The future of UK and Ireland GAAP for insurers

Comments

On 30 January 2012, the UK and Republic of Ireland’s Accounting Standards Board (ASB) published three Financial Reporting Exposure Drafts (FREDs) 46 to 48, setting out proposals for the future of UK GAAP in the UK and Republic of Ireland (RoI).

In addition, and this may be of significant interest and importance for certain insurance companies, the ASB published a discussion paper on the future of insurance accounting in the UK and RoI, considering the ultimate replacement for existing Financial Reporting Standard (FRS) 27 and the Association of British Insurers Statement of Recommended Practice (ABI SORP).

The ASB is proposing that the revised FREDs proposals (possibly with additional insurance accounting-specific aspects, depending on the feedback to the discussion paper) should take effect for accounting periods beginning on or after 1 January 2015.

The FREDs and the discussion paper are open for comment until 30 April 2012.

Summary of the insurance accounting discussion paper

The discussion paper notes that, until International Financial Reporting Standard (IFRS) 4 Phase II comes into full force, there is potentially a void in the insurance accounting standards. This is because the introduction of Solvency II is likely to render the existing UK GAAP approach, aligned with Solvency I and realistic reporting for with-profits business, obsolete. In addition, the effective date of Solvency II is likely to be earlier than the effective date of IFRS 4 Phase II.

The paper presents four options that the ASB staff have considered and asks for feedback or other possible solutions. The four options are as follows:

• Require the use of the current version of IFRS 4 under UK GAAP. This has the benefit of continuity and stability of accounting method in the short term, but appears to be the least favoured by ASB staff.
• Embed the current approach based on Solvency I into UK GAAP. This has the benefits of being well known but would require Solvency I-style valuations to be maintained for a period which could be several years after the Solvency II implementation date.
• Amend the requirements in UK GAAP to refer to Solvency II requirements. This has the benefit of being better known and understood by the insurance community. However Solvency II is a regulatory standard focussing on solvency and hence is not necessarily a methodology appropriate for general accounting purposes. Disclosures and reporting requirements would thus require more extensive consultation for both standard setters and the insurance community.
• Incorporate IFRS 4 Phase II into UK GAAP. This is of course the “end-game” and thus gives continuity to the standards. The major difficulty is that it is unlikely that IFRS 4 Phase II will be finalised and adopted in time (a Phase II standard is not expected to be published until late 2012 at the earliest, and more likely 2013) and hence the insurance industry would need to work from the IASB’s tentative decisions. Further changes and effort may be needed as the initiative gets finalised.

Summary of the FREDs

The ASB is issuing these FREDs following feedback to its previous FREDs 43 to 45. Having considered the matters raised, the ASB is proposing significant changes to its previous proposals, including:

• Eliminating the concept of a tier system for financial reporting depending on the status of an entity. The ASB has removed this proposal in FRED 46 and, consequently, the application of EU-adopted IFRSs will not be extended beyond that required by regulation.
• Introducing accounting treatments permitted under current accounting standards. As a consequence the options to revalue land and buildings, capitalise borrowing costs or carry forward certain development expenses have been incorporated into FRED 48.
• Incorporating guidance for public benefit entities into FRED 48. The ASB is now proposing that all accounting requirements be incorporated into the single standard.

The ASB's objective in putting the FREDs together was: To enable users of accounts to receive high quality, understandable financial reporting proportionate to the size and complexity of the entity and the users’ information needs.

FRED 46 sets out the reporting framework for UK and RoI insurance companies, directing them as to whether existing reporting under IFRS, UK GAAP or SORP will continue to apply to them or whether FRS 102 (the proposed new standard) will apply.

FRED 47 sets out a framework under which certain UK and RoI entities will be permitted to provide reduced levels of disclosure from those set out in FRED 48. Insurance companies however will have to provide disclosures required under the relevant IFRSs.

FRED 48 is the draft Standard (FRS 102) and is intended to replace all existing financial reporting and accounting standards. To meet the ASB’s objective, noted above, the proposed Standard draws from existing IFRSs and should apply to a broader group of insurance companies preparing accounts. The draft FRS will move the UK and RoI to a single international financial reporting framework.

Towers Watson perspectives

The uncertain situation for insurance accounting under UK GAAP in the period between the start of Solvency II and the coming into effect of IFRS 4 Phase II has been considered in some depth by ASB staff. The options proposed require detailed consideration by each affected company to assess whether they are comprehensive and whether they take into account their own circumstances and the priorities as they see them.

For many small and medium sized insurance companies the removal of the concept of "publicly accountable" companies will be a welcome change. The previous FREDs required all insurance companies to meet quite onerous disclosure standards - which may not have added very much value for the typical reader of such accounts, but would have added time and cost in the production. It is encouraging that the ASB took the feedback from previous FREDs on board.

The proposed timetable for the new standards with an implementation date for accounting periods ending on or after 1 January 2015 would help to give some much needed certainty in this area. The debate and discussion has been going on for a long time and we expect many companies will welcome the increased clarity.