The landscape of insurance contract accounting is complex and constantly evolving, with standards such as FRS 103 and IFRS 17 guiding companies on how to report insurance liabilities and assets. While both standards aim to improve transparency and comparability in financial reporting, they differ significantly in their approach. This article explores the key differences between FRS 103 and IFRS 17, highlighting how businesses must navigate these changes to remain compliant, and how Insights can support these efforts.
Key Differences Between FRS 103 and IFRS 17
1. Scope and Purpose
FRS 103 is part of the UK Generally Accepted Accounting Principles (GAAP) and focuses primarily on UK and Irish entities. It allows insurers to continue applying their pre-existing accounting policies, which gives more flexibility but less consistency across different insurers.
In contrast, IFRS 17 is a global standard, mandated for companies reporting under International Financial Reporting Standards (IFRS). It replaces IFRS 4, aiming to standardise how insurance contracts are accounted for across countries and industries, ensuring greater transparency and comparability.
2. Measurement Models
Under FRS 103, insurers have the choice to continue using legacy accounting policies, including the “modified” form of the liability adequacy test. This can result in variations in reporting practices across companies.
On the other hand, IFRS 17 introduces three key measurement models:
- General Measurement Model (GMM): The default model for most insurance contracts.
- Premium Allocation Approach (PAA): Simplified for short-term contracts.
- Variable Fee Approach (VFA): For contracts where payments are linked to underlying items, such as investment-related contracts.
These models require a more forward-looking and dynamic assessment of insurance liabilities, particularly when compared to FRS 103.
Chart: Comparison of Measurement Models in FRS 103 and IFRS 17
Standard | Measurement Models | Applicability |
| FRS 103 | Legacy Policies (including liability adequacy test) | Flexible, historical approach |
| IFRS 17 | GMM, PAA, VFA | Standardised, forward-looking approach |
3. Presentation and Disclosure
FRS 103 offers flexibility in the presentation of financial statements. Companies can retain traditional practices, which might obscure comparability across companies and jurisdictions.
IFRS 17, on the other hand, mandates a more detailed presentation of insurance revenue, separating insurance contract liabilities into the liability for remaining coverage and liability for incurred claims. This distinction allows for clearer insights into the financial health of insurers.
Key takeaway: IFRS 17 ensures more transparency by providing more detailed and standardised disclosures.
4. Impact on Financial Statements
With IFRS 17, the financial statements of insurers are expected to change significantly. IFRS 17 adopts a discounting approach that recognizes the time value of money in insurance liabilities, resulting in fluctuations in reported profits based on market conditions.
In contrast, FRS 103 doesn’t necessarily require discounting for all contracts, allowing companies more discretion. This can result in less volatile, but less transparent, financial statements.
- IFRS 17 is expected to reduce the variance in profit recognition across companies by 15-20%, improving comparability.
How Insights Can Help
Maintaining compliance with these standards requires a strategic approach. At Insights, we are experts in helping businesses adapt to these accounting challenges through:
- Tailored Advisory Services: We offer personalised guidance on selecting the appropriate measurement models and implementing IFRS 17 standards.
- Internal Control & Compliance Reviews: Our team conducts comprehensive compliance audits to ensure adherence to the latest regulations.
- Training and Capacity Building: We provide hands-on training to internal teams, empowering them to manage compliance with ease.