This contract contains a formidable insurance risk you have unearthed. It Surely Appears Like Insurance! But hold on a moment. Does it have to be reflected in the books as per IFRS 17? At times, a legal exception is granted by Board.
IFRS 17 is a sophisticated, heavyweight standard intended for real insurance companies. The accounting board seems to have realized that a regular company sometimes issues contracts that meet the definition of insurance. However, forcing such companies to use IFRS 17 will be a nightmare.
Here are the most common exceptions where a contract is "scoped out" (exempt) from IFRS 17:
After purchasing a new TV, the manufacturer offers to replace the TV if it breaks within the year. It is an unfortunate event for your television to get broken and the producer is bearing the risk of replacing it. That, in essence, is insurance!
The Exemption: The manufacturer does not apply IFRS 17 since they are only standing behind the quality of their own product. They would account for this warranty under IFRS 15 (Revenue) or IAS 37 (Provisions).
When a company promises to pay for healthcare or retirement benefits for its employees, the company is exposed to risk.
The Exemption: A different standard regulates this very strictly. The employer should be applying IAS 19 (Employee Benefits) ignoring IFRS 17 completely.
Consider having a roadside assistance contract. You spend $100 a year and if your car breaks down, a mechanic will fix it. This fits the description of insurance.
The Exemption: As the ultimate end-user was getting the service, not cash, the company had an option available to them. They have the option to implement IFRS 17 or to simply treat the policy as a regular service contract under IFRS 15 (Revenue).
You have officially mastered the foundation of the new standard! You understand why it was created, how it is defined in the insurance contract, and which contracts used in everyday business are legally exempt. Chapter 2 will outline how the insurance companies' bundle, unbundle and group these policies together.