THE UNIVERSITY OF FIJI

ACC 203

GROUP ASSIGNMENT 2

SHAFAAN ALI 20160081

AMAAN KUMAR 20160078
DIVESH PILLAY 20160064

- Amaan Kumar (IFRS 13)-Shafaan Ali (IFRS 16)-Divesh Pillay (IFRS 17)- Page 1
 ACCOUNTING
STANDARD
APPLICATIONS
IN
EVERYDAY LIFE
IN A
COMMON
BUSINESS

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IFRS 13

All assets and liabilities require valuation at a point in time and therefore IFRS 13 is a
standard that provides guidelines and techniques for fair value measurement of assets and
liabilities. The aim of fair value measurement is to give assets and liabilities a fair value.
Under IFRS 13 fair value is defined as “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date” [ CITATION Ste18 \l 5129 ]. There are three valuation techniques used under
fair value measurement that is, incomes approach, cost approach and the market approach,
and these approaches can only be useful if the fair value hierarchy of inputs is used, whereby
inputs are assumptions which are observable or unobservable. Thus, this paper will critically
discuss the applicability of IFRS 13 in a developing nation.

I.INTRODUCTION
Fair value has three valuation techniques of valuation the target of the valuation strategy
chosen is to evaluate the cost at which a deliberate deal would happen between market
members under current economic situations. There are three valuation approaches under fair
value measurement, the market approach, is a methodology where value of assets and
liabilities depend on market exchanges, selling similar or indistinguishable items. The market
approach can be utilized to estimate the value of property, business ownership interest and
security intangible assets. The market approach studies recent sales of similar assets and
makes changes in the qualities such as shape of size. An example could be, a real estate
industry valuing a property based on a sale of a similar property which was sold in the same
location which has similar features in size and shape.

Moreover, the cost approach also referred to current replace cost, a valuation technique that
reflects the amount that would be required currently to replace the service capacity of an
asset. Such as a real estate client should not pay more than the cost of building a house.
Furthermore, the incomes approach is a method that allows potential users to estimate value
of asset based on the income it would gain in the future. Such as a real estate estimates value
of a property based on the income it generates.

These valuation approaches can only be used if the fair value hierarchy of inputs are used.
Inputs are defined as the assumptions that the members would utilize when estimating the
asset or liability, including assumptions about risks associated to it, for example, risk intrinsic
to a specific valuation method used (Pricing model) to measure Fair value, and the risk
intrinsic in the contributions to the valuation strategy. Sources of information's (inputs) might
be observable or observable.

II.FAIR VALUE HIERARCHY

The level of inputs in a hierarchy is categorised into three levels; level 1, 2 and 3. Form
which each level uses different valuation techniques, depending on the market participants
and current market conditions. Level 1 inputs, are inputs or the quoted prices generated in an
active market for similar assets or liabilities that the reporting entity access during the
measured date. The active market is where transactions for the assets and liabilities occur
with enough frequency and scale that gives the pricing information on an ongoing basis. A
quoted price is considered to be the most reliable evidence of fair value and may be used
when requiring valuation.

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Moreover, level 2 inputs include inputs other than quoted price which are from level 1 that
are observable, which may be direct or indirect. Level 2 may include observable quoted
prices that are generated from similar or identical prices. Therefore, focusing on items
qualities such as size, shape and similar features hence the valuation is generated upon
observations in the valuation of a similar asset or liability. Example quoted prices for a
similar asset or liabilities (CPAs, 2019).

Level 3, the inputs are unobservable inputs for the assets and liabilities. The unobservable
inputs for the assets and liabilities are gathered from the best information available in the
case. However, the entity cannot ignore the data gathered from the market participant’s
assumptions. The entity relies on internal data to value assets depending on past data and the
remaining years. Level three can be also known as mark to market approach where
assumptions are based on assumptions about the value of assets and liabilities.

