Background

An insurance contract is defined in FRS 102 as “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.  Although FRS 102 includes a definition of an 'insurance contract' it does not set out the accounting required for such a contract. Instead, a separate standard FRS 103 "Insurance Contracts" issued by the FRC in March 2014 contains specific accounting requirements for 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 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.

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.

FRS 103 is expected to have a limited life and will be revisited by the FRC when the International Accounting Standards Board (IASB) completes its own Insurance Accounting project.

Current status of project

FRS 103 'Insurance Contracts' was issued by the FRC on 20 March 2014.