LAM07020 | Trade profits: Financial Statements: GAAP for insurance companies: CTA09/S35

The starting point for the trade profit calculation is the profit before tax as disclosed by the entity accounts. Of course the accounts do not distinguish between the profits attributable to the BLAGAB and non-BLAGAB businesses, which is determined by FA12/CH7 (see LAM05110). If prepared under IFRS the accounts may not distinguish between general insurance business and long-term business.

Trade profits are charged under CTA09/S35, which means that they must be calculated in accordance with UK generally accepted accounting practice (UK GAAP) or International Financial Reporting Standards (IFRS). Both include accounting standards which specifically deal with insurance contracts: FRS 103 ‘Insurance Contracts’, in the case of UK GAAP, and IFRS 4 ‘Insurance Contracts’ in the case of IFRS.

In general there are no major current differences between IFRS and UK GAAP; however, this may change in future as a new international accounting standard, IFRS 17 ‘Insurance Contracts’, is proposed to replace IFRS 4 for 2022 onwards.

Both FRS 103 and IFRS 4 include definitions of insurance contracts and insurance risk; both standards apply to insurance and reinsurance contracts.

IFRS 4:

• defines an insurance contract

• disallows within liabilities provisions for future claims from contracts not entered into at the reporting date, such as catastrophe, equalisation and other statutory provisions

• contains rules on disclosures

• exempts insurers temporarily from some of the requirements of other IFRSs

However the definition of insurance contracts is not necessarily followed for taxation. For example many contracts are classed as investment contracts for IFRS purposes but are still long-term business and taxed as such.

Significantly, in relation to the accounting for insurance contracts, IFRS 4 generally permits insurers to continue to use the GAAP approved in their Home State. In the UK this means that FRS 27 ‘Life Assurance’ and the ABI SORP, both now incorporated into FRS 103, will be of relevance even where the company adopts IFRS generally. Under both FRS 103 and IFRS 4 insurers may adopt new accounting policies if they make financial reporting more relevant without adversely affecting reliability, or more reliable without adversely affecting relevance.