The FRC published periodic changes to FRS 102 in March. So what do these changes mean for insurers?
In a previous edition, we provided an overview of the proposals in FRED 82, which were issued at the end of 2022. In March this year the FRC made amendments to FRS 102. These include a new model of revenue recognition based on IFRS 15, a new model of lease accounting based on IFRS 16, new transition requirements for insurance contracts, and various other incremental improvements and clarifications. The revised standard is applicable from 1 January 2026.
Periodic amendments happen at least every five years, but these latest changes are significant for most UK GAAP reporters, including insurers. The FRC has considered proportionality in making them and allows for more flexibility and practical expedients compared to the equivalent IFRS 15 and IFRS 16 standards.
A key benefit of alignment with IFRS principles is that high quality financial information supports a range of broader effects, including improved access to capital. There is consistency with international accounting principles in key areas, which improves comparability and reduces ‘GAAP differences’. This means the consolidation process requires fewer topside adjustments for IFRS groups with subsidiaries reporting under UK GAAP. On the other hand, with further alignment while providing reduced disclosure frameworks, UK GAAP is a more attractive option for IFRS group subsidiaries.
The good news on IFRS 17 first
Let’s get the elephant in the room out of the way. The FRC is not bringing IFRS 17 (Insurance Contracts) into UK GAAP. At least not yet. This is a welcome relief for insurance carriers that report under FRS 102/103 or have transitioned from IFRS. In fact, the FRC has gone further. It’s made an amendment to FRS 103 that would allow current IFRS reporters to transition in future to UK GAAP and unwind their IFRS 17 accounting policies. This is effective for periods beginning on or after 1 January 2024.
It’s an attractive option, especially where there are alterations to ownership structure that might trigger a change in reporting framework or new circumstances that might merit a change to UK GAAP for certain group entities.
This amendment follows feedback expressing concerns that once an entity applied IFRS 17, there would be ‘no way back’ as FRS 103 would ‘grandfather in’ existing accounting policies. The FRS 103 amendment requires an insurer that applies adopted IFRS (or an equivalent financial reporting framework), and transitions to FRS 103 for the first time, to disregard its existing accounting policies for insurance contracts.
This is because the provisions in FRS 103 for an insurer to continue with its existing accounting policies for insurance contracts on transition were not intended to provide a mechanism for importing accounting principles from IFRS 17 through the back door. In this scenario, an insurer should apply FRS 103 as if it were setting accounting policies for insurance contracts for the first time.
But bear in mind that FRS 101 (ie IFRS with reduced disclosure framework) is no longer an option for Schedule 3 insurers, because of the conflicts between IFRS 17 and company law. The FRC has concluded that insurers applying IFRS 17 in Companies Act accounts (ie those prepared in accordance with FRS 101 or FRS 102/103) would not be complying with company law.
Given the complexity of IFRS 17, the IASB is unlikely to complete its post-implementation review of the standard by 2026. What’s more, the FRC’s periodic consultation timetable means IFRS 17 is unlikely to be incorporated, if at all, any earlier than 2030. But at least the current amendments to FRS 103 provide certainty in the medium term for the insurance industry, and this is good news.
What are the other key changes?
Leases
In short, if you have material operating leases you will be impacted.
The key changes to leases are:
- No longer a distinction between operating and finance leases
- More leases now recognised with an asset and liability on-balance sheet (similar to the now extant finance lease accounting)
- Recognition exemptions allow short-term leases and leases of low-value assets to remain off balance sheet
- Compared with IFRS 16 leases, a higher threshold for low-value assets means FRS 102/103 does not require recognition of as many leases on balance sheet.
The FRC claims the changes provide several benefits. Financial information is improved through greater transparency over the indebtedness of the business. Information about assets and liabilities is more relevant, with a clearer picture of the economics of significant lease arrangements.
Non-insurance related revenue recognition
In short, if you have revenue streams (other than under FRS 103), you will be impacted.
The key change is the introduction of a single, comprehensive five-step model for revenue recognition. This will apply to all contracts with customers broadly aligned with IFRS 15, but with some simplifications. The five steps are:
- Identify the contracts with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue when each performance obligation is satisfied.
