecognition, or that are accounted for using the continuing-
involvement method, are subject to particular measurement requirements.
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm's length
transaction. [IAS 39.9] IAS 39 provides a hierarchy to be used in determining
the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs
AG69-82]
Quoted market prices in an active market are the best evidence of fair value
and should be used, where they exist, to measure the financial instrument.
value by using a valuation technique that makes maximum use of market
inputs and includes recent arm's length market transactions, reference to
the current fair value of another instrument that is substantially the same,
discounted cash flow analysis, and option pricing models. An acceptable
valuation technique incorporates all factors that market participants would
consider in setting a price and is consistent with accepted economic
methodologies for pricing financial instruments. If there is no active market
for an equity instrument and the range of reasonable fair values is
significant and these estimates cannot be made reliably, then an entity must
measure the equity instrument at cost less impairment.
Amortised cost is calculated using the effective interest method. The
effective interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the financial
instrument to the net carrying amount of the financial asset or liability.
Financial assets that are not carried at fair value though profit and loss are
subject to an impairment test. If expected life cannot be determined
reliably, then the contractual life is used.
IAS 39 fair value option
IAS 39 permits entities to designate, at the time of acquisition or issuance,
any financial asset or financial liability to be measured at fair value, with
value changes recognised in profit or loss. This option is available even if the
financial asset or financial liability would ordinarily, by its nature, be
measured at amortised cost – but only if fair value can be reliably measured.
Measurement of Insurance Contract
On initial recognition, an entity shall measure a group of insurance contracts
at the total of: [IFRS 17:32]
(a) the fulfilment cash flows (“FCF”), which comprise:
(i) estimates of future cash flows; (ii) an adjustment to reflect the time value
of money (“TVM”) and the financial risks associated with the future cash
flows; and (iii) a risk adjustment for non-financial risk
(b) the contractual service margin (“CSM”).
An entity shall include all the future cash flows within the boundary of each
contract in the group. The entity may estimate the future cash flows at a
higher level of aggregation and then allocate the resulting fulfilment cash
flows to individual groups of contracts. [IFRS 17:33]
The estimates of future cash flows shall be current, explicit, unbiased, and
reflect all the information available to the entity without undue cost and
effort about the amount, timing and uncertainty of those future cash flows.
They should reflect the perspective of the entity, provided that the
estimates of any relevant market variables are consistent with observable
market prices.
II. BANK
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1. The capital adequacy ratio (CAR) is a measurement of a bank's
available capital expressed as a percentage of a bank's risk-
weighted credit exposures. The capital adequacy ratio, also known
as capital-to-risk weighted assets ratio (CRAR), is used to protect
depositors and promote the stability and efficiency of financial
systems around the world. Two types of capital are measured: tier-1
capital, which can absorb losses without a bank being required to
cease trading, and tier-2 capital, which can absorb losses in the
event of a winding-up and so provides a lesser degree of protection
to depositors.
The capital adequacy ratio is calculated by dividing a bank's capital
by its risk-weighted assets. The capital used to calculate the capital
adequacy ratio is divided into two tiers.
The Formula for CAR Is
CAR = (tier 1 + tier 2 capita)
risk weighted assets
What is a Depository
A depository is a facility such as a building, office, or warehouse in which
something is deposited for storage or safeguarding. It can refer to an
organization, bank, or institution that holds securities and assists in the
trading of securities. The term can also refer to a depository institution that
accepts currency deposits from customers.
BREAKING DOWN Depository
A depository institution provides financial services to personal and business
customers. Deposits in the institution include securities such as stocks or
bonds. The institution holds the securities in electronic form also known
as book-entry form, or in dematerialized or paper format such as a physical
certificate.
Functions of a Depository
Transferring the ownership of shares from one investor's account to
another investor's account when a trade is executed is one of the primary
functions of a depository. This helps reduce the paperwork for executing a
trade and speeds up the transfer process. Another function of a depository
is it eliminates the risk of holding the securities in physical form such as
theft, loss, fraud, damage or delay in deliveries.
Depository services also include checking and savings accounts, and the
transfer of funds and electronic payments through online banking or debit
cards. Customers give their money to a financial institution with the belief
the company holds it and gives it back when the customer requests the
money.
These institutions accept customers' money and pay interest on the money
over time. While holding the customers' money, the institutions lend it to
other people or businesses in the form of mortgages or business loans and
generate more interest on the money than the interest paid to customers.
IAS 41 applies to biological assets with the exception of bearer plants,
agricultural produce at the point of harvest, and government grants related
to these biological assets. It does not apply to land related to agricultural
activity, intangible assets related to agricultural activity, government grants
related to bearer plants, and bearer plants. However, it does apply to
produce growing on bearer plants.