FRS 103 - UK GAAP for Insurers 18 September 2013 Download the slides to accompany the webinar /FRFwebinarresources
Introduction Philippa Kelly Technical Manager, Financial Services Faculty
Introduction Jenny Carter Project Director Financial Reporting Council Ray Tidbury Partner Mazars LLP
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Agenda Background to the exposure draft Challenges Content Construction Practical considerations Time frame
Background to draft FRS 103 Jenny Carter, FRC
Background to draft FRS 103 New UK GAAP where does FRS 103 fit in? Overall approach Challenges and issues Financial Reporting Council
New UK GAAP FRS 100 Application of Financial Reporting Requirements FRS 101 Reduced Disclosure Framework FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland FRS 103 Insurance Contracts out for comment Financial Reporting Council
FRS 102 FRS 102 issued 14 March 2013 Introduces a definition of an insurance contract Requires entities with insurance contracts to apply FRS 103 to those contracts Financial Reporting Council
FRS 103 Insurance Contracts Overall approach FRED 49 issued 29 July 2013 Aims to consolidate existing accounting requirements Some modernisation and improvement consistent with FRS 102 Based on IFRS 4, plus FRS 27 and ABI SORP Accompanied by draft Implementation Guidance Comments by 31 October 2013 Financial Reporting Council
Challenges and issues (1) Timescale FRS 102 effective 1 January 2015 IASB has a long-running project to revise IFRS 4 Further changes anticipated Minimise changes in quick succession where possible Financial Reporting Council
Challenges and issues (2) Some flexibility in IFRS 4 Those applying EU-adopted IFRS can improve their accounting policies Consistency between UK entities Scope of source documents varies Some legal restrictions Mandatory or non-mandatory guidance? Financial Reporting Council
Challenges and issues (3) Consistency with approach in FRS 101 and FRS 102 Insurance businesses are financial institutions Effective date Financial Reporting Council
Your comments to the FRC Comments by 31 October 2013 Questions in the Invitation to Comment, including: Aim to allow, generally, existing accounting policies Improvement option New entrants Capital disclosures Effective date Financial Reporting Council
FRS 103 Outreach Ray Tidbury, Mazars LLP
What is FRS 103? A standard primarily for insurance contracts not insurance business But issued with Implementation Guidance that refers to insurance accounting and presentation more broadly The accounting requirements will be in one place No need to maintain a SORP A short term solution Overall objective minimal or no change on current requirements of UK GAAP but within the general framework of FRS 102 Long-term Review or revise FRS 103 for when Solvency II and IFRS 4 Phase 2 effective Open question as to whether Phase 2 should be the long term solution for UK GAAP Runs to some 100 pages including Implementation Guidance
What is current UK GAAP for insurers? Companies Act 2006 Companies Act 2006 Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) Schedule 3 FRS 27 Life Assurance (aimed at with-profits after Equitable Life) ABI SORP Accounting for insurance business (last amended December 2006) FRS 26 issued 31 March 2004 introduced definition of an insurance contract derived from IFRS 4, for those to which FRS 26 applies FRSs 26, 27 to be withdrawn
Definition of an insurance contract A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. FRS 103 Appendix II elaborates Note: A definition for true and fair reporting whether or not it corresponds to legally defined insurance classes or insurance for regulatory returns
FRS 103 construction overview Start with IFRS 4 Phase 1 Does not contain detailed rules for recognition and measurement of insurance contracts Requires you to continue with current GAAP Option to improve accounting policies if more relevant and no less reliable or more reliable and no less relevant Add in FRS 27 Requires life liabilities to be measured according to prudential rules (INSPRU) subject to some adjustments Disclosures in respect of risks underwritten FRC sensitive that this was introduced by Penrose following Equitable Life and hence seen as an improvement Finally, include elements of the ABI SORP (mostly in the Implementation Guidance supplement) FRC needed to provide benchmark accounting basis for new entrants, and mindful of IAS 8
FRS 103 - construction Section 1 Scope Insurance and reinsurance contracts Financial instruments with a discretionary participation feature (DPF) Section 2 Accounting Policies, Recognition and Measurement Heavily derived from IFRS 4 in IFRS 4 language Written to regulate changes in accounting policy rather than saying what you should do (interim IFRS) Talks about: using current market interest rates, eliminating excessive prudence, use of future investment margins, need for liability adequacy test, how to treat embedded derivatives, unbundling of deposit components, options for portfolio transfer and DPF contracts accounting Section 3 Recognition and Measurement: Requirements for entities with long-term business Mostly derived from FRS 27 Life assurance Brings in the realistic value of liabilities of the PRA regime and talks about the basis for measuring VIF assets Back to UK GAAP language
FRS 103 - construction Section 4 Disclosure Largely derived from IFRS 4 disclosure of insurance amounts within assets, liabilities, income and expense Disclosures about insurance risk, how actual claims compare to previous estimates the ten year history for general insurers Sensitivity analysis for reasonable changes in risk variables Also cross refers to Company Law (Schedule 3) and FRS 102 Section 34 requiring additional disclosures by financial institutions brings in the management of capital Section 5 Disclosure: Additional requirements for with-profits business Brings in specific disclosure and presentation that was required for with-profits business under FRS 27 concerning the fund for future appropriations, FFA Section 6 Transition to this FRS Cross refers to FRS 102 Section 35 Brings in the IFRS 4 relief on transition for claims development disclosure (five years rather than ten) and the ability to re-designate financial assets at FVTPL if there is a change in accounting for insurance liabilities unlikely to be relevant in the context of existing UK GAAP reporters
