Insurers within the scope of Solvency II can prepare financial statements using local generally accepted accounting principles (GAAP) under certain conditions.
The Prudential Regulation Authority (PRA) said GAAP, rather than International Financial Reporting Standards (IFRS), could be used if the insurer fulfils certain criteria. GAAP are a set of accounting principles, standards and procedures firms use to ensure a minimum level of consistency in financial statements.
According to a consultation paper published today, Solvency II: ensuring consistency with UK generally accepted accounting principles, the PRA outlined expectations of firms which are considering applying the derogation within Article 9 (4) of the Commission Delegated Regulation.
This allows a firm to value some assets and liabilities using local generally accepted accounting principles (GAAP) if they fulfil some "very specific criteria listed in that Article".
Firms' financial statements can be prepared under UK GAAP for Solvency II purposes if:
- UK GAAP is consistent with Article 75 of the Solvency II directive;
- The valuation method is proportionate to the nature, scale, and complexity inherent in the business of the undertaking; and
- The process of valuing the assets and liabilities using international accounting standards would impose costs which are disproportionate with respect to the total administrative expenses of the firm.
"The PRA's clarification of which UK GAAP provisions may potentially be applied for recognition and valuation purposes (if the specific criteria of the derogation are fulfilled) will reduce the administrative burden on firms which are considering whether to seek to apply the derogation," said the paper.
The regulator is seeking views from the industry and comments should be submitted via email by 10 July.
Last month the PRA published another consultation paper, Solvency II: treatment of sovereign debt in internal models, setting out the PRA's position. This runs until 1 May 2015.