Which of the following is NOT part of the three steps to determine liabilities under IFRS?

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Multiple Choice

Which of the following is NOT part of the three steps to determine liabilities under IFRS?

Under IFRS, the liability for an insurance contract is measured by building it up from the cash flows the contract will generate and then adjusting for the time value of money and uncertainty. You start with the unbiased probability-weighted expected cash flows, meaning you consider all likely future outflows and inflows and weight them by their probabilities to get an expected path of payments. Those expected cash flows are then brought to present value through discounting, because money today is worth more than money later. Finally, you add a margin to reflect the uncertainty around those cash flows—this margin captures the extra compensation needed for bearing non-financial risk. Recognizing revenue from premiums, while essential for accounting for the insurance contract, is not a step in measuring the liability itself. Premium recognition is about when and how much revenue the insurer reports over the contract period, not about determining the liability amount today. That’s why recognizing revenue from premiums is not part of the three steps to determine the liability.

Under IFRS, the liability for an insurance contract is measured by building it up from the cash flows the contract will generate and then adjusting for the time value of money and uncertainty. You start with the unbiased probability-weighted expected cash flows, meaning you consider all likely future outflows and inflows and weight them by their probabilities to get an expected path of payments. Those expected cash flows are then brought to present value through discounting, because money today is worth more than money later. Finally, you add a margin to reflect the uncertainty around those cash flows—this margin captures the extra compensation needed for bearing non-financial risk.

Recognizing revenue from premiums, while essential for accounting for the insurance contract, is not a step in measuring the liability itself. Premium recognition is about when and how much revenue the insurer reports over the contract period, not about determining the liability amount today. That’s why recognizing revenue from premiums is not part of the three steps to determine the liability.

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