III.BUSINESS USING FAIR VALUE IN FIJI

There are a lot of companies using fair value measurement here in Fiji and abroad, due to the
features it possesses which may include the easy applicability in business and the benefit it
has. Fair value measurement provides valuation of assets and liabilities in an ongoing basis,
where the values generated can be considered accurate valuation of assets as it measured at
current market prices. The business that use fair value measures are the companies that are
either dealing with biological goods or are considered, the sole seller of goods as they use fair
value and give values based on assumptions in the level three input. Pacific Greens Industries
Fiji is a company that uses fair value “in measuring fair value of the plants, management
estimates and judgements are required for the determination of fair value. At this stage the
fair value of these plants cannot be reliably measured as very little biological transformation
has taken place since initial cost incurrence and the impact of the biological transformation
on price is not expected to be material, and its cost is approximated to be its fair value”.
[ CITATION ano19 \l 3081 ]
Pacific Greens industries is one of the biological goods sellers in Fiji, it manufactures and
sells architectural products and furniture which are made from plants which are grown in
house of PGI some of the items sold by Pacific Greens are, armchairs, sofas, chairs, tables
and storage units. The company’s head office is located in sigatoka, Fiji. The reason why
Pacific Greens use fair value as there is no technique of valuing the assets it has as there is no
other company that is selling that hence the managers use their own knowledge and
judgement and value assets after evaluating the life and the production costs.

SCANDLES IN IFRS 13
There are many companies that are finding loop holes in this accounting standard and do
scandals. And deliberately overstating and understating assets values for their own benefits in
the market. The information acquired from input level 1 and 2 are considerably reliable as all
the information are based on observable inputs in an active market and can be used to
determine fair value. The only question is whether prices produced under level 3 to be
considered as fair value since the information reliability is at stake, as all the information is
acquired on the basis of managerial judgement under unobservable units. Companies
normally do fraud in the true value of assets to gain the attention of shareholders or
stakeholders such as a bank will most probably give loans to an industry which looks
successful under going concern concept rather to a business which is struggling to make
profit. Therefore, some shell companies (sole purpose to take loans and dissolve the
company) normally do scandals and attract investors and run away with money. An industry
that did scandals in fair value measures was Enron which had led to the desolation of the

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industry despite being one of the leading industries of its time, where the company was
making profits in billions. Enron was an American industry which was involved in energy
such as gas and electricity, Enron had employed a total of 29000 staff in year 2000 and
claimed revenue of nearly $101 billion dollars the same year. It was year 2001when the
company underwent revaluation and revealed ‘‘that Enron's reported financial condition was
sustained by institutionalized, systematic, and creatively planned accounting fraud, known
since as the Enron scandal’’[ CITATION ano19 \l 5129 ]. Since all the information gathered was
on ‘‘observable inputs’’. Enron auditors Arthur Andersen, were overstating stock prices from
information gathered by using ‘mark-to-market’ which was when Enron moved from
historical cost accounting methods to Mark to Market as measures for fair value of account,
as MTM provided a more realistic appraisal of the company’s financial information.
(SEGAL, 2019). However, Enron manipulated Mark to Market since it was not based on
actual costs but on fair value where is it hard to get 100% exact figures hence the company
were manipulation the assets values and attracting investors to invest more and more in the
business.

APPLICABILITY OF IFRS 13
There are many cases and articles on fair value discussing on the implications of fair value in
a developing nation which are elaborated through research papers and related articles.

Bignon discuses in the article as how fair value is used to value assets and stocks value in the
future periods. “Economic research on financial bubbles or irrationalities in stock market
quotes push one to question the capacity of market prices to reflect the present value of future
profits” [ CITATION Vin09 \l 1033 ]. When purchasing stock prices, one can never be sure of the
value of the stock’s price in the future. With the value paid in acquisition date, some stock
prices can be acquired at lower prices when compared to the value it has in the future,
keeping in mind the concept of time value of money Bignon argues, what is the best
valuation technique to value stock prices under fair value measurement. Bignon suggest that
the market approach as the best valuation method as the current market prices will be
generated from market transactions where value will be based on similar and identical assets
value which will determine the best and current prices to be paid for the asset under fair value
measurement.

Moreover, in another article different from the one before, written by R Wayne states in the
article “One key issue is whether fair values of financial statement items can be measured
reliably, especially for those financial instruments for which active markets do not readily
exist” [ CITATION Lan07 \l 1033 ]. In the article Wayne argues how reliable will the information
be where fair value valuation is acquired in an in active market, as Wayne is aware of the
scandals in Enron where Enron auditors falsely valued its assets value on unobservable units
where there was no active market to value the assets. Wayne sums up his paper with the
conclusion that despite level 3 input being used, it is considered the least preferable out of the
3 levels of inputs.

