INSURANCE CONTRACTS #0004

1. An insurance contract can contain both deposit and insurance elements. An example might be a
reinsurance contract where the cedent receives a repayment of the premiums at a future time if
there are no claims under the contract. Effectively this constitutes a loan by the cedent that will be
repaid in the future. PRFS 4 requires that:
A. Each payment by the cedent is accounted for as a loan advance and as a payment for insurance
cover.
B. The insurance premium is accounted for as a revenue item in the income statement.
C. The premium is accounted for under PAS 18.
D. The premium paid is treated purely as a loan and is accounted for under PAS 39.

2. Which of the following accounting practices has been outlawed by PFRS No. 4?
A. Shadow accounting
B. Catastrophe Accounting
C. A test for the adequacy of recognized insurance liabilities
D. An impairment test for reinsurance assets.

3. Which of the following types of insurance contract would probably not be covered by PFRS 4?
A. Motor insurance
B. Life insurance
C. Medical insurance
D. Pension plan

4. PRFS 4 says that insurance contracts should:

A. Be covered by existing accounting policies during phase one.
B. Comply with the PRFS Framework document
C. Comply with all existing PFRS
D. Be covered by PAS 32 and PAS 39 only

5. PRFS 4 was introduced principally for what reason?

A. To ensure that insurance companies could comply with international Financial Reporting
Standards by 2005
B. To completely overhaul insurance accounting
C. As a response to recent scandals within the insurance industry
D. Because of pressure from the financial services authorities in several countries.

6. Which International Financial Reporting Standard will apply to those contracts that principally
transfer financial risk, such as credit derivative?
A. PAS 32
B. PAS 18
C. PAS 39
D. PFRS 4

7. If an entity gives a product warranty that has been issued directly by a manufacturer, dealer, or
retailer, which Philippine Financial Reporting Standards is likely to cover this warranty?
A. PFRS 4
B. PAS 39
C. PAS 32 and PAS 39
D. PAS 32

8. PAS 39 requires an entity to separate embedded derivatives that meet certain conditions from the
host insurance contract that contains them. It also requires the embedded derivative to be
measured at fair value and any changes in fair value to go into profit or loss. An insurer need not
separate an embedded derivative that itself meets the definition of an insurance contract.

INSURANCE CONTRACTS #0004

INSURANCE CONTRACTS #0004

Which of the following types of embedded derivative would need to be fair-valued under PAS 39
when embedded in an insurance contract?
A. The guarantee of minimum interest rates when determining the surrender or maturity value of a
contract.
B. Death benefit linked to equity prices or stock market index payable only on death.
C. Policyholder’s option to surrender the insurance contract for a cash value that was specified in
the original insurance contract.
D. The guarantee of minimum equity returns that is available only if the policyholder decides to
take a life contingent annuity.

9. Insurers can recognize an intangible asset that is the difference between the fair value and book
value of insurance liabilities taken on in business combination. This asset should be accounted for
using:
A. PAS 38, Intangible assets.
B. PRFS 4, Insurance contracts.
C. PAS 16, Property, plant and equipment
D. Such an asset should not be accounted for until phase two of the insurance contract.

10. Entity A writes a single policy for a P100,000 premium and expects claims to be made of P60,000 in
2013. At the time of writing the policy, there are commission costs of P20,000. Assume a discount
rate of 3% risk-free. The entity says that if a provision for risk and uncertainty were to be made, it
would amount to P25,000 and that this risk would expire evenly over the years 2011, 2012, and
2013. Under existing policies, the entity would spread the premiums, the claims expense, and the
commissioning costs over the first two years of the policy. Investment returns in years 2010 and
2011 are P2,000 and P4,000 respectively.
What is the profit in year 2010 and 2011, using the matching and deferral approach in years 2010
and 2011?
A. 2010: P12,000, 2011: P14,000
B. 2010: P10,000, 2011: P10,000
C. 2010: P26,000, 2011: P 0
D. 2010: P 0, 2011: P26,000

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INSURANCE CONTRACTS #0004