FRS 101 amendments – Changes that prohibit insurers applying FRS 101 in their financial statements

Tue 06 Aug 2019

The Financial Reporting Council (“FRC”) has issued Amendments to FRS 101 – 2018/19 cycle, which prohibit insurers applying FRS 101 Reduced Disclosure Framework (“FRS 101”) in their financial statements when IFRS 17 Insurance Contracts (“IFRS 17”) becomes effective.

Why – what’s the background?

FRS 101 requires entities to apply the recognition and measurement requirements of EU-adopted International Financial Reporting Standards (“IFRS”) with reduced disclosures, as well as comply with UK company law as set out in The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (“Regulations”). As all insurers are undoubtedly very aware, the new insurance standard, IFRS 17, is due to become effective from 1 January 2021 (or more likely 1 January 2022 as a result of the proposed amendments issued by the IASB in June 2019). However, some of the requirements of IFRS 17 conflict with the requirements of the Regulations in a manner that the FRC considers is not resolvable – the primary conflict is in relation to the Schedule 3 formats of the primary statements within the Regulations; the approach and methodology that underpins IFRS 17 is so fundamentally different that presenting amounts determined in accordance with IFRS 17, within the formats laid down in company law, is not possible.

What do the amendments state?

The amendments, which have been issued as part of the annual review of FRS 101 for 2018/19, change the definition of a ‘qualifying entity’ under FRS 101 so that entities that are both required to comply with Schedule 3 to the Regulations (i.e. insurance companies), or similar (i.e. friendly societies, Lloyd’s syndicates or other insurance undertakings), and have contracts that are within the scope of IFRS 17 may not be qualifying entities for preparing FRS 101 financial statements.

What does this mean in practice?

The amendments mean that insurance companies or similar types entities (collectively referred to as “insurers”), which have contracts within the scope of IFRS 17 will no longer be permitted to apply FRS 101 when IFRS 17 becomes effective. Instead, such entities, will be required to either:

1. transition to IFRS and prepare financial statements that company with IFRS and IFRS 17; or
2. transition to FRS 102 The Financial Reporting Framework applicable in the UK and Republic of Ireland (“FRS 102”) and prepare financial statements that company with FRS 102 and FRS 103 Insurance Contracts (“FRS 103”).

Accordingly, only insurers that currently apply FRS 101 need to take action; there will be no change for insurers that already apply FRS 102/FRS 103 or IFRS.

Entities that are therefore affected will need to consider which framework to transition to. Factors that entities may wish to consider are:

1. Recognition and measurement of IFRS vs FRS 102 – The recognition and measurement requirements of IFRS are different in various ways as compared to FRS 102 and therefore a transition assessment should be carried out to identify the specific differences that will affect each entity.
2. Presentation and disclosure requirements of IFRS vs FRS 102 – The presentation and disclosure requirements of IFRS are more onerous and lengthy as compared to FRS 102, and will be more time-consuming to prepare, however the specific differences will depend upon the size and complexity of each entity.
3. Frameworks applied within in the group – The financial reporting framework applied by other entities in the group may have an impact on the entity’s chosen new framework. This is because the entity may wish to take advantage of aligning recognition, measurement, presentation and disclosure as much as possible with other group entities, or conversely, there may be more notable advantages for having alignment with group, for example for eliminating consolidation adjustments.

Action is not required immediately as the amendments are not effective until IFRS 17 becomes effective, which is currently for accounting periods beginning on or after 1 January 2021. The effective dates are aligned so that it enables entities, that currently apply FRS 101, to continue to do so until IFRS 17 becomes effective.  However, as the IASB is considering changing the effective date of IFRS 17 to be 1 January 2022, then the effective date of this amendment to FRS 101 will also be pushed backed to maintain alignment, if required.

Conclusions

Whilst these amendments to FRS 101 are small and simple in nature, they have large and potentially complex implications in practice. This is because for those entities affected, they will need to transition to a new financial reporting framework come 2021 (or more likely 2022), which of course will involve considerable change for the entity in terms of accounting, internal and external reporting and systems; and this therefore is a decision that shouldn’t be taken lightly.