The PRA have issued have issued a Supervisory statement on solvency 2 and deferred tax.
Key points:-
The supervisory statement applies to recognizing deferred tax in the solvency 2 balance sheet and the tax effects of a 1:200 shock.
The statement makes an explicit link between recognizing deferred tax assets for solvency 2 and the rules for recognizing deferred tax assets under International accounting standards (IAS 12). IAS 12 applies a probable test for recognizing deferred tax assets, i.e. a deferred tax asset should be recognized if it is more likely than not that a timing difference or tax loss can be utilized against future profits . There is no concept of a valuation allowance in IAS 12 and if it's more likely than not that a loss can be utilzed then a deferred tax asset can be recognized in full. Accordingly under solvency ii there will be much more scope to recognize deferred tax assets than in PRA returns as prepared currently, where there is an assumption that deferred tax assets will not be recognized.
As in IAS 12, firm's are able to consider the use of management actions (i.e. tax planning) in determining whether it is possible that deferred tax assets can be recognized.
The PRA provide quite a lot of guidance on how the probable test for recognizing a deferred tax asset should be applied. There is a specific reference that models should have a "sufficient level of granularity to address the relevant detail of all applicable tax regimes." I think this will require tax departments to assist / sign off on in the preparation of actuarial models that calculate deferred tax.
The PRA does not expect a tax losses to be recognized in a firm's SCR calculation, if the notes to its statutory accounts disclose that: it has unrecognized tax losses; and those tax losses were not recognized because it was considered not probable that future profits would arise against which they might be utilized. Although the supervisory statement does say that this expectation of non recognition can be refuted.
There is a specific reference to companies and supervisors applying judgement to the recognition of deferred tax assets. This seem to me to be the challenge that companies face. When financial markets crash tax departments generally put quite a lot of effort into determining what deferred tax assets they have available for recognition in GAAP accounts and there will generally be quite a lot of discussions, to and froing with the auditors etc. But my impression of the solvency 2 process is that it doesn't lend itself to judgement because the sheer volume of data bring churned out is too large.
The supervisory statement applies to recognizing deferred tax in the solvency 2 balance sheet and the tax effects of a 1:200 shock.
The statement makes an explicit link between recognizing deferred tax assets for solvency 2 and the rules for recognizing deferred tax assets under International accounting standards (IAS 12). IAS 12 applies a probable test for recognizing deferred tax assets, i.e. a deferred tax asset should be recognized if it is more likely than not that a timing difference or tax loss can be utilized against future profits . There is no concept of a valuation allowance in IAS 12 and if it's more likely than not that a loss can be utilzed then a deferred tax asset can be recognized in full. Accordingly under solvency ii there will be much more scope to recognize deferred tax assets than in PRA returns as prepared currently, where there is an assumption that deferred tax assets will not be recognized.
As in IAS 12, firm's are able to consider the use of management actions (i.e. tax planning) in determining whether it is possible that deferred tax assets can be recognized.
The PRA provide quite a lot of guidance on how the probable test for recognizing a deferred tax asset should be applied. There is a specific reference that models should have a "sufficient level of granularity to address the relevant detail of all applicable tax regimes." I think this will require tax departments to assist / sign off on in the preparation of actuarial models that calculate deferred tax.
The PRA does not expect a tax losses to be recognized in a firm's SCR calculation, if the notes to its statutory accounts disclose that: it has unrecognized tax losses; and those tax losses were not recognized because it was considered not probable that future profits would arise against which they might be utilized. Although the supervisory statement does say that this expectation of non recognition can be refuted.
There is a specific reference to companies and supervisors applying judgement to the recognition of deferred tax assets. This seem to me to be the challenge that companies face. When financial markets crash tax departments generally put quite a lot of effort into determining what deferred tax assets they have available for recognition in GAAP accounts and there will generally be quite a lot of discussions, to and froing with the auditors etc. But my impression of the solvency 2 process is that it doesn't lend itself to judgement because the sheer volume of data bring churned out is too large.
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