The UK’s £200bn insurance sector is approaching a critical crossroads which could have a major impact on how assets, liabilities and profits appear in companies'books.
UK standard setters are canvassing opinion on how insurance contracts should be accounted for under proposed new UK accounting rules. For those insurers that have adopted International Financial Reporting Standards (IFRS), many have continued to apply current UK GAAP when accounting for insurance under IFRS. Therefore, both unlisted and listed insurance companies that use UK GAAP will be affected by these proposals.
These changes will particularly affect life insurers as they use regulatory rules in measuring the liabilities in their accounts today. From 1st January 2014 the new ‘Solvency II’ regulatory regime comes into force for all insurers. There is significant uncertainty as to how life insurers will measure their liabilities in the financial statements once the regulatory rules change.
The International Accounting Standards Board is revising its accounting for insurance contracts and the Accounting Standards Board (ASB) is proposing to use this new standard in the longer term. However, this may not be finalised by 2014. In fact there may be a two-to-seven year lag before the new standard is ready. UK insurers do not want to be left with a void in their accounting guidance, which has led to the ASB putting some stopgap options on the table.
There is the possibility of non-listed insurers having to make changes before listed insurers, creating a two-tier system which investors and analysts would find difficult to compare.
All companies currently using UK GAAP will, from 2015, have a choice of applying the requirements of the new UK GAAP or IFRS. However, for insurers, that choice will be heavily influenced by the outcome of the debate that PwC is urging them to join.
Gail Tucker, partner, PwC said "UK insurers have vital choices to make. The first is to make their voices heard and respond to the ASB. The outcome of the ASB’s approach to accounting for insurance contracts is likely to have a significant influence on whether an insurer will want to stick with UK GAAP or move to full IFRS. Those in the life insurance sector will be particularly affected by these proposals.
Given the delay in the finalisation of the new IFRS for insurance contracts and the new Solvency II regulatory regime due to be implemented in 2014, insurers will not want to find themselves in No-Man’s Land until the revised accounting for insurance contracts under IFRS is clarified."
The changes will be watched closely by the analyst and investor community who have demanded a reporting framework capable of explaining current developments and company performance in a consistent way.
The ASB has already made considerable headway in trying to smooth out issues for all companies. An updated blueprint from the standard setter on its recommendations for the future of the UK accounting is aiming to pare down the accounting rule book, previously 2500 pages long, to 250 pages as a result of the simplification.
Under earlier proposals, all insurance companies fell into the category of "entities with public-accountability" and would have had no choice but to follow IFRS. The requirement to follow IFRS will now only apply to the group accounts of businesses listed on a regulated market in the EU.
Tucker added "The next few years could see a significant impact on the accounting for insurance contracts and some of the proposed changes may be costly to implement. The changes could also result in an increase in diversity in the accounting being used by insurers. Stakeholders should get involved to help the ASB find a solution until the final IFRS for insurance is developed."
The ASB has requested comments by 30th April.
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