Furthermore, an article written by Casabona, titled “New Requirements for Measuring and
Reporting Fair Value in GAAP” [ CITATION Cas07 \l 1033 ] states in the articles that fair value
definition was issued in 2006 where the definition partly explains on the valuation measures
under fair value and therefore suggests to follow the principals under GAAP as it supports all
valuation of assets and liabilities broadly and which are applicable in todays market, fair
value defined under GAAP; the price that would be paid to buy or sell an asset between

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willing parties. Hence identifies fair value fails in unobservable inputs and valuation under in
active markets where level 3 inputs are used.

In addition to, Professor David Prochazka from the University of Economics identifies in his
article “Fair value is a current market-based hypothetical value. This market value is not
always directly observable. The debate on usefulness of fair value accounting has arisen in
connection with the financial crunch and economic crisis in years 2007-2009” [ CITATION
Pro11 \l 1033 ] where the article was based on the market situation in the time of financial
crisis where companies were failing in operation during the inflation periods therefore if
assets value were based on market transaction, it will lead to the unrealistic fair value of
entities that were doing well during those periods , hence David argues should the valuations
determined under fair value hierarchy to be considered fair value.

Moreover, John A Enahoro talks in his article upon the importance of disclosure, where he
explains that all information that are presented should be gathered from a reliable and
authentic source, which are free from biasness fraud and error as all the information will be
used for comparison purposes throughout years and therefore all information should be true
and fair, taking into consideration of the principals under IFRS 1 (presentation of financial
statements) as all information presented to be true and fair as if the information are slightly
incorrect the valuation will be unrealistic which can lead to the failure of the company.
[ CITATION Ena13 \l 1033 ].

CONCLUSION
The applications of fair value assets measurement can be considered faithful representation of
information as from date of publishment and till to date majority of the companies are
continuing using it despite the critic’s assumptions. Fair value is a good measurement
technique as it provides valuation under three approaches when compared to the historical
cost approach as historical cost were failing to revalue assets value in the current market
prices. The only places where fair value is failing and IRFS could do amendments is in level
three inputs and find a way to value assets for which there is no active market.

(2185 Words)

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REFERENCES
anonymous, 2019. Wikipedia, the free encyclopedia. [Online]
Available at: https://en.wikipedia.org/wiki/Enron
[Accessed 31 03 2019].
Bignon1, V., 2009. An Economic Analysis. Accounting as a Vector of Crisis, pp. 21-23.
Bragg, S., 2018. accounting tools. [Online]
Available at: https://www.accountingtools.com/articles/fair-value-accounting.html
[Accessed 13 march 2019].
Casabona, P. & Shoaf, V., 2007. Review of Business; New York. Special Accounting Issue,
27(4), pp. 25-30.
Enahoro, J. A. & Jayeoba, 2013. Asian Economic and Financial Review. 3(9), p. 1170.
Landsman, W. R., 2007. Accounting and Business Research. Is fair value accounting
information relevant and, 37(3), pp. 19-30.
Procházka, D., 2011. Journal of Business &Economics Research; Littleton. Business And
Economics, 6(1), pp. 989-1001.

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IFRS 16 – Leases
Overview on the standard
Objective of International Financial Reporting Standards (IFRS) 16, LEASES is to represent
faithful lease transactions in the company’s financial statements as bias free as possible.
Users use these representations (financial statements) from entities to evaluate the amount
and the likelihood of cash generated from leases.

A number of companies locally are creating loopholes while applying the standard & are
finding means to manipulate data to evade from its potential users. Therefore, my critical
analysis will be based on the criticism of applying International Financial Reporting
Standards (IFRS) 16, LEASES.

Two components of this important standard are Lessee & Lessor. As defined, a lessee is the
person or an entity that uses an asset to generate revenue. Whereas, Lessor is the entity that
leases out its assets to an external party which the entity receives payments periodically
depending in their agreement signed.
The agreement which takes place between Lessee and the Lessor is known as a Lease. It is an
official and legal tender attaining all the terms & conditions relating to the leased asset.
[ CITATION San19 \l 3081 ]

Accounting for Leases under Finance lease is where the proprietorship of the rented lease is
transferred under Lessees responsibility. On the other hand, under Operating lease, the
proprietorship of the leased asset remains under Lessors custody.

