Imagine that your car insurance company offers a free oil change as part of your policy. The total cost of the insurance for the year is $100.
There are two parts to this contract. The insurance component covers damages and other events specified in the policy. The goods or services component includes the annual oil change.
In this example, step 1 is irrelevant as there are no investment components or embedded derivatives.
To separate promised goods or services other than insurance contract services from the insurance component of the contract, the company shall use the stand-alone selling price of the components.
Let’s say that insurance policies with similar coverage are sold for $90 and a similar oil change service is available for $30.
To allocate the cash inflow of $100, the company shall use the stand-alone selling price of the component. In this example:
The allocated insurance premium would be $75 (90/(90+20)100) and the allocated service revenue would be $25 (20/(90+20)100)
Finally when accounting for the insurance component under IFRS 17 cash outflows pertaining to oil change should be excluded.