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FRC issues amendments to FRS 103 as a result of Solvency II

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26 May 2016

The Financial Reporting Council (FRC) has today issued amendments to FRS 103 ‘Insurance Contracts’. The amendments update the terminology and definitions used in FRS 103 as a result of the implementation of the Solvency II Directive.

The main changes that have been made, following a consultation in December 2015, are:

  • Acknowledgement that different entities would be subject to different regulatory frameworks. Revision of definitions referring to the PRA realistic capital regime and the Prudential Sourcebook for Insurers (INSPRU) have been made to the extent that the entity’s regulatory framework has changed with the commencement of the Solvency II Directive. A mention is also made that with the changes in regulatory framework most entities will not be required to recognise an equalisation provision from 1 January 2016.
  • Clarification around establishing a benchmark accounting practice for long term insurance business as at 1 January 2015 before considering changes in accounting policies. The benchmark accounting practice can be the requirements of Section 3 of FRS 103, the Regulations and relevant parts of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Any changes from these policies must result in information that is either more relevant not less reliable or more reliable not less relevant. Alternatively, the benchmark accounting policies can be based on the Solvency II rules, but the entity then would need to make appropriate adjustments to ensure the resulting information is both reliable and relevant. The Accounting Council’s advice makes suggestions of the factors the entity may need to consider.
  • Clarification that entities that have changed their accounting policies in accordance with the standard, so that the new policies are not consistent with the requirements of Section 3, need not apply those requirements of Section 3 that are not consistent.
  • Clarification that entities should be permitted to continue to apply established accounting practice in their financial statements by referring to the realistic value of liabilities measured under INSPRU rules as at 31 December 2015 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.  

The amendments are effective for accounting periods ending on or after 1 January 2016.

The press release and amendments are available on the FRC website.

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