FRS 27 Life Assurance
FRS 27 (December 2004) (PDF)
Memorandum of Understanding (MoU) (withdrawn May 2016) (PDF)
Report to HM Treasury 'Financial Reporting for Life Assurance' (June 2005) (PDF)
FRS 27 applies to all entities with a life assurance business (including a life reinsurance business), and is effective for accounting periods ending on or after 23 December 2005, except that some smaller friendly societies are exempt until 2006 or 2007.
Under the terms of a Memorandum of Understanding (MoU) between the ASB, the Association of British Insurers and the major UK life assurers and bancassurers, the companies agreed to apply the standard from 2005 even though, as entities reporting under IFRS, it was not mandatory for them. In addition these companies agreed to make disclosures for 2004 in their operating and financial review (or elsewhere in their annual report) covering much of the information that would be required under the standard. The ABI agreed to encourage a similar approach by insurance entities not signatories to the MoU. This MoU was withdrawn in May 2016.
The FRS builds on the new prudential capital requirements regime recently introduced by the Financial Services Authority (FSA) for with-profits life assurance business, based on the ‘realistic balance sheet’ approach, and set out in FSA Policy Statement 04/24. This approach takes into account constructive obligations to pay future bonuses and uses modelling techniques to value options and guarantees.
FRS 27 requires:
- For large UK with-profits life assurance businesses falling within the scope of the FSA's realistic capital regime, liabilities to policyholders are required by the FRS to be measured on the basis determined in accordance with that regime, subject to adjustments specified in the FRS. Further adjustments are made to related assets and deferred tax for consistency with the measurement of the realistic liabilities, and the resulting effect on profit and loss account is offset by a corresponding transfer to the fund for future appropriations or, in the case of a mutual, to retained surplus.
- For all entities within the scope of the FRS, the fund for future appropriations must be separately presented on the balance sheet and an explanation given of a negative FFA balance.
- The FRS restricts the recognition of the value of in-force business, but permits entities that currently recognise such value to continue to do so, subject to limitations on the way this value may be determined.
- A capital statement is required setting out the total available capital for sections of the life assurance business of the entity.
- The capital statement is required to be supported by information on regulatory capital requirements or management’s capital targets, the basis of determining regulatory capital, the sensitivity of liabilities and capital to changes in market variables and key assumptions, and the entity's capital management policies. An appendix to the FRS sets out an example of a capital statement and its supporting narrative.
- Information is also required to be disclosed on the assumptions used in the measurement of liabilities, and the terms and conditions of options and guarantees relating to life assurance contracts. For those liabilities to policyholders resulting from options and guarantees that are not measured at fair value or on a statistical basis that takes into account all possible outcomes of the option or guarantee, entities must provide additional information on the nature and extent of the options and guarantees and the possible liabilities that may arise.
- A movements table is also required to show the changes in capital from one reporting date to the next.
FRS 27 was one part of the Board’s response to a request from the Financial Secretary to the Treasury, in March 2004, for a study into accounting for with-profits business by life assurers. The other part of this response was a report by the Board on life assurance financial reporting, issued in June 2005. This report summarised the needs of different users of financial statements of life assurance entities, and the improvements introduced by FRS 27 to meet those needs. It also analysed key areas where further improvements could be made, including the measurement of liabilities, profit recognition, the distinction between equity and liabilities, and the role of embedded value methods. The report concludes that these complex issues, that could not be addressed in the timescale available for the development of FRS 27, are best considered in the wider context of international insurance accounting that is being addressed by the IASB’s project. The Board will continue to monitor and give input to this wider IASB project.