Psak 36
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statement of financial accounting standard 36 indonesian institute of accountants
accounting for life insurance
1
statement of financial accounting standard 36 accounting for life insurance contents paragraph foreword foreword from central committee of the indonesian institute of accountants foreword from the ministry of finance foreword from the indonesian insurance council introduction characteristics of the life insurance industry scope and application definition
01 - 20 02 03 - 05 06 - 20
presentation of financial statements balance sheet income statement notes to the financial statements
21 - 29 21 - 25 26 - 28 29
revenue short term premium contract long term premium contract other revenue
30 - 32 30 31 32
expenses claim expenses acquisition expenses
33 - 36 33 - 35 36
assets investments reinsurance receivables
37 - 39 38 39
liabilities liability for future policy benefit estimation of claim liability unearned premium reinsurance liability
40 - 44 41 42 43 44
disclosure effective date
45 46
attachments samples of financial statements 1. balance sheet 2. income statement (single step) 3. statement of cash flows (direct method) 4. statement of cash flows (indirect method)
2
foreword deregulation and de-bureaucratisation measures taken by the government have given significant flexibility and opportunity to the public, including insurance companies, to develop and play a greater role in the social and economic life of this country. faced with new challenges, insurance companies need to create a system to improve the flow of their business activities, to manage and to maintain their financial condition. one such system required is a financial accounting standard for more informative, more accurate financial statements of life insurance companies. recognising this, the indonesian institute of accountants in cooperation with the indonesian insurance council and the directorate of insuranceministry of finance, has developed an accounting standard for life insurance industry. this accounting standard is set (1) in the spirit of harmonising with international financial standards, but (2) using as a reference official accounting standards of modern countries such as fasb/fas of the u.s., (3) considering the needs of public company financial statements and the global stock exchange, (4) considering rules and regulations of the insurance law, (5) considering opinions of the government, experts, practitioners and watchers during setting process and public hearing, (6) considering condition and culture of the indonesian business, (7) in the spirit and in perspective of the macro economics. this standard has been set based on the decision of the indonesian institute of accountants. this standard is expected to (1) give protection to the policy holders and the public, (2) build an insurance business which is conservative, prudent and healthy, (3) make use of globally accepted accounting technology in efforts to create a more prosperous indonesian society. accounting standard for life insurance is a new standard that requires the participation of all parties to ensure the dissemination, comprehension, application and future revisions of the standard. the indonesian institute of accountants wish to thank to: mr. drs. mar'ie muhammad mr. dr. ir. bambang subianto institutions mr. drs. sophar l. toruan, mpa drs. kartomo wiryobroto
minister of finance directorate general
of
director of insurancer director of supervisory of accountants and appraisers 3
financial
4
the chairperson and members of the steering committee of the standardsetting project, as follows: 1. 2. 3. 4. 5. 6.
chairperson member member member member member
: : : : : :
drs. sophar l. toruan, mpa drs. kartomo wiryobroto drs. murniati firman drs. vjh boentaran drs. jusuf halim didi achdijat, fsai
the chairperson and members of the formulating team of the standard setting project, as follows: 1. chairperson 2. secretary 3. member 4. member 5. member 6. member 7. member 8. member 9. member 10. member 11. member 12. member 13. member
: : : : : : : : : : : : :
drs. jan hoesada, mm drs. firdaus djaelani, ma drs. bambang heryanto drs. brata antakusuma drs. agust. sudjiono didi adrianto hadrian bambang sumantoro drs. achmad wahidin dr. nur indriantoro drs. rusdy daryono h. kasir iskandar, fsai drs. warnedy, msc. drs. ruchyat kosasih
the secretariat of the formulating team of the standard-setting project, as follows: 1. 2. 3. 4. 5. 6. 7. 8.
agus prawoto, s.h., m.a. ronny agandhi, mec. darul dimasqy k, s.e. agus suparto, s.e. fatati sriwahyuni, s.e. fitri amanda, s.e., m.b.a. asep rahmansyah, s.e. salusra satria, s.e., m.a.f.
all sponsors, information sources, and attendants of the public hearing of the concept publication of the accounting standard of life insurance. without their prayers, supports, commitments, spirits, and attention of the parties stated above, this accounting standard would not have been completed.
5
by the blessing of the almighty god, this accounting standard is approved by the central committee of the indonesian institute of accountants. jakarta, april 26 1996 the central committee of the indonesian institute accountants
drs. soedarjono chairperson
6
of
statement of financial accounting standard 36, accounting for life insurance, was adopted by a meeting of the indonesian accounting principles committee on march 22, 1996 and was ratifited by the national council of the indonesian institute of accountants on april 26, 1996.
jakarta, april 26, 1996 national council indonesian accounting principles committee drs. jusuf halim drs. ipg ary suta, mba
chairperson vice-
chairperson drs. mirza mochtar, mba secretary dr. wahjudi prakarsa member dr. katjep k. abdoelkadir member drs. jan hoesada, ak., mm member drs. hein g. surjaatmadja member drs. sobo sitorus member drs. timoty r. marnandus, mba member drs. mirawati sudjono, msc member dr. nur indrianto member drs. rusdy daryono member dra. siti ch. fadjriah member drs. osman sitorus member dra. istini t. siddharta member drs. jusuf wibisana member dra. yosefa sayekti member
7
speech from the director general of financial institutions ministry of finance we thank to god, for the legalisation of this financial accounting standard for life insurance companies. current developments in the global economy has placed the service industry in a strategic position. the increase in the service industry including insurance, has given significant contribution to the economic growth of a country. in response to the increase in the trade of insurance services, requiring similar perceptions and interpretations to all insurance business practitioners, a financial accounting standard for life insurance is needed. by standardising financial accounting and reporting we hope that all parties, involved in the insurance industry, will be able to use the standard as a guide when setting up the accounting system, as a reference in reviewing life insurance companies as well as in decision-making process. last but not least, we hope that this financial accounting standard, developed in cooperation with the indonesian insurance industry and the indonesian institute of accountants, will be of benefit to all of us by assisting developments in the accounting profession and in the accounting systems of life insurance companies. jakarta, april 26 1996 director
general
of
institutions
dr. ir. bambang subianto
8
financial
speech from the general chairperson of indonesian insurance council on the approvement of financial accounting standard 36 on life insurance accounting we all believe that a standard financial accounting procedure is needed in every industry, including the insurance industry. the application of different accounting systems in accounting for insurance companies makes it difficult to compare companies. in addition, insurance laws and regulations require the application of a standard accounting system. for this purpose, an 'exposure draft' for financial accounting standard 36, accounting for life insurance companies, has been produced in cooperation between the indonesian institute of accountants and indonesian insurance council (formalised by an agreement dated june 1, 1995). further, the central committee of the indonesian institute of accountants has legalised that draft so that now we have the statement of financial accounting standard for life insurance companies. we hope that members of the indonesian insurance council adjust their financial accounting procedure with this financial accounting standard. we would like to thank to the central committee of the indonesian institute of accountants and its members for their assistance to the indonesian insurance council in preparing both statement of financial accounting standard which will benefit development in indonesia's insurance industry. we also hope that this cooperation will continue in the future.
