11 February 2013
How there can be any intangible assets arising in insurance enterprises from contracts with policyholders? And what are the examples of the same.
14 July 2024
In the context of insurance enterprises, intangible assets arising from contracts with policyholders primarily relate to the acquisition costs of insurance contracts. Let's delve into how these intangible assets arise and provide examples:
### Intangible Assets Arising from Contracts with Policyholders:
1. **Acquisition Costs of Insurance Contracts:** - Insurance companies incur significant costs when acquiring insurance contracts, such as commissions paid to agents or brokers and other direct costs directly attributable to acquiring, renewing, or renegotiating insurance contracts.
2. **Recognition Criteria (AS 26):** - According to Accounting Standard (AS) 26 - Intangible Assets, these acquisition costs can qualify as intangible assets if they meet specific recognition criteria: - **Identifiability:** The asset is identifiable, meaning it is separable from the entity or arises from contractual or other legal rights. - **Controlled by the Entity:** The entity controls the asset, which arises from contractual or other legal rights. - **Expected Future Economic Benefits:** The asset is expected to generate future economic benefits for the entity.
3. **Examples of Intangible Assets in Insurance Enterprises:**
- **Insurance Contracts Acquired from Policyholders:** When an insurance company acquires an existing insurance policy from another insurer or policyholder, the future premium income streams associated with these policies can be recognized as intangible assets.
- **Deferred Acquisition Costs (DAC):** These are costs incurred to acquire new insurance contracts, such as commissions, underwriting costs, and other directly attributable acquisition costs. DAC represents the unamortized portion of these costs, which are recognized as assets on the balance sheet and amortized over the expected period of benefits.
- **Value of Renewal Business:** The value attributed to the expected future income from renewals of existing insurance policies can also be considered an intangible asset, provided it meets the recognition criteria.
### Accounting Treatment:
- **Initial Recognition:** Intangible assets arising from insurance contracts are initially recognized at cost, which includes the direct costs incurred to acquire or originate the asset.
- **Subsequent Measurement:** These intangible assets are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.
- **Amortization:** The costs recognized as intangible assets (such as DAC) are amortized over the period during which the entity expects to benefit from the insurance contracts, generally reflecting the pattern of the expected future cash flows from the contracts.
### Conclusion:
Intangible assets arising from contracts with policyholders in insurance enterprises primarily encompass deferred acquisition costs (DAC) and the value of acquired insurance contracts. These assets are recognized in accordance with AS 26 based on their identifiability, control by the entity, and expected economic benefits. Proper recognition and measurement of these intangible assets are essential for accurate financial reporting and analysis within insurance companies.
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