Finance lease is an agreement between parties where both agrees on a fixed periodical sum
which the Lessor will receive after issuing his/her asset to the lessee. This type of agreement
is referred to as loan agreement.
After the agreement has been signed, the lessor will start to receive payments after lessee
makes full use of the leased asset to generate its revenue. These agreements and payments for
lessor are usually for longer stages.
Since the proprietorship of the leased asset has been under lessee’s custody, any maintenance
or repairs needed will be done by the lessee.
In additions to this, all expenses such as depreciations will & a tax deduction comes under
lessee’s responsibility. The lessee will be given the opportunity to buy the leased asset once
the term of usage has been expired.

Operating lease is an agreement between parties where both agrees on a fixed periodical
sum which the Lessor will receive after issuing his/her asset to the lessee. After the
agreement has been signed, the lessor will start to receive payments after lessee makes full
use of the leased asset to generate its revenue. These agreements and payments for lessor are
usually for shorter stages.
Since the proprietorship of the leased asset has been under lessor’s custody, any maintenance
or repairs needed will be done by the lessor.

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Likewise, all expenses such as depreciations will & a tax deduction comes under lessee’s
responsibility. Unlike under Finance lease, where lessee are given the opportunity to buy the
leased asset, in operating leases, nothing such that is given to the lessee. The custody of the
leased asset remains under the Lessor. [ CITATION Dhe19 \l 3081 ]

Why choose Finance Lease?

This is an ideal option for those entities that are not able to purchase the asset from the
market. Instead they prefer to lease out the asset from external parties to generate revenue.
An advantage of approaching finance lease for the lessee is that the lessee will be offered
with the opportunity to buy the leased asset once the agreed contract has completed.

Why choose Operating Lease?

From Lessees point of view; there are no accounting done for the leased asset in balance
sheet, but it will come under the lessee’s income statement as ‘Rent’. On the other hand
Lessor will show fully in its financial statements under both Balance sheet and Income
Statement as its Leased asset and Depreciations & Interest received from leasing.
Much local company’s approach this method just because accounting is not done for the
leased assets from the lessee’s point of view. [ CITATION Dhe19 \l 3081 ]

Changes in IFRS 16 applicable from 1st January, 2019

Much has been analysed & reviewed by the respective Accounting standards body in the
accounting standard IFRS 16, Leases. Previously local company as well as international
company used to approach Operating lease since there was no recording of leased assets in
the balance sheet of the lessee.
Henceforth this has driven the change in distinguishing both, finance & operating lease in the
balance sheet under the revised IFRS 16 standard.

Ever since the revised International Financial Reporting Standards (IFRS) 16, LEASES has
been adapted, many companies around the globe as well as in Fiji has been vastly affected to
adopt the application of IFRS 16 and its impact. [ CITATION Sil19 \l 3081 ]

Local examples of companies getting affected by the implications IFRS 16

In Fiji, there are a handful number of firms getting affected by the application of IFRS 16.
For example, Banks such as ANZ using other entities property to set up its ATM. It is widely
seen that such banks use other entities asset such as Land to place their ATM for its
customers to consume the service. Henceforth, the standard states that the lessee and the
lessor should depict in both of their financial statements.

Second example in Fiji where leasing takes place is Jacks of Fiji renting out other entities
asset to set up its Retail store for business purpose. In Lautoka, there are 4 Jacks of Fiji retail
stores where apparently all are leased.

How Businesses (Lessees) Scandal while applying IFRS 16

Our standards state that “all operating lease expense were shown under “operating expenses”,
but now, a part of them falls under the “depreciation” (you depreciate the right-of-use asset)
and a part of them falls under the “finance cost” or interest expense”. [ CITATION Sil19 \l 3081 ]
When a financial statement is prepared for an entity, some businesses tend to overstate and
understate its depreciation amount to escape from being charged tax. This depicts unfair &
unfaithful presentation of information.

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In addition, entities (lessee & lessor) can provide false information to the governing body by
showing some assets and not writing correct amounts but understating revenues and
overstating expenses to escape from paying higher amount of tax. With adherence to the
standard, lessor is supposed to depreciate the leased asset. Lessor may depreciate asset
unfaithfully in order to save tax. Lessee and lessor, both are supposed to disclose their assets
in the financial statements, according to the standard, International Financial Reporting
Standards (IFRS) 16, Leases.

