Insurance Accounting Advisory Quarterly April 2025

Whether you are a (re)insurer reporting under UK/Irish Generally Accepted Accounting Practice (‘UK/Irish GAAP’) or International Financial Reporting Standards (‘IFRS’) there are forthcoming changes under each financial reporting framework that may have an impact on your entity. This article focuses on some of the key changes under each framework [1].

By understanding the changes that will impact your entity and being clear on what changes need to be implemented you can ensure that compliance with the new requirements is achieved on time and financial reporting integrity is maintained.

As with all change projects, the earlier you start the better- this gives you time to make informed accounting judgements, gather data, implement system changes, undertake dry runs and engage with stakeholders to ensure the information you are producing is sufficient to meet all your financial reporting needs. Remember, a successful transition is not just about compliance—it's an opportunity to enhance your financial reporting processes and provide more valuable insights to stakeholders.

This article will help you understand the key new requirements under each framework, how they could impact your entity and what you should do next.

Forthcoming changes under UK/Irish GAAP

For UK/Irish GAAP reporters, the FRC published a number of amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102') in March 2024. Most of the amendments will be mandatory for accounting periods starting on or after 1 January 2026 however early adoption is permitted.

At a high level, the changes to FRS 102 seek to provide greater consistency and alignment with IFRS whilst being proportionate to the size and complexity of the entities applying FRS 102.

The principal amendments expected to have an impact on (re)insurers financial statements include:

On balance sheet accounting for lessees: This amendment is based on IFRS 16 Leases but with certain practical exemptions. This change is expected to result in an impact on the financial statements of most (re)insurers that are currently lessees under one or more operating leases.
A new revenue recognition model: The new model is based on the five-step revenue recognition model in IFRS 15 Revenue from Contracts with Customers, with some simplifications. The degree to which (re)insurers pattern of revenue recognition will change depends largely on whether it has customer contracts within the scope of FRS 102 and the nature and structure of those contracts. (Re)insurance contracts within the scope of FRS 103 are not impacted by the changes. To the extent that a (re)insurer has other streams of income from customers (e.g. for admin services, custody services, asset management services, insurance broking services) it will be impacted by this amendment.

Revenue and lease accounting changes at a glance

Key changes

Based on IFRS 16 Leases: On-balance sheet lease accounting for lessees, as a right of use (RoU) asset and lease liability.
Lease expenses now presented as depreciation and interest.
Exemptions available for short-term leases and leases of low-value assets.

Key simplifications from IFRS 16

Greater flexibility in defining low value assets.
More discount rate options.
Reduced modification triggers requiring a revised discount rate.
Simpler approach to recognising gains/losses for sale and leaseback transactions.

Transition

Apply retrospectively.
No restatement of comparatives required.
Permitted to use carrying amounts for group reporting under IFRS 16 as opening balances.
If not applying the group reporting practical expedient, on transition the asset recognised shall be measured at an amount equal to the lease liability adjusted by the amount of any prepaid or accrued lease payments.
Any cumulative effect of initially applying the changes is recorded as an adjustment to opening retained earnings.

Key changes

Based on IFRS 15 Revenue from Contracts with Customers: Five-step revenue recognition model to be applied, potentially impacting the timing of revenue recognition.
Focus on control, not transfer of risks and rewards.
Contracts that have, variable consideration, warranties, customer options, or significant financing components will warrant careful attention.

Key simplifications from IFRS 15

Not required to adjust for the effects of the time value of money on payments received in advance.
Simplifications for allocating discounts in the contract.
Accounting policy choice for capitalisation of costs to obtain a contract.
Disclosures are aligned to IFRS for SMEs rather than IFRS 15.

Transition

Apply retrospectively.
Option to either:
1. Restate comparatives, or;
2. Not restate comparatives and record the cumulative effect of initially applying the standard as an adjusted to opening retained earnings.

Next steps for UK/Irish GAAP reporters

With less than 12 months to go we would encourage (re)insurers to begin preparing for the adoption of these changes. Performing an initial impact assessment will help you better understand how the changes will impact your financial statements, whether that be profit or loss, balance sheet or note disclosures.

