Entity A writes a single policy for a $1,000 premium and expects claims to be made of $600 in year 4.
At the time of writing the policy, there are commission costs paid of $200. 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 $250, and that this risk would expire evenly over years 2, 3, and 4. Under existing policies, the entity would spread the net premiums, the claims expense, and the commissioning costs over the first two years of the policy. Investment returns in years 1 and 2 are $20 and $40 respectively.
Show the treatment of this policy using a deferral and matching approach in years 1 and 2 that would be acceptable under IFRS 4. How would the treatment differ if a “fair value” approach were used?