FRS 102 provides the definition of an insurance contract, however it does not set out the accounting required for such a contract; FRS 103 has been issued to provide the specific accounting requirements for such contracts.

FRS 103 combines existing guidance on insurance contracts found elsewhere and broadly allows entities to continue with their current practices (subject to certain additional considerations). In addition, it allows them to take advantage of ‘improvement options’ similar to those available to entities that apply IFRS 4 Insurance Contracts, provided that such options continue to comply with existing legal and regulatory requirements and are either more relevant to the users’ economic decision making and no less reliable or more reliable and no less relevant. Improvements that are permitted (but not required) include:

• Allowing remeasurement of designated insurance liabilities to reflect current market interest rates through profit or loss.
• Allowing remeasurement of liabilities for recognised but unrealised gains and losses where realised gains and losses on assets affect the valuation of insurance liabilities. The related adjustment to the liability is recognised through Other Comprehensive Income (OCI) if and only if the unrealised gains or losses are recognised through OCI.

New entrants to the insurance market which have no existing policies are advised to start with FRS 103 guidance based on FRS 27 Life Assurance/ the Association of British Insurers’ SORP before deciding whether to implement the improvements.

The standard contains disclosure requirements that:

• identify and explain amounts arising from insurance contracts issued by an entity and reinsurance contracts held by an entity;
• relate to the financial strength of entities with a long-term insurance business;
• help users understand cash flows associated with those insurance contracts.

FRS 103 is applied by companies that apply FRS 102 and:

• issue insurance (and reinsurance) contracts;
• hold reinsurance contracts;
• issue financial instruments with a discretionary participation feature.

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