Industrial and Provident Societies - Tagging Companies House Registered Number

To prevent the Digita tool asking for a Companies House number that is not available.

1.  Go into report info and select Building and Friendly Society in the first "identifier scheme" box.

2.  In the second idetifier scheme box click on the elipses.  This brings up the taxonomy.

3.  In the taxonomy select description of alternative registration tag which is under entity identifying codes under entity information.

4.  Add a tag for the entity identifying code, either by tagging in the document or by including a manual entry.

5.  Still need a tag for Companies House registered number but this is 00000000.

6.  Dates need to be mm/dd/yyyy i.e. American format.

7.  If manually inputting a number need to include commas.

IFRS 17

I went to a recent ILAG seminar on the introduction of IFRS 17.  A few observations and thoughts.

Scope and Implementation

A key point is that the standard only applies to insurance contracts (i.e. contracts that transfer significant insurance risk.) and investment contracts with discretionary participating features.  So contracts of an insurance company currently accounted for as investment contracts will, in all likelihood, continue to be accounted for as investment contracts. This contrasts with SII with any contract in an insurance company is an insurance contract.

Also IFRS 17 is a standard for the valuation of insurance contracts so does not cover the assets in place to back those contracts.  However, there is a link to the valuation of assets as it was possible for insurers to defer the introduction of IAS 9 to match the introduction of IFRS 17.

IFRS 17 is very complicated and principles based.  In common with SII many of the definitions in IFRS 17 are clumsy / meaningless so quite a lot is down to how a company interprets IFRS 17. 

IFRS comes into force 1 January 2021.  Probably quite a long way away for tax departments but given the implementation issues quite soon for finance functions.   If an insurer wanted to parallel run IFRS 4 and IFRS 17 for 2020 it would need all the system adjustments in place by end 2019.  Impression I got was most companies are only thinking about IFRS 17 so quite a tight timetable.  There is talk that the EU might defer introduction until 2022 but that only begs a different question.

Currently no proposal to align UK GAAP (FRS 102 /103) with IFRS 17.  View seemed to be alignment would come but maybe not from as early as 2021.  So post 2021 the incidence of tax could vary quite sharply depending on accounting basis.

Basic Approach

At initial recognition a group of insurance contracts (see below) is measured as 

The value of  cash flows (hopefully an asset)

An adjustment to those cash flows to reflect the time value of money and financial risks (effectively a discount rate.  There was a bit in the seminar about how the discount rate is calculated but I didn't follow.)

An adjustment for non  - financial risks.

The Contractual Service Margin.

The Contractual Service Margin is the difference between value of cash flows, discounted for financial risk, minus the adjustment for non  - financial risks and so recognises the future "profit" from the contract.  The Contractual Service Margin is released to P&L over a period of time (The standard presumably tells you how to do this, although not in a clear way.)  The Contractual Service Margin can't be negative, so if there is an onerous contract at initial recognition or subsequently, the loss is immediately recognised in P&L.

Where things get very complicated is under what circumstances the Contractual Service Margin is re - stated.  The point is that if there is a change in the assumptions used at inception that change could either be recognised directly in P&L or by a change in the Contractual Service Margin.  So say that at recognition a policy had a Contractual Service Margin of 20 being the difference between an upfront premium of 100 and a discounted value of claims of 80.  At a subsequent point in time it is decided that a more likely value of future claims was 90.  You could either take the additional 10 to P&L; or, increase the liability for future claims by 10, reduce the Contractual Service Margin by 10.  This second approach gives a zero immediate impact on P&L; instead the loss of 10 is recognised over time via the amortisation of the Contractual Service Margin.

In deciding in whether a change in assumptions is amortised or recognised up front there is a distinction between insurance contracts that include "direct participation features" and those that don't.  The standard defines direct participation features and in the seminar direct participation contracts were identified as unit linked and with profit. 