jakarta, april 26 1996 the indonesian insurance council
b. munir sjamsoeddin general chairperson
9
psak 36
accounting for life insurance
introduction 01 the insurance industry grows in line with the growth of the business world. the rise of the insurance industry is a natural consequence and uavoidable in a situation in whch many business people and members of the public have the inclination to avoid or transfer the risks of financial loss. the insurance industry assumes or insures part of those risks in return for insurance premiums from the entrepreneur or the insured. the type of risk insured under life insurance includes death, accidents and disabilities, and loss of ability to earn income. the insurance industry will insure all or part of the financial risk suffered by the insured resulting from events or situations that have been insured for during the period of the insurance contract. the life insurance business has specific characteristics that make insurance transaction and insurance accounting unique. the premium is received or known, while the claim or insurance benefit has not arisen and it is uncertain as to occurrencefor several products, the insurance claims are surrounded by uncertainties as to the ccurrence as wll as amounts. this statement addresses the accounting treatment for transactions which are specifically related to the life insurance industry. other general matters or matters that are not addressed in this statement should be treated in accordance with generally accepted accounting principles. characteristics of the life insurance industry 02
the business of life insurance has the following characteristics:
-
life insurance bsiness represent a system of protection against risk of financial loss resulting from the death of an individual as well as an effort to accumulated funds from the general public.
-
premium represents revenue to the insurance enterprise, in addition to return on investments which constitutes an activity that cannot be separated in the life insurance business.
-
the main function of investments is to meet all benefit obligations due to the policyholders.
-
financial liabilities of life insurance enterprises are affected by uncertainty as to occurrence of an event, which influences the presentation of the financial statements.
-
financial statements are influenced by estimates, such as estimates of the liability for the future policy benefits which is based on actuarial calculations, estimates of unearned premium income, 10
psak 36
accounting for life insurance
estimates of the amount of the total cllaim liability, and estimates of the incurred but not reported claims.
11
psak 36
accounting for life insurance
-
policyholders pay the insurance premiums or deposits to the insurance enterprise before the insured event occurs. these payments represent revenues to the insurance enterprise. when the i nsurance contract is agreed, the insurance enterprise does not usually know whether or not it will pay the insurance benefits, what the amount of payment is going to be, and if payment is made when it should be made. this will influence the issues if revenue recognition and the measurement of expenses.
-
life insurance enterprises should meet the financial health criteria in accordance with regulations in the insurance industry, such as solvency margin.
scope and application 03 a life insurance enterprise can take one of the following legal forms: a corporation, a cooperaive, alimited liability enterprise or a joint venture. 04 this statement is intended to be applied in the presentation of the financial statements of life insurance enterprises. any circumstances not addressed by this statement should be accounted for in accordance with generally accepted accounting principles. when the enterprise’s main transactions are related to life insurance transactions, this statement should be applied. 05 the life insurance business is influenced by rules and regulations which may differ from generally accepted accounting principles. financial statements presented in accordance with this statement are not intended to comply with specific rules definition 06 a life insurance contract is classified into short term contract or long term contract depending whether the contract will be in efffect for a certain period of time. the factors which should be considered when determining whether the contract is expected to be in effect for a certain period of time are: a.
short term contract. in this type of contract, the amount of premium charged, amount of coverage given or other policy terms can be amended by the insurance enterprise at the policy renewal date.
b.
long term contract. this contract is usually irrevocable, renewal is guaranteed and other terms caonnot be amended unilaterally. long term contracts also include service or other functions performed by insurance enterprises
12
psak 36
accounting for life insurance
07 subordinated liability is a loan from shareholders or other parties, which in the event of liquidation, is settled after the payment of other liabilities. this liability is intended to improve the solvency margin.
13
psak 36
accounting for life insurance
08 solvency margin is a measurement used to assess an insurance company’s ability in fulfilling its liabilities to the policyholders, which is reflected by comparison between allowable net value and the company’s liabilities. 09 grace period is a period in which the policy is in effect, but the policyholders have not been required to pay the premiums at the date they are supposedly due. 10
gross premium is a premium received from policy holder.
11 premium receivable is a claim of premium to the policyhoder which is due and is still within the grace period 12 unearned premium is a part of the gross premium which has not been recognised as revenue since the period covered extends beyond the end of the current period. 13 reinsurance premium is a part of the gross permium which is due to the reinsurer based on the reinsurance agreement. 14 reinsurance receivable is a claim to the reinsurer which arises from reinsurance transcations, in relation to the receipt of reinsurance premium, reinsurance commission, profit commission and reinsurance claim. 15 reinsurance payable is a liablility that arises from reinsurance transactions in relation to the charging or reinsurance premium, reinsurance commission, profit commission and reinsurance claim. 16 claim and insurance benefit are expenses which consist of: claims and insurance benefits where payment is based on the occurrence of an insured event. such claims and benefits include dath claim, disability claim and health insurance claim; claims and benefits due on maturity date; and claims and benefits due to surrender of the contract. 17 reinsurance claim is part of the claim that becomes a liability of the reinsurer in accordance with the reinsurance agreement. 18 liability for future policy benefit (in insurance technical term it is called a premium reserve) is an obligation to the policyholders that concerns the premium that is due, including grace period premium. 19 estimated of claim liability is claim where the amount and/or the responsibility has not been determined, including the incurred but not reported claims. 20
acquisition cost are costs related to new insurance contracts or 14
psak 36
accounting for life insurance
renewals, including commissions and other expenses (such as salaries of underwiting employees).
