Investment contract with discretionary participation features – How 2 best account it

Investment contract with discretionary participation features – A financial instrument that provides a particular investor with the contractual right to receive, as a supplement to an amount not subject to the discretion of the issuer, additional amounts:Investment contract with discretionary participation features

  1. that are expected to be a significant portion of the total contractual benefits;
  2. the timing or amount of which are contractually at the discretion of the issuer; and
  3. that are contractually based on:
    1. the returns on a specified pool of contracts or a specified type of contract;
    2. realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or
    3. the profit or loss of the entity or fund that issues the contract.

Further analysis

Under IFRS 17, investment contracts with discretionary participation features are only within the scope of the standard if the entity also issues insurance contracts. Otherwise, they are accounted for as compound instruments containing a financial liability component within the scope of IFRS 9 and an equity component, if applicable. This is a change compared to IFRS 4. Under the current guidance, all investment contracts with discretionary participation features are included in the scope of the insurance standard, regardless of whether the issuer also issues insurance contracts.

The term ‘investment contracts with discretionary participation features’ describes contracts under which the investor receives an additional payment, the amount or timing of which is contractually at the discretion of the issuer. To meet the definition, it should be expected that the amount is a significant portion of the total contractual benefits, and it should be contractually based on either:

  • the returns on a specified pool of contracts or a specified type of contract,Investment contract with discretionary participation features
  • realised and/or unrealised investment returns on a specified pool of assets held by the issuer, or
  • the profit or loss of the entity or fund that issues the contract.

These contracts are included within the scope of IFRS 17, provided the entity also issues insurance contracts, for the following reasons [IFRS 17 BC83]:

  • Investment contracts with discretionary participation features and insurance contracts that specify a link to returns on underlying items are sometimes linked to the same underlying pool of assets (one provides additional insurance benefits and the other does not). Using the same accounting for both types of contracts simplifies the accounting and enhances comparability within an entity.
  • Both types of contracts often have characteristics (long maturities, recurring premiums and high acquisition cash flows) that appear more frequently in insurance contracts than in most other financial instruments. The accounting model in IFRS 17 specifically generates useful information about contracts containing such features.
  • The accounting model in IFRS 17 provides more appropriate treatment of discretionary cash flows than any other model for these types of contracts.
Something else -   Reinsurance contracts held

Under IFRS 17, investment contracts with discretionary participation features are only within the scope of the standard if the entity also issues insurance contracts. Otherwise, they are accounted for as compound instruments containing a financial liability component within the scope of IFRS 9 and an equity component, if applicable. This is a change compared to IFRS 4. Under the current guidance, all investment contracts with discretionary participation features are included in the scope of the insurance standard, regardless of whether the issuer also issues insurance contracts.

Points for consideration

IFRS 17 does not mention a “de minimis” limit on the number of insurance contracts that an entity must issue to ensure that its investment contracts with discretionary participation features are within the scope of IFRS 17.

The IASB’s decision to retain investment contracts within the scope of the insurance contracts standard means entities may continue the accounting for these contracts under the insurance contract guidance. However, the measurement model under IFRS 17, in many cases, will represent a major change from existing accounting practices applied to investment contracts with discretionary participation features under IFRS 4.

Something else -   Separate distinct good promise from insurance

Non-participating insurance contracts or Insurance contract without direct participation features – An insurance contract that is not an insurance contract with direct participation features.


Investment contracts with direct participation features – An insurance contract for which, at inception:

  1. the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;
  2. the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and
  3. the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items.

Investment contracts without direct participation features – An insurance contract that is not an insurance contract with direct participation features.

Participating insurance contracts – Participating contracts are insurance contracts or investment contracts with discretionary participation features where an insurer shares the performance of underlying items with policyholders. All other contracts are referred to as non-participating contracts.

Investment contract with discretionary participation features

Investment contract with discretionary participation features

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Something else -   Reinsurance contracts held

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