Kolkata: Insurance companies, which will have to comply with the International Financial Reporting Standards (IFRS) in line with other companies from 2011, will feel a significant impact on their product classification.

Insurance policies could be called "insurance contracts" or be classified as "investment contracts" if they are accounted for in a different manner. At present, the classification of insurance/non-insurance products does not exist in India.

However, under IFRS 4, which is the first standard from the International Accounting Standards Board (IASB) on insurance contracts, a product classification is a pre-requisite, as it gives a clear guidance on accounting for insurance and investment products.

The standard is designed to make limited improvements to accounting practices and other key areas with respect to accounting for insurance contracts.

The Insurance Regulatory & Development Authority (Irda) committee set up to prepare a road map to move towards complete compliance with the IFRS has said that in the Indian context, most contracts are likely to be classified as insurance contracts.

However, it said, for the purpose of having a uniform practice in the industry with regard to significant risk classification, it has been proposed that a contract would be an insurance contract if the benefit payable on death is higher by at least 5% of the fund value at any time during the life of the contract for unit-linked products or at least 5% of the premium at any time during the life of the contract for non-ulip products.

The Institute of Chartered Accountant of India (ICAI) has announced the convergence with the IFRS from accounting periods commencing on or after April 1, 2009. As far as insurance in India is concerned, the committee was helped by consultants like KPMG and Ernst & Young.

According to the report, classification of investments under the IFRS is expected to have a considerable impact on insurance companies.

Classification of securities under "held to maturity" category could be an issue if sold off before maturity, even in preceeding two years, because of the "tainting" provisions.