15
psak 36
accounting for life insurance
presentation of financial statements balance sheet 21 in presenting the balance sheet, assets and liabilities are not classified into current or non-current items, but emphasis on the investment accounts and liabilities to policy holders accounts. in this manner, the financial statements reflect a company’s ability to fulfil its obligations to the policy holders. 22 assets are presented by listing the investment accounts first, followed by other asset accounts. other asset accounts are presented in the order of liquidity. 23 liabilities are presented by listing “liability to the policy holders” account first, followed by other liabilities. other liabilities are presented in order of maturity. 24 subordinated liabilities, if any, are presented after other liabilities and before equity. 25 equity is presented in compliance with the generally accepted accounting principles. income statement 26
income statements are presented using the single step method.
27 premium income is in a manner reflecting the amount the gross premium, reinsurance premium, and change in unearned premium income. reinsurance premium is presented as a reduction of gross premium. 28 investment income is presented by deducting direct investment costs from investment revenue. gain (loss) from the sale of investment, and foreign exchange differences which relate to the investment is presented as a part of the investment income. notes to financial statements 29 notes to the financial statements include disclosures as mandated by the generally accepted accounting principle, except as stated otherwise in paragraph 45.
16
psak 36
accounting for life insurance
revenue short term contract premium 30 short term contracts premium (some type of credit life insurance, such as credit life insurance) is recognised as revenue during the contract period in proportion to the amount of insurance coverage. if the risk period is significantly different from the contract period, the premium is recognised as revenue over the risk period in proportion to the insurance coverage. as a reslut, premium is recongnised as income on a straight line basis over the contract period (or the risk period, if different), unless the insurance coverage declines in accordance with a predetermined schedule. long term premium contract 31 long term contracts premium (whole life contracts and guaranteed renewable term life contracts) are recognised as income from the policyholders when the policy is come due. the obligation for costs expected to arise in relation to the contract is recognised during current period and the renewal period. the present value of estimated future policy benefit which will be paid to the policyholder or their representatives, less the present value of estimated premium which will be received (liability for future policy benefits), is recognised at the time the premium income is recognised. these estimates are based on assumptions such as expected investment income, mortality, morbidity, termination and expenses determined at the time the insurance contract was signed. other income 32 reinsurance commission and reinsurance profit commission is recognised as other income. expenses claim expenses 33 claims include settled claims, outstanding claims and claims incurred but not reported. 34 the amount of claims outstanding, including claims incurred but not reported, are calculated based on an estimate the claim liability. changes in the amount of estimation of claim liability, as a result of further reviewing process and differences between the amount of claim estimation and claim actually paid, are recognised as additions to or deductions from expenses in the income statement for the period such changes occur. 35
reinsurance claims are recognised as a deduction from claim 17
psak 36
accounting for life insurance
expenses in the period where the claim expense is recognised.
18
psak 36
accounting for life insurance
acquisition costs 36 acquisition costs are allocated using actuarial calculation since the liability for future policy benefits uses the net level premium method. assets 37 asset accounts are recorded in accordance with generally accepted accounting principles except specifically stated in this statement. investments 38 accounting treatment for investments should be in accordance with sfas no. 13, accounting for investments, and sfas no. 15, accounting for investment in associates, except for marketable securities where the accounting treatment should be as follows: 1.
debt securities that are intended to be held until maturity are stated at acquisition cost, net of amortization of premium or discount. when determining this amount, an enterprise should consider its experienses relating to the sale and transfer of securities. an enterprise cannot classify a debt security in this category if the enterprise intends to hold the security only for an unspecified period. therefore, debt securities cannot classified in this category if the enterprise intends to sell the securities, for examole, to deal with the following situations: (a) there are changes in the market interest rate and changes related to similar risks; (b) there are liquidity needsthat arise; (c) there are changes in the availability and alternative investment returns; (d) changes in foreign exchange risk.
2.
debt and equity securities which are classified as trading securities are stated at market value. trading in this case reflects active purchases and sales and is often intended to abtain benefit from short term price differences. equity securities classified under this category are those for which fair values can be determined, that is when there is quotation of bid and ask prices available from a stock exchange registered with bapepam. for debt securities with no quoted market prices, the estomated fair values can be determined through various techniques of price determination, such as discounted cash flow analysis. unrealized gain or losses resulting from increase (decrease) in market price is reported in the current year’s income statement.
19
psak 36
3.
accounting for life insurance
other debt and equity securities not included inthe above categories are classified as “available for sale securities” and are stated at market price. debt securities included in this category are securities held for an unspecified period, for instance, the security will eventually be sold to meet liquidity needs or as a part of a company’s risk management strategy. unrealised gains (losses) as a result of increases (decreases) in price are not recognised in income statements but are separately presented in the equity component.
reinsurance receivables 39 reinsurance receivables cannot be offset against reinsurance payables unless the reinsurance contract specially allow for the right of offset. if a credit balance arise from the offsetting of the reinsurances receivable against the reinsurance payable, the balance should be presented in the liability section as reinsurance payale. liabilities 40 liability accounts should be recorded in accordance with generally accepted accounting principles, except they are specially specifically stated in this standard. liability for future policy benefit 41 liability for future policy benefit is stated in balance sheet based on actuarial calculations. estimatied claim liability 42 estimation of claim liability on short term contract, in particular for health and accident insurance, are stated at the estimated amount based on the insurance technical review. unearned premium income 43 unearned premium income on short term health and accident insurance contracts is calculated by applying the following rules: a.
in aggregate, without considering the end of the policy period, and the mount calculated based on a certain percentage of the premium retained for each insurance, or ;
b.
individually for each of insurance and the amount of unearned premium revenue is calculated in proportion to the amount of protection given, during the insurance period or risk period, which is consistent with the premium revenue realised as explained in 20
psak 36
accounting for life insurance
paragraph 30.