For (re)insurers impacted by the amendments, it is likely that changes to systems and processes will be required ahead of 1 January 2026. This may involve updating charts of accounts, assessing system capabilities and designing revised processes and controls to ensure full compliance.

Investing time early and establishing efficient processes are key to the successful, low-stress adoption of the changes.

Forthcoming changes under IFRS

In response to strong demand from stakeholders, particularly from users of financial statements, for improvements to financial performance reporting, the IASB developed IFRS 18 Presentation and Disclosure in Financial Statements ('IFRS 18') which will replace IAS 1 Presentation of Financial Statements from 1 January 2027 (with early adoption permitted).

The new standard seeks to respond to the demands for more relevant information and transparency in the presentation of companies’ financial statements by requiring a more structured income statement and greater disaggregation of information. IFRS 18 also makes management-defined performance measures (‘MPMs’) part of the audited financial statements for the first time. This will bring more credibility to certain key performance indicators reported by companies. Together, the new requirements will help companies to better tell their story and connect their reporting in the financial statements.

Although companies’ net profit will remain unchanged, many will see changes to the structure of their income statement. For some, the changes will be significant, depending on their current presentation practice under IFRS.

While 1 January 2027 may seem like a long way away, preparing for the implementation of IFRS 18 will take time and effort. (Re)Insurers need to focus on the detailed requirements set out in the standard and apply these requirements to their specific circumstances. Management will also need to make new judgements, navigate complexities and oversee changes to systems, processes and controls in advance of the implementation date.

IFRS 18 changes at a glance

IFRS 18 replaces IAS 1 Presentation of Financial Statements. Notwithstanding net profit will remain unchanged, the impacts of the new standard are pervasive and many aspects of financial statement presentation and disclosure will be affected, particularly the income statement.

The key impacts of IFRS 18 are set out below:

Income and expenses classified into three new categories- operating, investing and financing.
Main business activities drive classification of income and expenses.
Analysis of operating expenses by nature, function or on a mixed basis presented on the face of the income statements.

An example income statement for an insurer that has a main business activity of investing in assets is shown below:

New definition of MPMs applies- some but not all 'non-GAAP' measures typically used by (re)insurers are captured.
MPMs are disclosed in a single note to the financial statements and are subject to audit.
Specific disclosures, including reconciliations, are required.

Enhanced principles of aggregation v’s disaggregation of information based on shared v’s non-shared characteristics.
Entities are discouraged from labelling items as 'other' with additional disclosures required for items using this label.

Next steps for IFRS reporters

In order to ensure a smooth transition to IFRS 18, now is the time to get ready to report under the new standard. While the standard is not effective until 1 January 2027 , it applies retrospectively. Therefore, for (re)insurers with December year-ends, it will be necessary for the changes to systems, processes and controls to be in place from 1 January 2026 in order to capture the necessary information for reporting in 2027. As was seen with IFRS 17 implementation, starting early is key for successful implementation of the necessary changes.

Management and those charged with governance should:

Assess the impacts on the entity’s financial statements and consider new judgements
Communicate the expected impact with investors and other stakeholders
Consider how the new requirements impact financial reporting systems, processes and controls; and
Monitor any changes in the local reporting landscape.

How KPMG can help

KPMG’s accounting advisory team is ready to support you to implement the changes required under UK/Irish GAAP and IFRS. Together with our systems transformation specialists, our team of technical accountants have experience in working with (re)insurers to implement accounting changes by:

Providing training/workshops to bring you up to speed on the new requirements and how they apply to your entity
Performing impact assessments to evaluate the potential impact of the changes on your financial statements
Preparing and/or reviewing lease accounting models which produce the required journal entries for financial reporting purposes
Preparing and/or reviewing accounting policy papers which document the key accounting judgements applied in implementing the changes
Drafting the new required disclosures for inclusion in the financial statements
Implementing changes needed to existing systems, processes and controls.

Footnotes

Please note that this article discusses the key forthcoming changes under FRS 102 and IFRS that are expected to impact (re)insurers. If you require further information on the full suite of forthcoming changes and how they may impact your business, please reach out to our team who will be happy to have a more detailed discussion with you.