GROUP ACCOUNTING POLICIES (continued) 5.1.2 Recognition and derecognition(continued) b) adjusts the CSM in the following manner, depending on the reason for the derecognition: (i) if the contract is extinguished, in the same amount as the adjustment to the FCF relating to future service; (ii) if the contract is transferred to a third party, in the amount of the FCF adjustment in (a) less the premium charged by the third party; or (iii) if the original contract is modified resulting in its derecognition, in the amount of the FCF adjustment in (1) adjusted for the premium that the Group would have charged if it had entered into a contract with equivalent terms as the new contract at the date of the contract modification, less any additional premium charged for the modification; when recognising the new contract in this case, the Group assumes such a hypothetical premium as actually received; and c) adjusts the number of coverage units for the expected remaining insurance contract services, to reflect the number of coverage units removed. 5.1.3 Measurement Fulfilment cash flows within contract boundary The Fulfilment Cash Flows (FCF) are the current estimates of the future cash flows within the contract boundary of a group of contracts that the Group expects to collect from premiums and pay out for claims, benefits and expenses, adjusted to reflect the timing and the uncertainty of those amounts. The estimates of future cash flows: a) are based on a probability-weighted mean of the full range of possible outcomes; b) are determined from the perspective of the Group, provided that the estimates are consistent with observable market prices for market variables; and c) reflect conditions existing at the measurement date. Due to the mutual operating model of the Group, the expected future cash flows are split into two separate components with various sub-components. These are: I. Estimates of present value of future cash flows; and II. PPS Profit-share Accounts Surpluses or deficits arising in component (i) above as well as surplus arising from non-participating contracts, reinsurance contracts and cash flows not directly related to an insurance contract, emerge as the change in fair value of underlying items attributable to policyholders disclosed as insurance finance income or expenses. Profit allocations for the year, in line with the bonus basis, are processes in the statement of comprehensive income from the change in fair value of underlying items attributable to policyholders not resulting from financial risk or time value of money after reserving for statutory solvency requirements. The expected future cash flows are therefore a combination of cash flows that do not vary with the underlying items and the fair value of the residual interest. The cash flows that do not vary with the underlying items are modelled in the actuarial valuation system. The fair value of the residual interest is sourced from the insurance administration system and is not modelled. 116 Group Accounting Policies
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