21
psak 36
accounting for life insurance
reinsurance payable 44 reinsurance payable cannot be offset against reinsurance receivable unless the reinsurance contract specifically allows for the right of offset. if a debit balance arises from the offsetting of the reinsurance receivable and payable, this balance should presented in the asset section as reinsurance receivable disclosure 45
the following disclosures are required:
a.
accounting policies on: premium revenue recognition and method of determining liability for future policy benefits and unearned premium income reinsurance transactions, including explanations of their nature, objective and effect of such transaction on the company’s operation; recognition of claim expenses and the method of determining estimeted claims retained; and other important accounting policies as mandated by the prevailing financial accounting standard.
b.
deferred acquisition costs. disclosures in relation to the nature, amount, type and expense allocation method used to amortise deferred acquisition costs.
c.
liability to the policy holders. details of liabilities to the policy holders and explanation on method, assumption and system of calculation used as a base to determine such liability.
d.
subordinated loan. explanations on characteristics of subordinated loan, interest rate and value of remaining loan.
e.
mutual life insurance equity. explanation on nature as well as rules and regulations related to the mutual life insurance equity; explanations on method and amounts distributed to the policy holders.
f.
gross premium revenue. disclosure on first year premium and details of its renewal based on the group and the type of insurance.
g.
claim and benefit. disclosure on type, amount and reasons for significant increase in claim and benefit.
22
psak 36
accounting for life insurance
effective date 46 this standard becomes operative for the presentation and preparation of financial statements for the period beginning on or after january 1, 1996. early application is highly recommended.
23
psak 36
accounting for life insurance
attachment example of financial statements 1. balance sheet p.t. asuransi jiwa abc balance sheets december 31, 19x2 and 19x1 assets
liability and equity 19x2
19x1
19x2
19x1
xx xx xx
xx xx xx
xx
xx
xx
xx
xx xx xx
xx xx xx
xx xx xx
xx xx xx
obligatory deposit non-obligatory deposit time deposit capital stocks bonds money market securities direct participation land and building mortgage loan policy loan other investments total investment
xx xx xx xx xx xx xx xx xx xx xx xx
xx xx xx xx xx xx xx xx xx xx xx xx
cash and bank premium receivable reinsurance receivable investment income receivable other receivables prepaid expenses fixed assets - land - building acc. depr. - other fixed assets acc. depr. other assets - deferred acq. cost
xx xx xx xx xx xx
xx xx xx xx xx xx
xx xx (xx) xx (xx)
xx equity xx authorised cap....shares (xx) @rp. ... xx subscribed and paid in cap. (xx) ....shares additional paid in cap./ xx retained earnings total equity
xx
xx
xx xx xx
xx xx xx
xx
xx
xx
total assets
xx
xx
24
liab. for future policy benefit est. of claim payable . claim payable unearned premium income total liab. to policy holders premium deposits reinsurance payable commission payable undistributed earnings attributable to policy holders accrued expenses subordinated debt
total liab.&eq.
psak 36
2.
accounting for life insurance
income statement (single step)
p.t. asuransi jiwa abc income statement for the years ended december 31, 19x1 and 19x2 19x2
19x1
xx (xx)
xx (xx)
(xx) xx
(xx) xx
investment income financial institution pension fund service income other income
xx xx xx
xx xx xx
total revenue
xx
xx
xx (xx)
xx (xx)
xx xx xx xx xx
xx xx xx xx xx
xx
xx
xx xx xx xx xx xx
xx
income premium income gross premium less: reinsurance premium less (add) increase (decrease) of unearned premium income total premium income
expenses claim and benefit deducted by: reinsurance claim recovery add (less) : increase (decrease) in liability for future policy benefit and estimation of claim payable amortisation of deferred acquisition cost marketing general and administrative other income (expenses) total expenses profit (loss) before tax income tax xx current year net income dividend retained earnings, beginning of the year retained earnings, end of the year
25
xx xx xx xx
psak 36
3.
accounting for life insurance
statement of cash flows (direct method)
p.t. asuransi jiwa abc statement of cash flows for the years ended december 31, 19x2 and 19x1
cash flows from operating activities premium receipt reinsurance claim receipt other receipts payment for reinsurance premium payment for commission payment for claim payment for general and administrative expense payment for tax payment for other costs net cash flows from/for operating activities cash flows from investing activities receipt from investment income liquidation of deposit liquidation of bonds proceed from sale of equity and debt securities proceed from sale of fixed assets additions to deposit acquisition of equity and debt securities acquisition of fixed assets acquisition of other investments net cash flows from/for investing activities cash flows from financing activities receipt of subordinated debt proceeds in paid in capital payment of subordinated loan payment of cash dividend net cash flows from/for financing activities net increase (decrease) in cash balance of cash & cash equivalentbeginning of period balance of cash & cash equivalentend of period
26
a+b+c
19x2
19x1
a
xx xx xx (xx) (xx) (xx) (xx) (xx) (xx) xx
xx xx xx (xx) (xx) (xx) (xx) (xx) (xx) xx
b
xx xx xx xx xx (xx) (xx) (xx) (xx) xx
xx xx xx xx xx (xx) (xx) (xx) (xx) xx
c
xx xx (xx) (xx) xx
xx xx (xx) (xx) xx
xx xx xx
xx xx xx
psak 36
4.
