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We comment on FRED 64 — Draft amendments to FRS 103 Insurance Contracts

  • Deloitte document (mid gray) Image

26 Feb 2016

We have published our comment letter on the Financial Reporting Council’s (FRC’s) Financial Reporting Exposure Draft (FRED) 64 ‘Draft amendments to FRS 103 Insurance Contracts’.

FRED 64 proposes updating the terminology and definitions used in FRS 103 as a result of the implementation of Solvency II.  The main changes that have been made are:

  • Removal of references to the PRA realistic capital regime and the Prudential Sourcebook for Insurers (INSPRU) which will be replaced with the commencement of Solvency II.
  • Clarification that entities should be permitted to continue to apply established accounting practice in their financial statements under the Solvency II regime and hence are not required to change their accounting policies.
  • Clarification of the scope of the Standard for with-profits businesses and with-profits funds in paragraph 3.1b.  

Overall we support the proposal to revise FRS 103 and the related Implementation Guidance for the changes in the insurance companies’ regulatory requirements currently referred to in the Standard. 

Our key comments are as follows: 

  • We agree with FRC’s decision to retain the approach of allowing continuation of existing accounting policies and methodologies unless the introduction of new policies represents an improvement. We agree that no entity should be forced to adopt a Solvency II method of calculating their insurance liability provisions in their financial statements and that those entities who wish do so must follow the change of accounting policy guidance in the Standard.  In our view, this would ensure consistency and comparability between entities and over time.
  • We note that certain accounting requirements, such as the need for the equalisation reserve to be shown as provision in the insurer’s balance sheet, are contained in the law. The introduction of Solvency II regulation from 1 January 2016 brings into question the interaction between the regulatory, statutory and financial reporting requirements.
  • We recommend clarifying the references in FRED 64 to ‘regulatory framework’ and ‘statutory basis’, in some cases to refer to the current position and in others to the position immediately prior to 1 January 2016. Currently this term is not defined and is used to convey a variety of meanings in different context. In our view, it is important to give clarity to this term to ensure precise application of the revised FRS 103 provisions and revised implementation guidance.
  • Finally, we note that some of the definitions used in the standard relate to the previous UK regime. It will be necessary to include equivalent material for the Republic of Ireland in the finalised standard.

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

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