As stated, the lessee will also have to show the asset in the financial statement, so when
lessee prepares Income statement, the lessee can overstate the payments made to the lessor
since it is tax deductible. To attain a taxable profit in favour of the lessee, he/she may
overstate payments to evade tax.

Impact Assessment of IFRS 16 (Article 1 & 2)

For lessee’s, one of the impacts IFRS 16 could bring is bringing assets which are under
operating lease & lease liabilities, to Balance sheets. Organizations by means of considerable
financing over operating leases, this will bring a significant increment in their reported Assets
& Liabilities. Therefore, the organizations financial statements (Income statement, in this
scenario.) will accompany some variations where their yearly rental expense will be changed
to Interest expense & a devaluation charge for the lease. Due to this change company’s
income before interest, devaluation of assets, amortization and tax will increase.
Other impacts involve costs for lessee while adapting to IFRS 16, such as training cost of
staffs or cost of setting up accounting systems and procedures. This will lead to a rise in
lessee’s remuneration and incentive schemes cost. Sectors such as Airlines, Tourism industry,
and Retail stores in Fiji will be highly affected as acquire most of the operating leases. With
the adaption of new IFRS 16 standard, effective from 01 January, 2019, it is prominent that to
some extend Judgement is required from the lessee while identifying which contract contains
leases.
Other conflict related to IFRS 16 is, company’s decision making whether to lease an asset or
to buy on loan. Since both, leasing the asset and buying on loan will be treated the same in
company’s financial statements, it is wise to buy the asset on loan. It is favourable to buy on
mortgage as the company will be given the right of ownership after repayments have
finished. [ CITATION Eur17 \l 3081 ]

Due to the application of new standard, decisions the organization takes should be crucial as
it will impact their financial statements. These decisions can be divided in two:
 “The standard allows the entity to choose between alternative accounting treatments
with respect to separation of non-lease components, capitalisation model exceptions,
and transition.
 Entities must make estimations regarding lease term and discount rate.” [CITATION
Jos18 \l 3081 ]

In some lease contracts there are Non-lease components present thus it is important for the
organization to recognize these components. For example, a lease for car may include
servicing and other maintenance works which are non-lease components. Under this standard,
(IFRS 16, paragraph 12) all lease components should be accounted for separately from non-
lease components. Sometimes it is hard for the organizations to identify these components
should be stated separately in the contract so that it is easier for both, lessor and the lessee
while preparing financial statements.

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How Businesses misuse leased assets and how IFRS 16 affects accounting
approach (Article 3)
Entities may use the leased asset anyhow to generate revenue unless and until some
restrictions are obliged in the contract which the lessee and the lessor have agreed to.
In accordance to this, where no restrictions are provided by the lessor, lessee may use the
leased asset anyhow to generate revenue. For example, in a transport business, lessee can use
leased trucks to transport legal and possibly illegal items in some cases. Since the lessor has
no control over the leased asset which is given out, lessee has the right to use the asset for
different purposes unless stated previously in the contract (restrictions or for what purpose
the asset is being leased out). [ CITATION Ali18 \l 3081 ]
Moving on, with the implication of new standard active from 1st January 2019, lessees are
affected more compared to lessors in terms of preparing financial statements.
Lessee shall account its leased asset in their Financial Position whether it is financial lease or
operating lease. Leased asset will be recognized as both, an Asset (right of use asset) as well
as a Liability (leasing liability) in lessee’s financial position. [ CITATION Ali18 \l 3081 ] Leased
asset is recorded as an Asset because the leased asset is recognized at its cost from the
contracts commencing date. On the other hand, it is also recorded as a liability since there
still will be payments left in exchange of leased asset.

Impact of IFRS 16 (Article 4)

As discussed earlier, the new standard, International Financial Reporting Standards 16 will
affect lessee’s financial position also, it will have an impact in the Income Statement for
Lessee. Whereas the accounting for Lessor’s will be the same as it was before the
introduction of new & revised standard, International Financial Reporting Standards 16. The
noticeable change will be the inclusion of leased assets Depreciation (devaluation) amount
and its Interest value. This will hinder the company’s operating profit as interest is not
recognized in operating expenses. [ CITATION Ale16 \l 3081 ]
Furthermore, since depreciation are used to calculate organizations operating profit, there will
be an increment on the grounds that the devaluation charge included is lower than the cost for
non-financial positions items that are not included.
In accordance to the change in IFRS 16, businesses are forced to review their structure to
adjust to new standard and its requirements. Similarly, various areas of the organization will
be exaggerated such as IT department where the question is whether the current system is
compatible to adapt the new standard and take advantage from all leases and whether the
frameworks are equipped for running parallel information amid the change time frame.
[ CITATION Ale16 \l 3081 ]
Another impact of the standard IFRS 16 for businesses is Budgeting. The question arises
whether the budget has included means to adapt to the change and information’s that will be
needed to reflect the outcome of the new International Financial Reporting Standards 16
when practiced.