accounting for life insurance
cash flows (indirect method)
p.t. asuransi jiwa abc statement of cash flows for the years ended december 31, 19x2 and 19x1
cash flows from operating activities income before tax adjustments for noncash expenses fixed assets depreciation amortisation of intangible assets operating income before changes in working capital decrease (increase) in current assets increase (decrease) in current liabilities: (increase) in premium receivable, reinsurance receivable, accrued investment income, other receivables, decrease in prepayment increase in liability for future policy benefit, estimation of claim liability, claim payable, unearned premium income net cash from insurance main operations payment of corporate income tax payment of interest cash flows from operations other income net cash from operating activities cash flows from investing activities net investment income adjustment for noncash expenditure investment depreciation investment amortisation cash flows from investing activities decrease (increase) in statutory deposit, ordinary deposit decrease (increase) in shares, obligation, marketable securities decrease (increase) in direct investment cash flows from investment accounts cash flows from financing activities proceed from share emission
27
a
b
19x2
19x1
xx
xx
xx xx xx
xx xx xx
(xx) xx
(xx) xx
xx xx (xx) (xx) xx xx xx
xx xx (xx) (xx) xx xx xx
xx
xx
xx xx xx
xx xx xx
(xx)
(xx)
(xx) (xx) xx
(xx) (xx) xx
xx
xx
psak 36
accounting for life insurance
receipt from subordinated loan payment of dividend cash flows from financing activities
c
net increase (decrease) in cash balance of cash & cash equivalent, beginning of period balance of cash & cash equivalent, end of period
28
a+b+c
xx (xx) xx
xx (xx) xx
xx xx xx
xx xx xx
accounting for life insurance
1
statement of financial accounting standard 36 accounting for life insurance contents paragraph foreword foreword from central committee of the indonesian institute of accountants foreword from the ministry of finance foreword from the indonesian insurance council introduction characteristics of the life insurance industry scope and application definition
01 - 20 02 03 - 05 06 - 20
presentation of financial statements balance sheet income statement notes to the financial statements
21 - 29 21 - 25 26 - 28 29
revenue short term premium contract long term premium contract other revenue
30 - 32 30 31 32
expenses claim expenses acquisition expenses
33 - 36 33 - 35 36
assets investments reinsurance receivables
37 - 39 38 39
liabilities liability for future policy benefit estimation of claim liability unearned premium reinsurance liability
40 - 44 41 42 43 44
disclosure effective date
45 46
attachments samples of financial statements 1. balance sheet 2. income statement (single step) 3. statement of cash flows (direct method) 4. statement of cash flows (indirect method)
2
foreword deregulation and de-bureaucratisation measures taken by the government have given significant flexibility and opportunity to the public, including insurance companies, to develop and play a greater role in the social and economic life of this country. faced with new challenges, insurance companies need to create a system to improve the flow of their business activities, to manage and to maintain their financial condition. one such system required is a financial accounting standard for more informative, more accurate financial statements of life insurance companies. recognising this, the indonesian institute of accountants in cooperation with the indonesian insurance council and the directorate of insuranceministry of finance, has developed an accounting standard for life insurance industry. this accounting standard is set (1) in the spirit of harmonising with international financial standards, but (2) using as a reference official accounting standards of modern countries such as fasb/fas of the u.s., (3) considering the needs of public company financial statements and the global stock exchange, (4) considering rules and regulations of the insurance law, (5) considering opinions of the government, experts, practitioners and watchers during setting process and public hearing, (6) considering condition and culture of the indonesian business, (7) in the spirit and in perspective of the macro economics. this standard has been set based on the decision of the indonesian institute of accountants. this standard is expected to (1) give protection to the policy holders and the public, (2) build an insurance business which is conservative, prudent and healthy, (3) make use of globally accepted accounting technology in efforts to create a more prosperous indonesian society. accounting standard for life insurance is a new standard that requires the participation of all parties to ensure the dissemination, comprehension, application and future revisions of the standard. the indonesian institute of accountants wish to thank to: mr. drs. mar'ie muhammad mr. dr. ir. bambang subianto institutions mr. drs. sophar l. toruan, mpa drs. kartomo wiryobroto
minister of finance directorate general
of
director of insurancer director of supervisory of accountants and appraisers 3
financial
4
the chairperson and members of the steering committee of the standardsetting project, as follows: 1. 2. 3. 4. 5. 6.
chairperson member member member member member
: : : : : :
drs. sophar l. toruan, mpa drs. kartomo wiryobroto drs. murniati firman drs. vjh boentaran drs. jusuf halim didi achdijat, fsai
the chairperson and members of the formulating team of the standard setting project, as follows: 1. chairperson 2. secretary 3. member 4. member 5. member 6. member 7. member 8. member 9. member 10. member 11. member 12. member 13. member
: : : : : : : : : : : : :
drs. jan hoesada, mm drs. firdaus djaelani, ma drs. bambang heryanto drs. brata antakusuma drs. agust. sudjiono didi adrianto hadrian bambang sumantoro drs. achmad wahidin dr. nur indriantoro drs. rusdy daryono h. kasir iskandar, fsai drs. warnedy, msc. drs. ruchyat kosasih
the secretariat of the formulating team of the standard-setting project, as follows: 1. 2. 3. 4. 5. 6. 7. 8.
agus prawoto, s.h., m.a. ronny agandhi, mec. darul dimasqy k, s.e. agus suparto, s.e. fatati sriwahyuni, s.e. fitri amanda, s.e., m.b.a. asep rahmansyah, s.e. salusra satria, s.e., m.a.f.
all sponsors, information sources, and attendants of the public hearing of the concept publication of the accounting standard of life insurance. without their prayers, supports, commitments, spirits, and attention of the parties stated above, this accounting standard would not have been completed.
5
by the blessing of the almighty god, this accounting standard is approved by the central committee of the indonesian institute of accountants. jakarta, april 26 1996 the central committee of the indonesian institute accountants
drs. soedarjono chairperson
6
of
statement of financial accounting standard 36, accounting for life insurance, was adopted by a meeting of the indonesian accounting principles committee on march 22, 1996 and was ratifited by the national council of the indonesian institute of accountants on april 26, 1996.
jakarta, april 26, 1996 national council indonesian accounting principles committee drs. jusuf halim drs. ipg ary suta, mba
chairperson vice-
chairperson drs. mirza mochtar, mba secretary dr. wahjudi prakarsa member dr. katjep k. abdoelkadir member drs. jan hoesada, ak., mm member drs. hein g. surjaatmadja member drs. sobo sitorus member drs. timoty r. marnandus, mba member drs. mirawati sudjono, msc member dr. nur indrianto member drs. rusdy daryono member dra. siti ch. fadjriah member drs. osman sitorus member dra. istini t. siddharta member drs. jusuf wibisana member dra. yosefa sayekti member
7
speech from the director general of financial institutions ministry of finance we thank to god, for the legalisation of this financial accounting standard for life insurance companies. current developments in the global economy has placed the service industry in a strategic position. the increase in the service industry including insurance, has given significant contribution to the economic growth of a country. in response to the increase in the trade of insurance services, requiring similar perceptions and interpretations to all insurance business practitioners, a financial accounting standard for life insurance is needed. by standardising financial accounting and reporting we hope that all parties, involved in the insurance industry, will be able to use the standard as a guide when setting up the accounting system, as a reference in reviewing life insurance companies as well as in decision-making process. last but not least, we hope that this financial accounting standard, developed in cooperation with the indonesian insurance industry and the indonesian institute of accountants, will be of benefit to all of us by assisting developments in the accounting profession and in the accounting systems of life insurance companies. jakarta, april 26 1996 director
general
of
institutions
dr. ir. bambang subianto
8
financial
speech from the general chairperson of indonesian insurance council on the approvement of financial accounting standard 36 on life insurance accounting we all believe that a standard financial accounting procedure is needed in every industry, including the insurance industry. the application of different accounting systems in accounting for insurance companies makes it difficult to compare companies. in addition, insurance laws and regulations require the application of a standard accounting system. for this purpose, an 'exposure draft' for financial accounting standard 36, accounting for life insurance companies, has been produced in cooperation between the indonesian institute of accountants and indonesian insurance council (formalised by an agreement dated june 1, 1995). further, the central committee of the indonesian institute of accountants has legalised that draft so that now we have the statement of financial accounting standard for life insurance companies. we hope that members of the indonesian insurance council adjust their financial accounting procedure with this financial accounting standard. we would like to thank to the central committee of the indonesian institute of accountants and its members for their assistance to the indonesian insurance council in preparing both statement of financial accounting standard which will benefit development in indonesia's insurance industry. we also hope that this cooperation will continue in the future.
