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FRC issues new standard for Insurance Contracts

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20 Mar 2014

The Financial Reporting Council (FRC) has today issued Financial Reporting Standard ‘FRS 103 Insurance Contracts’ which is applicable for accounting periods beginning on or after 1 January 2015. Early application is permitted, provided the entity also applies FRS 102 from the same date and discloses this fact that it has applied FRS 103 early.

The new standard is applicable to entities that have insurance contracts (including reinsurance contracts) and are applying FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.  The standard is also applicable to entities applying FRS 102 who issue financial instruments with a discretionary participation feature. 

FRS 103 consolidates existing guidance included within the International Accounting Standard Board’s (IASB’s) IFRS 4 Insurance Contracts, the existing requirements of FRS 27 Life Assurance and elements of the Association of British Insurers’ Statement of Recommended Practice on Accounting for Insurance Business (ABI SORP).  It allows entities to continue with their current practices for insurance contracts (subject to certain additional considerations, such as, for example, identification of embedded derivatives) whilst also allowing them the flexibility to take advantage of “improvement options” (subject to legal and regulatory requirements) similar to those which are available to entities applying IFRS 4 in the UK and Republic of Ireland.  

FRS 103 requires disclosure that: 

identifies and explains the amounts in an insurer’s financial statements arising from the insurance contracts (including reinsurance contracts) it issues and reinsurance contracts that it holds;

relates to the financial strength of entities carrying on long-term insurance business; and

helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from those insurance contracts. 

The final standard is largely consistent with the Financial Reporting Exposure Draft (FRED) 49: ‘Draft FRS 103 Insurance Contracts’ issued in July 2013.  The main changes are:

  • Clarification about the ability of entities not legally constituted as insurers to continue with accounting policies similar to those adopted previously.
  • Clarification that for the purposes of applying section 30 Foreign Currency Translation of FRS 102 entities should treat all assets and liabilities arising from an insurance contract as monetary.
  • Clarification around the status of implementation guidance, stating that it is non-mandatory. 

The FRC expects the FRS 103 to have a “limited life” stating: 

We are issuing FRS 103 to fill a gap in UK and Irish accounting standards for those entities applying FRS 102 that have insurance contracts.  We recognise that there are forthcoming changes to the regulatory framework for insurers, as well as on-going work internationally on financial reporting for insurance contracts, and as a result we are allowing entities, generally, to continue with their existing accounting policies for the time being.  We expect to revisit this topic in a few years’ time, to consider whether changes to FRS 103 are desirable in response to regulatory or international accounting developments. 

FRS 103 is the latest addition to financial reporting standards in the UK and Republic of Ireland and follows the publishing of FRS 100 ‘Application of Financial Reporting Requirements’, FRS 101 ‘Reduced Disclosure Framework’ (both published in November 2012) and FRS 102 (published in March 2013) – the three main standards that were introduced as a package to replace UK GAAP. 

Alongside FRS 103 the FRC has also published non-mandatory implementation guidance.  The FRC has also issued an impact assessment for FRS 103 and a feedback statement summarising the comments received in response to FRED 49. 

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