Example: House Rental (Article 5)

Some contracts or lease agreements contain non lease components which should not be done.
These non-lease components vary in terms of accounting for it. It is essential to exclude them
from leasing contracts so that accurate accounting can be done.
In Fiji there are many individuals that provide the service of giving out house for rent purpose
(Leasing). Once said by Hon. Grant Thornton:

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“For most real estate contracts, the landlord does not have a substantive substitution right.
Further, the tenant generally has exclusive use of the leased property and, therefore, has the
right to substantially all of the economic benefits from its use. The tenant also generally has
the right to direct the use of the underlying property because the tenant decides how and for
what purpose the property will be used...” [ CITATION Gra17 \l 3081 ]

As per the quote above, an agreement is signed before handing out their asset on lease. The
contract or agreement contains restrictions prior to the use of asset. Therefore, there will be
different accounting for the lessee and the lessor. For lessor, the accounting will be same as
discussed earlier. As for the lessee, that is the tenant in this scenario, rent paid to the landlord
is recognized as a lease liability which will be taken into consideration while preparing
financial statements. Whereas the asset (House, Property) utilised by the lessee (Tenant) is
recognized as Right of use asset.
The contract or tenancy agreement may contain non lease components which are not
supposed to be present. For example, maintenance of the property. Lessee should not be
liable for the maintenance and is referred to as non-lease component if IFRS 16 is to be taken
into consideration. Lessors are to provide lease components in the lease agreement and for
non-lease components, apply standalone price basis. [ CITATION Gra17 \l 3081 ]

To conclude this analysis, the new IFRS 16 will impact an organizations financial statement
which is dependent on firms lease intensity. Handful number of businesses in Fiji lease out
assets in order to proceed with their normal operations. Businesses such as retails shops
where stores are rented out, hotel industry where executive vehicles are hired to
accommodate foreigners and Service stations where companies rent out places to operate
their business. All these businesses are highly associated with IFRS 16 as it is practised daily.

(2439 words)

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Bibliography
Alex Fisher, C. C., MARCH 2016. Chartered Professional Accountants of Canada. Financial
Reporting Alert, p. 9.
Alin Eliodor Tănase; Traian Ovidiu Calotă; Florin Răzvan Oncioiu, March 2018. The Impact
of IFRS 16 on the Companies’ Key Performance Indicators: Limits, Advantages and
Drawbacks. Academic Journal of Economic Studies, Volume Vol. 4, p. 4.
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lessee-and-lessor
[Accessed 5th April 2019].
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Assessment of IFRS 16 , 97(22 February 2017), pp. 6-97.
Jose Morales-Díaz;Constancio Zamora-Ramírez, January 2018. IFRS 16 (leases)
implementation: Impact of entities' decisions on financial statements. ResearchGate, 39(20
NOVEMBER 2017), p. 5.
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[Accessed 5th April 2019].
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[Accessed 5th April 2019].