jakarta, april 26 1996 the indonesian insurance council
b. munir sjamsoeddin general chairperson
9
psak 36
accounting for life insurance
introduction 01 the insurance industry grows in line with the growth of the business world. the rise of the insurance industry is a natural consequence and uavoidable in a situation in whch many business people and members of the public have the inclination to avoid or transfer the risks of financial loss. the insurance industry assumes or insures part of those risks in return for insurance premiums from the entrepreneur or the insured. the type of risk insured under life insurance includes death, accidents and disabilities, and loss of ability to earn income. the insurance industry will insure all or part of the financial risk suffered by the insured resulting from events or situations that have been insured for during the period of the insurance contract. the life insurance business has specific characteristics that make insurance transaction and insurance accounting unique. the premium is received or known, while the claim or insurance benefit has not arisen and it is uncertain as to occurrencefor several products, the insurance claims are surrounded by uncertainties as to the ccurrence as wll as amounts. this statement addresses the accounting treatment for transactions which are specifically related to the life insurance industry. other general matters or matters that are not addressed in this statement should be treated in accordance with generally accepted accounting principles. characteristics of the life insurance industry 02
the business of life insurance has the following characteristics:
-
life insurance bsiness represent a system of protection against risk of financial loss resulting from the death of an individual as well as an effort to accumulated funds from the general public.
-
premium represents revenue to the insurance enterprise, in addition to return on investments which constitutes an activity that cannot be separated in the life insurance business.
-
the main function of investments is to meet all benefit obligations due to the policyholders.
-
financial liabilities of life insurance enterprises are affected by uncertainty as to occurrence of an event, which influences the presentation of the financial statements.
-
financial statements are influenced by estimates, such as estimates of the liability for the future policy benefits which is based on actuarial calculations, estimates of unearned premium income, 10
psak 36
accounting for life insurance
estimates of the amount of the total cllaim liability, and estimates of the incurred but not reported claims.
11
psak 36
accounting for life insurance
-
policyholders pay the insurance premiums or deposits to the insurance enterprise before the insured event occurs. these payments represent revenues to the insurance enterprise. when the i nsurance contract is agreed, the insurance enterprise does not usually know whether or not it will pay the insurance benefits, what the amount of payment is going to be, and if payment is made when it should be made. this will influence the issues if revenue recognition and the measurement of expenses.
-
life insurance enterprises should meet the financial health criteria in accordance with regulations in the insurance industry, such as solvency margin.
scope and application 03 a life insurance enterprise can take one of the following legal forms: a corporation, a cooperaive, alimited liability enterprise or a joint venture. 04 this statement is intended to be applied in the presentation of the financial statements of life insurance enterprises. any circumstances not addressed by this statement should be accounted for in accordance with generally accepted accounting principles. when the enterprise’s main transactions are related to life insurance transactions, this statement should be applied. 05 the life insurance business is influenced by rules and regulations which may differ from generally accepted accounting principles. financial statements presented in accordance with this statement are not intended to comply with specific rules definition 06 a life insurance contract is classified into short term contract or long term contract depending whether the contract will be in efffect for a certain period of time. the factors which should be considered when determining whether the contract is expected to be in effect for a certain period of time are: a.
short term contract. in this type of contract, the amount of premium charged, amount of coverage given or other policy terms can be amended by the insurance enterprise at the policy renewal date.
b.
long term contract. this contract is usually irrevocable, renewal is guaranteed and other terms caonnot be amended unilaterally. long term contracts also include service or other functions performed by insurance enterprises
12
psak 36
accounting for life insurance
07 subordinated liability is a loan from shareholders or other parties, which in the event of liquidation, is settled after the payment of other liabilities. this liability is intended to improve the solvency margin.
13
psak 36
accounting for life insurance
08 solvency margin is a measurement used to assess an insurance company’s ability in fulfilling its liabilities to the policyholders, which is reflected by comparison between allowable net value and the company’s liabilities. 09 grace period is a period in which the policy is in effect, but the policyholders have not been required to pay the premiums at the date they are supposedly due. 10
gross premium is a premium received from policy holder.
11 premium receivable is a claim of premium to the policyhoder which is due and is still within the grace period 12 unearned premium is a part of the gross premium which has not been recognised as revenue since the period covered extends beyond the end of the current period. 13 reinsurance premium is a part of the gross permium which is due to the reinsurer based on the reinsurance agreement. 14 reinsurance receivable is a claim to the reinsurer which arises from reinsurance transcations, in relation to the receipt of reinsurance premium, reinsurance commission, profit commission and reinsurance claim. 15 reinsurance payable is a liablility that arises from reinsurance transactions in relation to the charging or reinsurance premium, reinsurance commission, profit commission and reinsurance claim. 16 claim and insurance benefit are expenses which consist of: claims and insurance benefits where payment is based on the occurrence of an insured event. such claims and benefits include dath claim, disability claim and health insurance claim; claims and benefits due on maturity date; and claims and benefits due to surrender of the contract. 17 reinsurance claim is part of the claim that becomes a liability of the reinsurer in accordance with the reinsurance agreement. 18 liability for future policy benefit (in insurance technical term it is called a premium reserve) is an obligation to the policyholders that concerns the premium that is due, including grace period premium. 19 estimated of claim liability is claim where the amount and/or the responsibility has not been determined, including the incurred but not reported claims. 20
acquisition cost are costs related to new insurance contracts or 14
psak 36
accounting for life insurance
renewals, including commissions and other expenses (such as salaries of underwiting employees).
