China Pacific Insurance : New Accounting Standards Forum Presentation Material

Main Changes and Impact of the New Accounting

Standards

April 2023

Foreword

In 2020, the Ministry of Finance of China issued the revised Accounting Standard for Business Enterprises ("ASBE") No. 25 - Insurance Contracts (Cai Kuai [2020] No. 20) (referred to as the "New Insurance Accounting Standard"), which will replace the previous ASBE No. 25 - Primary Insurance Contracts, ASBE No. 26 - Reinsurance Contracts and Rules on Accounting Treatment of Insurance Contracts (Cai Kuai [2009] No. 15) (collectively referred to as the "Old Accounting Standards") in due course.

In 2017, the Ministry of Finance of China issued ASBE No. 22 - Recognition and Measurement of Financial Instruments, ASBE No. 23 - Transfer of Financial Assets, ASBE No. 24 - Hedge Accounting, and ASBE No. 37 - Presentation of Financial Instruments

(collectively referred to as the "New Accounting Standards on Financial Instruments").

This presentation will briefly introduce the contents of the aforementioned accounting standards and related rules mainly from the perspective of users of financial statements.

Caution: All the viewpoints expressed in this presentation represent only personal views of the author.

The accounting standards and relevant rules referred to in this presentation are highly complex, and cannot possibly be covered entirely due to the limited volume of this presentation. In addition, the introduction in the presentation may be interpreted differently in different circumstances. Therefore, this is for discussion purposes only, and shall not be used as a direct guide for specific issues and work in practice. Whenever necessary, you are advised to consult professionals.

Note: This is English translation of a Chinese presentation, if there is any difference between the Chinese and English versions, the Chinese version shall prevail.

2	Main Changes and Impact of the New Accounting Standards

Contents

• Main changes and impact of the New Insurance Accounting Standard
• Interaction of the New Insurance Accounting Standard and the New Accounting Standards on Financial Instruments
• Possible key financial indicators under the new accounting standards

3	Main Changes and Impact of the New Accounting Standards

Main changes and impact of the New Insurance

Accounting

Standard

4	Main Changes and Impact of the New Accounting Standards

Measurement of insurance contract liabilities under the New Insurance Accounting Standard - an overview of the general model

Insurance contract liabilities

Fulfil-

ment cash flows

Building block 4:

Contractual

service margin

(CSM)

Building block 3: Risk adjustment for non-financialrisk (RA)

Building block 2: Adjustment for the time value of money and financial risk

Building block 1:

Estimates of

future cash flows

Unearned profit that the entity will recognize as it provides insurance contract services

The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk as the entity fulfils insurance contracts

Reflecting the time value of money and the financial risks, to the extent that the financial risks are not included in the estimates of the future cash flows

Estimates of future cash flows directly related to fulfillment of insurance contracts

Additional information and analysis

• The general model is also referred to as the building block approach ("BBA")
• CSM is not cash flow. It is unearned profit and cannot be negative (i.e. it cannot be a debit balance, except for reinsurance contracts held)
• Under the Old Accounting Standards, the insurance contract liabilities may also be measured via 4 building blocks - expected future cash flows, adjustment for the time value of money, risk margin and residual margin. However, the measurement units and detailed rules on measurement and accounting treatment are different.

5	Main Changes and Impact of the New Accounting Standards