AS THE ASB’s new UK GAAP proposals don’t cover insurance accounting, it is consulting separately on the direction in which to go. Because of the complexities involved, it has taken the unusual step of using its website to present a staff paper which invites comments on a number of possible options, which differ significantly
The complications arise from the IASB’s difficult and unfinished IFRS 4 phase II project and from Solvency II’s replacement of FSA rules that underpin both FRS 27 and the ABI SORP – they even still support IFRS 4 based accounts to some extent. The ASB’s options are derived from those two changing regimes and they try to deal with the significant timetable uncertainties involved.
The long-term IFRS 4 Phase II option would give consistency to insurance accounting across the UK. It also has the advantage of avoiding the potential difficulties in developing separate UK accounting requirements that the IASB’s decade old project so clearly suggests. But on the other hand, IFRS 4 Phase II will not be fully consistent with Solvency II.
For the shorter term (the ASB’s ‘gap’ period), much depends on how long that is, which we don’t yet know. Simply using the current IFRS 4 would permit current practices to continue, with improvements, and it clearly supports the later use of IFRS 4 Phase II. However, the current IFRS 4’s lack of comprehensiveness might reduce consistency. And again, with this option, regulatory numbers would be different – but perhaps to some extent that is inevitable.
By contrast, incorporating IFRS 4 Phase II early would bring consistency and comprehensiveness. But it would require non-listed insurers to apply new requirements earlier than listed insurers, and that would be a big step for the ASB to take. Further, and perhaps crucially, we don’t yet know what IFRS 4 Phase II will finally look like and when it will be applied.
Whichever way forward is supported, the changes may be significant. It’s important for non-listed life insurers in particular that the direction of travel is right at the outset.
We would encourage all firms and users that are affected by this change to engage with the ASB but also to let us know what they are thinking so that we understand whether there is a general consensus on the way forward.
John Breckenridge, Assistant Director of Prudential Regulation at the ABI
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