For direct participation contracts changes to the discount rate applied are taken to the Contractual Service Margin. For non  - direct participation contracts the assumption is that such changes are taken to the income statement.  However, there is the possibility to take changes in discount rates for non  - participating business to other comprehensive income (i.e. below the line.) (I think in reality this is all a bit more nuanced).

From the seminar it seems changes in non  - financial assumptions are taken to the Contractual Service Margin for both direct participation contracts and non - direct participation contracts, provided they affect future cash flows.  

Recognition 

Although the standard is for the valuation of insurance contracts it allows aggregation of contracts into groups.  The group is the level for deciding whether an insurance contract is onerous, for determining the contractual service margin and for electing whether to reflect changes in discount rates in other comprehensive income rather than the P&L (see above).

The concept of a group begins with the wider concept of a portfolio, a portfolio is expected not to include more than one product line.  Within a portfolio there are three groups, onerous contracts at initial recognition, contracts with no significant possibility of becoming onerous at recognition and other contracts at recognition.  But a group shall not include contracts issued more than one year apart.

Transition

The basic rule is that an insurance company should present 2021 financial statements as if IFRS 17 had always applied.  If practical, an insurance company should apply a full retrospective approach.  If not practical the insurance company can either go for a modified retrospective approach  (The standard sets out how modified but I didn't follow.) or a fair value approach.  The fair value approach calculates the contractual service margin as the difference between the fair value of the contract at transition less fulfilment cash flows (fulfilment cash flows are the discounted estimates of future cash flows less non  - financial risk.)  Quite what fair value is I don't exactly know.

Profit and Loss Account Disclosure

The old IFRS P&L account is done away with and replaced with a statement split between the insurance service result and insurance finance income  / expense.

Thoughts on tax

1)  I wondered to what extent tax should be taken into account in valuing future cash flows.  I don't think shareholder tax is included as cash flows are only included within the boundary of the insurance contract.  Transaction based taxes, premium taxes and levies are explicitly within the definition of future cash flows.  This leaves the question of I-E tax and whether it is within the definition of future cash flows.  I would guess not as there is a consensus  I-E tax is an income tax per IAS 12 notwithstanding it has some features of a policyholder levy.

2)  There might be some simplification for tax departments once IFRS 17 is adopted. Currently bases changes can make IFRS profitability / tax capacity hard to predict and there is the possibility of trapped losses or deferred relief for losses.  With IFRS 17 some bases changes will be taken to Contractual Service Margin or OCI which may make pre  - tax results more predictable.

3)  Transition looks to be a potential pitfall.  IFRS 4 allowed some upfront profit recognition whereas the profits are spread under IFRS 17 due to the Contractual Service Margin. Accordingly the impact of transition might be to replace shareholders equity with Contractual Service Margin. As the Contractual Service Margin at transition is run off profits can be recognised for a second time (i.e. once up front under IFRS 4 and again on amortisation under IFRS 17.)  

Presumably CTA 2009 108 & 109 would operate to prevent  double taxation by providing a trading deduction in the year of transition?  If that deduction reduces taxable profit for the year or gives rise to a loss that can be group relieved this is a good result as there is upfront relief for double taxation that may take years to arise.  But if the result of IFRS 17 and CTA 108 & 109 is a carried forward loss need to consider how this could be utilised, and proposed new loss relief rules (i.e. 50% of taxable profits restriction) might cause issues.  It would be possible to come up with an example where the combination of IFRS 17, CTA 108 and 109 and new loss relief rules might produce double taxation.  But is this an issue in practice?  Perhaps an override to CTA 2009 to replace with a 10 year spread would be preferable / fairer?

4)  To the extent bases changes are included in OCI does this mean they escape taxation  / are unrelieved?  Need to think about a bit more.

5)  Are figures in existing P&L used in VAT returns etc, if so what to use post implementation?

6)  Is IFRS 17 an opportunity to get a better commercial allocation of IFRS profit between BLAGAB and non  - BLAGAB?