- Amaan Kumar (IFRS 13)-Shafaan Ali (IFRS 16)-Divesh Pillay (IFRS 17)- Page 13
IFRS 17
IFRS 17 insurance contract is a contract where a company or organisation known as an
insurer considers risks from another party which are known as policy holders to pay if an
unfavourable incident occurs later on. Compensation occurs for only the insured incident
which affects the policyholders. Insurance contracts specify conditions; these are
requirements of an insured like payments of premiums or loss recording. The Limitations,
specifying limits of policies, like a limit of cash an insurance company would compensate.
Exclusions specify stuff not insured. Requirements for a valid contract include consideration,
legal purpose, competent parties and offer and acceptance. Legal forms are also a
requirement. The insurance contracts are managed by law so it has to adhere to these.
Contracts which lack these can be known as void contracts that the court will not be able to
enforce. Approvals of contracts are to be made by state insurance departments prior to the
usage to confirm that it complies with the regulations which are there. [ CITATION Acc19 \l 3081
] . If the information provided by applicants are not true, then the insurance company can
void the contract. Taking an example, the individual stating while filling the form that he has
no careless driving fines but in fact he has a few, that’s when the insurance provider can
decide not to provide for the claims made by the individual. The types of insurance include
one known as life insurance where the individual is the policy holder and is paid or where in
case of being deceased cash benefits are given. Insurance premiums are needed to be paid
monthly or annually. Some risks involved are the death of the person before time (premature
death). The cash is usually for future health related problems. General insurance covers for all
the loss and damages which occur. Yearly in insurance premium payments are made. Risks
with general insurance include in case of theft there will be loss of belongings or in case of
fire where everything is destroyed, getting injured in a car accident. Its main purpose is for
covering for individual’s accident, fire, medical, travelling insurances and car insurances. It is
very beneficial to have insurances as it gives a good sense of mind and peace for an
individual about its future and their relatives. Losses are covered by the insurance company
provided the premiums are paid. Majority purchase the premium at a younger age so they can
use the cash in the future. No taxes are paid on these. Even though life insurances are
expensive, people tend to buy this in expectations for profits in the later years. Sometimes
payments are very high and unaffordable. The older an individual gets, the higher rates for
payments are. Thus, this essay will critically evaluate the literature on the applicability of the
accounting standard developed by international accounting standards and international
financial reporting standards which is IFRS 17 Insurance contract.
APPLICABILITY OF IFRS 17

Insurance Performance
International Financial Reporting Standard 17 replaces IFRS 4 effective from 1st January
2022. This will enforce many changes to occur in financial statements and organizations
strategies in terms of investments. After the implication of new IFRS 17, insurance contracts
will be recognized as Present value of potential insurance cash inflows and outflows with
risks attached to each and every insurance policy.
Contractual service margin is generated to compensate the gain made by the future cash flows
at present value of the insurance contract. Contractual service margin is applied to pay off
over the life of the insurance policy.

In the article by Professor Hunsoo Kim which is on “A MULTI-LINE INSURANCE

FRAUD RECOGNITION SYSTEM: A GOVERNMENT-LED APPROACH IN KOREA”

- Amaan Kumar (IFRS 13)-Shafaan Ali (IFRS 16)-Divesh Pillay (IFRS 17)- Page 14
[ CITATION Kim06 \l 3081 ] .Identifies how the government uses highly advance technology to
overcome the insurance fraud cases in Korea. There are two types of fraud cases in Korea
soft fraud where shell companies are put in place to attract insurer to insure a business then,
in that same business the insured party deliberately do fraud by either burning or doing theft
to claim on the insurance premium and keep the money whereas, hard fraud is when the
insurer knows that the presented information is false and still provides insurance to parties
and or by taking forms of gifts or benefits from the insured parties, that is known as hard
fraud as it is hard to identify. The government uses highly advanced technology to cater for
these cases “Insurers have also developed systematic approaches to detect fraud and thus to
contain their loss experience. Such a development has become possible with the recent
advancement in information technology (e.g., data storage and processing), applied statistics,
and artificial intelligence.” [ CITATION Kim06 \l 3081 ]. When creating knowledge based expert
system normally it requires a super computer where all the data are fed into it about all the
insurance clients that do calculations and predictions itself by doing analysis based on the
inputs and help from artificial intelligence. Therefore, the insurance companies get a slight
indication as to whether it is a fraud or a true loss that the insured party is baring.

Models under IFRS 17

To begin with the discussion, implementing IFRS 17 and its model by means of measurement
comes expensive and more difficult to adapt. This change in financial statement will enforce
new key performance indicators to develop. Similarly, there are three approaches when it
comes to insurance contracts; General model, premium allocation approach and, variable fee
approach.
General model itself indicates that it acts as a default model for majority of the insurance
contracts. Local example of such contract (insurance) is LICI life insurance policy, BSP life
health policy and, Annuities. Whereas, premium allocation approach are short term insurance
policies with slight inconsistency present in the insurance policy. Example of such policies is
short term life insurance policy buyout. Moving on, variable fee approach is involved with
business contracts where insurance payments are associated to core items such as assets. For
example, annuities and organizations profit contract. [CITATION Ala18 \l 3081 ]
This standard lets users recognize the discounting of reserve earning in Income statement or
over other comprehensive income (OCI).