15
psak 36
accounting for life insurance
presentation of financial statements balance sheet 21 in presenting the balance sheet, assets and liabilities are not classified into current or non-current items, but emphasis on the investment accounts and liabilities to policy holders accounts. in this manner, the financial statements reflect a company’s ability to fulfil its obligations to the policy holders. 22 assets are presented by listing the investment accounts first, followed by other asset accounts. other asset accounts are presented in the order of liquidity. 23 liabilities are presented by listing “liability to the policy holders” account first, followed by other liabilities. other liabilities are presented in order of maturity. 24 subordinated liabilities, if any, are presented after other liabilities and before equity. 25 equity is presented in compliance with the generally accepted accounting principles. income statement 26
income statements are presented using the single step method.
27 premium income is in a manner reflecting the amount the gross premium, reinsurance premium, and change in unearned premium income. reinsurance premium is presented as a reduction of gross premium. 28 investment income is presented by deducting direct investment costs from investment revenue. gain (loss) from the sale of investment, and foreign exchange differences which relate to the investment is presented as a part of the investment income. notes to financial statements 29 notes to the financial statements include disclosures as mandated by the generally accepted accounting principle, except as stated otherwise in paragraph 45.
16
psak 36
accounting for life insurance
revenue short term contract premium 30 short term contracts premium (some type of credit life insurance, such as credit life insurance) is recognised as revenue during the contract period in proportion to the amount of insurance coverage. if the risk period is significantly different from the contract period, the premium is recognised as revenue over the risk period in proportion to the insurance coverage. as a reslut, premium is recongnised as income on a straight line basis over the contract period (or the risk period, if different), unless the insurance coverage declines in accordance with a predetermined schedule. long term premium contract 31 long term contracts premium (whole life contracts and guaranteed renewable term life contracts) are recognised as income from the policyholders when the policy is come due. the obligation for costs expected to arise in relation to the contract is recognised during current period and the renewal period. the present value of estimated future policy benefit which will be paid to the policyholder or their representatives, less the present value of estimated premium which will be received (liability for future policy benefits), is recognised at the time the premium income is recognised. these estimates are based on assumptions such as expected investment income, mortality, morbidity, termination and expenses determined at the time the insurance contract was signed. other income 32 reinsurance commission and reinsurance profit commission is recognised as other income. expenses claim expenses 33 claims include settled claims, outstanding claims and claims incurred but not reported. 34 the amount of claims outstanding, including claims incurred but not reported, are calculated based on an estimate the claim liability. changes in the amount of estimation of claim liability, as a result of further reviewing process and differences between the amount of claim estimation and claim actually paid, are recognised as additions to or deductions from expenses in the income statement for the period such changes occur. 35
reinsurance claims are recognised as a deduction from claim 17
psak 36
accounting for life insurance
expenses in the period where the claim expense is recognised.
18
psak 36
accounting for life insurance
acquisition costs 36 acquisition costs are allocated using actuarial calculation since the liability for future policy benefits uses the net level premium method. assets 37 asset accounts are recorded in accordance with generally accepted accounting principles except specifically stated in this statement. investments 38 accounting treatment for investments should be in accordance with sfas no. 13, accounting for investments, and sfas no. 15, accounting for investment in associates, except for marketable securities where the accounting treatment should be as follows: 1.
debt securities that are intended to be held until maturity are stated at acquisition cost, net of amortization of premium or discount. when determining this amount, an enterprise should consider its experienses relating to the sale and transfer of securities. an enterprise cannot classify a debt security in this category if the enterprise intends to hold the security only for an unspecified period. therefore, debt securities cannot classified in this category if the enterprise intends to sell the securities, for examole, to deal with the following situations: (a) there are changes in the market interest rate and changes related to similar risks; (b) there are liquidity needsthat arise; (c) there are changes in the availability and alternative investment returns; (d) changes in foreign exchange risk.
2.
debt and equity securities which are classified as trading securities are stated at market value. trading in this case reflects active purchases and sales and is often intended to abtain benefit from short term price differences. equity securities classified under this category are those for which fair values can be determined, that is when there is quotation of bid and ask prices available from a stock exchange registered with bapepam. for debt securities with no quoted market prices, the estomated fair values can be determined through various techniques of price determination, such as discounted cash flow analysis. unrealized gain or losses resulting from increase (decrease) in market price is reported in the current year’s income statement.
19
psak 36
3.
accounting for life insurance
other debt and equity securities not included inthe above categories are classified as “available for sale securities” and are stated at market price. debt securities included in this category are securities held for an unspecified period, for instance, the security will eventually be sold to meet liquidity needs or as a part of a company’s risk management strategy. unrealised gains (losses) as a result of increases (decreases) in price are not recognised in income statements but are separately presented in the equity component.
reinsurance receivables 39 reinsurance receivables cannot be offset against reinsurance payables unless the reinsurance contract specially allow for the right of offset. if a credit balance arise from the offsetting of the reinsurances receivable against the reinsurance payable, the balance should be presented in the liability section as reinsurance payale. liabilities 40 liability accounts should be recorded in accordance with generally accepted accounting principles, except they are specially specifically stated in this standard. liability for future policy benefit 41 liability for future policy benefit is stated in balance sheet based on actuarial calculations. estimatied claim liability 42 estimation of claim liability on short term contract, in particular for health and accident insurance, are stated at the estimated amount based on the insurance technical review. unearned premium income 43 unearned premium income on short term health and accident insurance contracts is calculated by applying the following rules: a.
in aggregate, without considering the end of the policy period, and the mount calculated based on a certain percentage of the premium retained for each insurance, or ;
b.
individually for each of insurance and the amount of unearned premium revenue is calculated in proportion to the amount of protection given, during the insurance period or risk period, which is consistent with the premium revenue realised as explained in 20
psak 36
accounting for life insurance
paragraph 30.
