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Many UK general insurance brokers still report their finances according to UK generally accepted accounting principles (UK GAAP). But they will not be able to for much longer. The old UK financial reporting regime will be phased out and a new system will be mandatory for reporting periods beginning on, or after, 1 January 2015.

The new reporting regime is not radically different to UK GAAP, but brokers cannot afford to ignore it, particularly if they plan to buy other brokers or use financial instruments such as derivatives to hedge against risks such as foreign currency movements. And brokers do not have long to prepare for the new system.

For many brokers, the new regime will be Financial Reporting Standard 102 (FRS 102), which can be seen as a direct replacement for UK GAAP. Those firms that meet the Companies Act 2006 definition of a small company, have a parent that already reports accounts using international financial reporting standards (IFRS), or are large listed companies, will have other options open to them.

Brokers could opt to use full-blown IFRS instead of FRS 102, as Towergate did for its full-year 2012 financial results. But it is more likely that brokers will take the easier option.

Accounting firm PKF Littlejohn partner John Perry says: “Most companies will go down the FRS 102 route. There will be less of a transition to comply with FRS 102 than there would be to adopt full international financial reporting standards.”

Goodwill changes

One of the most relevant changes for brokers, particularly given the recent rise in mergers and acquisitions (M&A) activity, is the way goodwill is accounted for under FRS 102.

Goodwill is recorded on a company’s balance sheet if the amount it pays for an acquisition is more than the value of the target firm’s assets. Because broker valuations are typically based on earnings potential, goodwill often arises in broking M&A and can be a big feature of acquisitive brokers’ accounts.

Leaving it too late could be a bad plan.”

John Perry, PKF Littlejohn

For accounting purposes, the value of the goodwill a broker records after buying another firm reduces over time under a process called amortisation. The goodwill value on the broker’s balance sheet will fall by a given amount yearly. The amount appears as an amortisation expense in the broker’s profit and loss account.

Under UK GAAP, goodwill is considered to have a maximum life of 20 years, and companies will typically amortise it over a 20-year period. Under FRS 102, however, goodwill is given a finite life of five years if its true finite value cannot be determined. This could mean fewer, larger amortisation expense charges to brokers’ profit and loss accounts, affecting their reported profit.

Goodwill is typically the only intangible asset that is recorded when one firm buys another. FRS 102 could allow for a more detailed breakdown.

Under UK GAAP, an intangible asset can only be recorded separately if it can be sold independently of the company it belongs to. But, under FRS 102, different types of intangible assets, such as client lists, may be reported.

Fair value accounting

UK brokers that invest in financial instruments and do business with overseas firms, for example, might buy derivatives to hedge against the risk of foreign currency movements. Under UK GAAP, the requirements for reporting the value of the derivatives are minimal.

But FRS 102 will introduce a greater element of fair-value accounting. Simply put, brokers will have to measure the value of the financial instruments they hold more often and record any changes in valuation in their balance sheets and profit and loss accounts. Rises and falls in the valuation would therefore affect their reported profit.

Brokers that invest any surplus in shares could also be affected by the fair-value elements of FRS 102.

The accounting changes may not be dramatic, but brokers do not have long to prepare. At first glance the implementation date may seem a long way off. For firms with financial years beginning on 1 January, the first set of accounts under the new system will be for the year ended 31 December 2015.

But this first set of accounts will also have to include comparable figures for the previous year, which for companies with 1 January start dates will mean the year ending 31 December 2014. So some brokers are already doing business that will have to be accounted for using the new system.

And there is more to complying with FRS 102 than just reporting the right data.

Perry says: “How are you going to get your staff trained in the new requirements? What impact is it going to have on IT systems? It goes beyond the numbers, so leaving it too late could be a bad plan.”


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Insurance Times has created a comprehensive UK Broker Regulation report that brings together everything brokers need to know about the changing regulatory landscape. From preparing for FCA visits to handling client money, dealing with unrated insurers and the implications of thematic reviews and more, this report is required reading for all brokers.

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