Issues under IFRS 17

This will cause a slight variation in organizations financial statements (financial position, to
be specific) where a slight proportion of Total Liabilities is affected. Whereas, in the income
statement, future insurance premiums are recognized attached with all the risks associated to
the insurance contract. [CITATION Ala18 \l 3081 ]
Due to the insurance investment, Profit & Loss is grouped down into an underwriting
outcome. With the implication of IFRS 17, the question of whether Transparency is present
has still been left unanswered. Premium revenue is an example of it, where revenue is
identified on cash basis instead it should be recognized proportional to the service provided.
In short, premium for a policy that has 10-year life should be recognized at 10% and not
100% as it is being done on a cash basis. The aim of this standard is to recognize the
insurance contract on its current value. Since profit and loss is accumulated under IFRS 17,
there will be less interaction between management of interest rate risk and the profit and loss.
In this case, risk is controllable and can be avoided by the insurer by matching assets and
liability cash flows.

- Amaan Kumar (IFRS 13)-Shafaan Ali (IFRS 16)-Divesh Pillay (IFRS 17)- Page 15
Many of the insurance companies are moving towards flowing the standards developed by
IFRS to affiliate the issues, where scams and frauds could be curbed. A research article
written by Nigel Masters in which he describes ‘‘Insurance companies: Waking up to
international standards’’[ CITATION Mas02 \l 1033 ], states that all the information catered by
insurance companies are to be free of error and fraud so that the information from the
insurance company is comparable with the information that the information users have.
Normally what happens according to the author is unlawful or fake information are produced
and are taken into consideration by insurance companies as truthful information based on
moral judgment, hence the insured party due scams or frauds based in that information.
Example, a sick individual who looks fit and fine gets a health insurance policy, where he
does not state that he has an internal disease therefore looking at the individual physically the
insurance company gives him premium, few moth later he requires a surgery which is
considered very expensive and there is a very slight chance that when will make it now due to
the neglections of the insurance company , where the insurance company had to do its side of
research now has to pay in millions for the surgery. The accounting standards states to
acquire information from multiple sources and which are considered true and do comparison
with past data and make decisions according to that.
After reading multiple articles it is so that insurance contracts also have a fair value, when it
comes to valuing contracts. An article written by Stefan in which he describes ‘‘A Reliable
Fair Value for Insurance Contracts’’[ CITATION Eng06 \l 1033 ]. Identifies that insurance
contracts have a beginning balance and according to that the premium is calculated for the
final value for the periods applied for. Normally the insurance company itself generated the
value based on past data acquired from similar insurance contracts therefore using the
valuation techniques from the market approach as market will determine the value of the
policy’s taking into account insurance and the general principles of time value of money
otherwise if the contact is based on unique terms therefore all the inputs will be from the
companies data where the company will determine the value of the contracts based on their
judgments. In this scenario the fair value measurement is used I comparison with ifrs 17 to
state out a better judgment of the understandings on the values generated on fair value.
To conclude, its justifiable that the safeguarded isn't as educated as a safety net provider and
may require some security, in any case, as the backup plan bears the budgetary weight of
cases then it is sensible to presume that they require more assurance in the arrangement of a
contract. Besides, if the safety net providers were to be hopelessly harmed because of the
abolishment of the obligation to reveal, at that point the economy would likewise endure.
Mostly it is easier to play the blame game on insurers when issues of claims come into
consideration as it is mostly assumed by many that they have more idea about the profession
of insurance than many individuals around or involved.

(1745 Words)

- Amaan Kumar (IFRS 13)-Shafaan Ali (IFRS 16)-Divesh Pillay (IFRS 17)- Page 16
Bibliography
Accuterm, 2019. accuterm. [Online]
Available at: http://www.accuterm.com/general-life-insurance.html
[Accessed 7th May 2018].
Anon., n.d. UKessays. [Online]
Available at: https://www.ukessays.com/essays/business/protection-insurer-insurance-
contracts-2982.php
[Accessed 7th May 2019]

Smith, A., 2018. IFRS 17 – Insurance Contracts. Current issues in General Insurance, p. 23.

(6707 WORDS)

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