21
psak 36
accounting for life insurance
reinsurance payable 44 reinsurance payable cannot be offset against reinsurance receivable unless the reinsurance contract specifically allows for the right of offset. if a debit balance arises from the offsetting of the reinsurance receivable and payable, this balance should presented in the asset section as reinsurance receivable disclosure 45
the following disclosures are required:
a.
accounting policies on: premium revenue recognition and method of determining liability for future policy benefits and unearned premium income reinsurance transactions, including explanations of their nature, objective and effect of such transaction on the company’s operation; recognition of claim expenses and the method of determining estimeted claims retained; and other important accounting policies as mandated by the prevailing financial accounting standard.
b.
deferred acquisition costs. disclosures in relation to the nature, amount, type and expense allocation method used to amortise deferred acquisition costs.
c.
liability to the policy holders. details of liabilities to the policy holders and explanation on method, assumption and system of calculation used as a base to determine such liability.
d.
subordinated loan. explanations on characteristics of subordinated loan, interest rate and value of remaining loan.
e.
mutual life insurance equity. explanation on nature as well as rules and regulations related to the mutual life insurance equity; explanations on method and amounts distributed to the policy holders.
f.
gross premium revenue. disclosure on first year premium and details of its renewal based on the group and the type of insurance.
g.
claim and benefit. disclosure on type, amount and reasons for significant increase in claim and benefit.
22
psak 36
accounting for life insurance
effective date 46 this standard becomes operative for the presentation and preparation of financial statements for the period beginning on or after january 1, 1996. early application is highly recommended.
23
psak 36
accounting for life insurance
attachment example of financial statements 1. balance sheet p.t. asuransi jiwa abc balance sheets december 31, 19x2 and 19x1 assets
liability and equity 19x2
19x1
19x2
19x1
xx xx xx
xx xx xx
xx
xx
xx
xx
xx xx xx
xx xx xx
xx xx xx
xx xx xx
obligatory deposit non-obligatory deposit time deposit capital stocks bonds money market securities direct participation land and building mortgage loan policy loan other investments total investment
xx xx xx xx xx xx xx xx xx xx xx xx
xx xx xx xx xx xx xx xx xx xx xx xx
cash and bank premium receivable reinsurance receivable investment income receivable other receivables prepaid expenses fixed assets - land - building acc. depr. - other fixed assets acc. depr. other assets - deferred acq. cost
xx xx xx xx xx xx
xx xx xx xx xx xx
xx xx (xx) xx (xx)
xx equity xx authorised cap....shares (xx) @rp. ... xx subscribed and paid in cap. (xx) ....shares additional paid in cap./ xx retained earnings total equity
xx
xx
xx xx xx
xx xx xx
xx
xx
xx
total assets
xx
xx
24
liab. for future policy benefit est. of claim payable . claim payable unearned premium income total liab. to policy holders premium deposits reinsurance payable commission payable undistributed earnings attributable to policy holders accrued expenses subordinated debt
total liab.&eq.
psak 36
2.
accounting for life insurance
income statement (single step)
p.t. asuransi jiwa abc income statement for the years ended december 31, 19x1 and 19x2 19x2
19x1
xx (xx)
xx (xx)
(xx) xx
(xx) xx
investment income financial institution pension fund service income other income
xx xx xx
xx xx xx
total revenue
xx
xx
xx (xx)
xx (xx)
xx xx xx xx xx
xx xx xx xx xx
xx
xx
xx xx xx xx xx xx
xx
income premium income gross premium less: reinsurance premium less (add) increase (decrease) of unearned premium income total premium income
expenses claim and benefit deducted by: reinsurance claim recovery add (less) : increase (decrease) in liability for future policy benefit and estimation of claim payable amortisation of deferred acquisition cost marketing general and administrative other income (expenses) total expenses profit (loss) before tax income tax xx current year net income dividend retained earnings, beginning of the year retained earnings, end of the year
25
xx xx xx xx
psak 36
3.
accounting for life insurance
statement of cash flows (direct method)
p.t. asuransi jiwa abc statement of cash flows for the years ended december 31, 19x2 and 19x1
cash flows from operating activities premium receipt reinsurance claim receipt other receipts payment for reinsurance premium payment for commission payment for claim payment for general and administrative expense payment for tax payment for other costs net cash flows from/for operating activities cash flows from investing activities receipt from investment income liquidation of deposit liquidation of bonds proceed from sale of equity and debt securities proceed from sale of fixed assets additions to deposit acquisition of equity and debt securities acquisition of fixed assets acquisition of other investments net cash flows from/for investing activities cash flows from financing activities receipt of subordinated debt proceeds in paid in capital payment of subordinated loan payment of cash dividend net cash flows from/for financing activities net increase (decrease) in cash balance of cash & cash equivalentbeginning of period balance of cash & cash equivalentend of period
26
a+b+c
19x2
19x1
a
xx xx xx (xx) (xx) (xx) (xx) (xx) (xx) xx
xx xx xx (xx) (xx) (xx) (xx) (xx) (xx) xx
b
xx xx xx xx xx (xx) (xx) (xx) (xx) xx
xx xx xx xx xx (xx) (xx) (xx) (xx) xx
c
xx xx (xx) (xx) xx
xx xx (xx) (xx) xx
xx xx xx
xx xx xx
psak 36
4.
accounting for life insurance
cash flows (indirect method)
p.t. asuransi jiwa abc statement of cash flows for the years ended december 31, 19x2 and 19x1
cash flows from operating activities income before tax adjustments for noncash expenses fixed assets depreciation amortisation of intangible assets operating income before changes in working capital decrease (increase) in current assets increase (decrease) in current liabilities: (increase) in premium receivable, reinsurance receivable, accrued investment income, other receivables, decrease in prepayment increase in liability for future policy benefit, estimation of claim liability, claim payable, unearned premium income net cash from insurance main operations payment of corporate income tax payment of interest cash flows from operations other income net cash from operating activities cash flows from investing activities net investment income adjustment for noncash expenditure investment depreciation investment amortisation cash flows from investing activities decrease (increase) in statutory deposit, ordinary deposit decrease (increase) in shares, obligation, marketable securities decrease (increase) in direct investment cash flows from investment accounts cash flows from financing activities proceed from share emission
27
a
b
19x2
19x1
xx
xx
xx xx xx
xx xx xx
(xx) xx
(xx) xx
xx xx (xx) (xx) xx xx xx
xx xx (xx) (xx) xx xx xx
xx
xx
xx xx xx
xx xx xx
(xx)
(xx)
(xx) (xx) xx
(xx) (xx) xx
xx
xx
psak 36
accounting for life insurance
receipt from subordinated loan payment of dividend cash flows from financing activities
c
net increase (decrease) in cash balance of cash & cash equivalent, beginning of period balance of cash & cash equivalent, end of period
28
a+b+c
xx (xx) xx
xx (xx) xx
xx xx xx
xx xx xx