The FRC believes these changes will make it easier for entities to account for revenue transactions correctly and consistently, across all sizes of entity and all contract types. This means more reliable and useful information about the nature, amount and timing of revenue and cash flows arising from contracts with customers.
Other changes
Other amendments include:
- Section 2A Fair Value Measurement – updated to align definitions with latest international standards, and provide additional guidance
- Section 7 Statement of Cash Flows – new disclosure requirements for supplier finance arrangements (effective 1 January 2025)
- Section 26 Share-based Payment – additional guidance, making application of the principles easier in certain situations
- Section 29 Income Tax – introduction of guidance on accounting for uncertain tax positions
- Section 34 Specialised Activities – improvements and clarifications on existing requirements and how to make consequential changes to reflect other amendments.
How might you be impacted?
The commercial impact of these changes could be wide reaching for the insurance industry. For the non-carriers in your group (eg intermediaries, service and treasury entities) the new model for revenue recognition could have a significant impact on the timing of revenue recognition. For example, revenue contracts with multiple performance obligations (such as brokerage, claims management, and policy administration) will be affected. So it’s important to review all major customer contracts in detail to understand the potential impact.
The new lease accounting model will see most material leases brought onto the balance sheet. This will affect your financial statements and key ratios, as your lease liabilities and right of use assets are reflected. It will also increase finance expenses and depreciation of the right of use assets and decrease the operating lease rentals in the income statement.
The IFRS 16 definition of what constitutes a lease might also mean that new contracts are identified as leases that were not previously accounted for under that heading. For example, in group scenarios, a decision on which entity has the right of use of an asset could mean new leases and sub-leases, in turn resulting in more complexity.
All these changes could affect your profit margins, reward schemes, and ability to meet financial obligations or pay dividends. So it’s important to start planning for a successful transition now. Insurers should also consider any potential impact on their Solvency UK balance sheet, although this is unlikely to be significant for most.
While 2026 might seem a long way off, it’s still wise to put these amendments onto your finance team’s agenda, given the implementation costs and challenges brought by IFRS 15 and IFRS 16.
Why not start by drawing up an inventory of all revenue and lease contracts, including any side agreements and implied contracts? Consider setting up an implementation team that includes not just those in finance but also contract managers, legal, brokers and IT.
Start engaging with your contract counterparties to clarify any contract terms that are subject to interpretation, and formalise any intercompany arrangements that could be impacted. Depending on the complexity of your contracts, consider seeking professional advice.
UK GAAP reporters can benefit from the lessons learned from IFRS 15 and IFRS 16 implementation. We highly recommend getting your finance team to look at some of the findings from the FRC’s thematic reviews of disclosures on the first year of application of IFRS 15 and IFRS 16.
Should you early adopt?
It depends on your circumstances. Early adoption might make sense for some.
The main effective date for the amendments is accounting periods beginning on or after 1 January 2026. Early application is allowed, so long as all amendments are applied at the same time. A different effective date applies to amendments made to FRS 103 (see above).
This is a great opportunity for reporters to align UK GAAP accounting policies with IFRS groups, if applicable. Even if you’re not part of an IFRS group, doing so early has the benefit of adding credibility and comparability to your business as you become more aligned with IFRS reporters.
It could also make your business more valuable to a potential acquirer and/or lender and improve access to capital.
In general, these amendments make transition more attractive for entities reporting under full IFRS or FRS 101 within a group to FRS 102. That’s because there might be minimal changes to accounting policies, while significantly reducing disclosure requirements for eligible entities. But for insurance groups reporting under IFRS, this transition might not be as practical for the carriers in the group, which will still need to prepare IFRS 17 financial information.
Whether or not early adoption is the best approach for you, our experience of helping others through the IFRS 15 and IFRS 16 transitions tells us you should tackle the potential transition issues early. This means they can be factored into your financial project plans and budgets, securing resources in advance and avoiding other potential future conflicts in your teams.
How can we help?
Our accounting advisory team can help you with impact assessment, implementation and transition to the amended FRS 102 standards. We have a team of experienced accounting specialists who have previously worked on IFRS 15 and IFRS 16 transition and understand the challenges these changes pose.
Please don’t hesitate to contact Satya Beekarry to discuss further.