FRS 103 - construction Sections 1-6 Appendix I: Glossary Definitions from IFRS 4, FRS 27 and the ABI SORP Both IFRS language and UK GAAP language terms Appendix II: Definition of an insurance contract From IFRS 4 Appendix III: Tables of concordance between FRS 103, FRS 27 and the ABI SORP By paragraph numbers Appendix IV: Note on Legal Requirements Entities not constituted as companies under Company Law (for example, friendly societies) need to satisfy themselves FRS 103 does not conflict with any relevant legal requirements Appendix V: Republic of Ireland (RoI) Legal References
FRS 103 - construction Implementation Guidance to accompany FRS 103 Accompanies but is not part of FRS 103, some 28 pages Brings in matter from FRS 27 and the ABI SORP The main part, Section 2, provides guidance for life and general insurers derived from the SORP on accounting for the basics under Company Law most useful to new entrants Sections 1 and 3 provide guidance for life insurers drawn from FRS 27 on measuring with-profits business and providing capital disclosures respectively
FRS 103 - points to note Insurance contracts not insurance business Already referred to Some will need to consider whether contracts they have treated as insurance meet the true and fair definition and may need to reclassify for accounting purposes Example of unit-linked life contracts with minimal mortality or life insurance risk Interaction with FRS 102 Sections 11 and 12 on financial instruments or full IAS 39/IFRS 9 recognition and measurement (allowed by FRS 102) There are choices. Expectation that those which applied FRS 26 will elect full IAS39/IFRS 9 recognition and measurement Capital disclosures apply to all (not just life) via Section 34 of FRS 102 (Specialised Activities Financial Institutions) The more prescriptive former FRS 27 requirement for life business becomes guidance for life offices in FRS 103 although the FRC does not anticipate a reduction in the usefulness of the information given There is no exemption from providing these disclosures for 90% subsidiaries as was allowed under FRS 27 as FRS 102 does not give exemptions to financial institutions from disclosures on financial instruments.
FRS 103 points to note With-profits business, Fund for Future Appropriations CA 2006 requires separate disclosure of retained funds yet to be allocated within liabilities.. IFRS 4 is flexible as to equity or liability. A proviso is therefore added to FRS 103 (para 2.29).. can be equity where permitted by the Regulations At present in the UK, it is not permitted. For mutuals, the FFA represents (in part, at least) mutual capital They will continue to present in the same way. Separable embedded derivatives identify and recognise separately (unless themselves insurance contracts or contracts with DPFs) Contrasts to FRS 102 s simplified approach for other financial instruments however unlikely to have any impact in the context of common UK products. Non-life business: Disclosure required of claims development triangles in the financial statements is required following IFRS 4 Nor previously a requirement under UK GAAP but not considered onerous.
FRS 103 points to note Individual firms can make improvements following the IFRS 4 interim position drafting Desire not to be more restrictive than IFRS (as it stands) but consistency concern arises Although facility has been available to IFRS reporters, has been little used in practice Compliance with Company Law Primacy of Company Law remains Hence for general insurance business, equalisation provisions will still reported and the CA 2006 rules on discounting (the 4 year rule) still apply. Though forbidden by IFRS 4, unless required by the Regulations caveats have been added in drafting FRS 103.
It s not just FRS 103 - FRS 102 changes acrossthe-board IAS 39-IFRS 9 or FRS 102 Sections 11 and 12 (and Section 34) Already mentioned FRS 102 Section 29 Income Tax Deferred tax: Timing differences plus approach, No discounting FRS 102 Section 9 Consolidated and Separate Financial Statements Different view on control and when to consolidate (unit trusts, OEICs) FRS 102 Section 19 Business Combinations and Goodwill Goodwill on acquisition not permitted to have an indefinite life; 5 year life presumption. FRS 102 Section 28 Employee Benefits (including pensions) IFRS basis net interest charge Group scheme recognition in entity which is legally responsible for the scheme
Overall observations about FRS 103 UK GAAP reporters under FRS 102/103 will continue to follow the CA 2006, Sch3 format and requirements Full IFRS reporters do not FRS 101 reduced IFRS reporters, being individual members of full IFRS reporter groups, must also follow Sch 3 format and requirements Life insurers regulatory basis (Solvency I - MSSB or Realistic Basis) will continue to apply Contract classification may change some insurance contracts may become investment contracts with a change in accounting to recognising a deposit plus management fees Disclosure exemptions for 90% subsidiaries no longer apply Non life insurers equalisation reserves and the 4 year rule on discounting will continue to apply These remain as differences from full IFRS Additional disclosures required of claims history
Timeframe: Preparing for the conversion FRS 102/103 December year-ends: 31 December 2013 31 December 2014 31 December 2015 Publication of FRS 103 Effective date First full year Comparative year Opening position (Date of transition) Y/e 31 Dec 2014 Y/e 31 Dec 2015 Preparation Now (4 months) Full retrospective application New assets, liabilities and equity to be recognised and remeasured Are there any mandatory exceptions? Should any optional exemptions be applied? Restated Profit and Loss Account Restated Balance Sheet New Profit and Loss Account New Balance Sheet
Preparing for the conversion What you need to do: Read the FRED 49 (Draft FRS 103): Comment by 31 October 2013 FRS 103 expected February 2014 Implementation concerns: not just FRS 103, also FRS 102 across-the-board changes the devil s in the detail there is work required Are full IFRS or FRS 101 preferable options? Timetable (Mandatory after January 2015; early adoption permitted) FRS 103 will be reviewed for Solvency II (2016?) and Phase 2 of IFRS 4 (2018?) Read the latest ED (June 2013) of IFRS 4 Phase 2 as this will shape accounting in the future. Comment period ends 25 October 2013 There is much to consider and time is short
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Questions Jenny Carter Project Director Financial Reporting Council Ray Tidbury Partner Mazars LLP
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