accounting trading profits verse FSA returns profits

[loadingr]

For OLTB business, the figures used to calculate taxable profits are moved from being based on FSA returns to statutory accounts from 1 Jan 2013.

I saw the Sep12 question 1 has a question on the impact of this change, although I am not very sure of the underlying reason of these impacts. Can any one help on the question below?

How is the accounting trading profit different from FSA returns profit? (e.g. the methodology of calculation, the items included, any assumption difference, timing of the profits emerging)

Many thanks!

 

[mugono]

Hi

At a fundamental level, stat accounts attempts to give a true and fair view of the profits earned whereas the Fsa returns contain deliberate prudence.

For example, fsa reserves include global reserves (eg closure reserves, mismatch reserves, data error reserves etc) which are removed from the stat accounts.

The stat accounts will include a DAC asset, which reduces the new business strain and improves year 1 profits (and lowers profits in subsequent years). By contrast nbs is higher under the fsa basis but there's higher surplus in future years.

For realistic wp liabilities, there may be no difference between the stat and fsa basis as there is no distortion here caused by having prudent assumptions.

The assets under the stat basis are higher as there are no admissible constraints in contrast to the fsa basis.

All that said, whilst taxable profits arise earlier under the stat accounts, this is purely a timing difference as the total profits to arise will be identical if the fsa basis were used. This is because the amount of profit to emerge depends on the actual experience of the contracts on the books.


(Any difference in the absolute amount of tax paid may differ however if the tax rates change over time and the emergence of the profit profile isnt level throughout).


These are the main differences I can think of.

Hopefully you find it useful

 

[kidstyx]

If the negative reserves have to be eliminated under statutory returns but allowed under accounting basis, this could result in a significant difference in the profits shown. However, this does not seem to be the case in the UK as policies with no guaranteed surrender value can have negative reserves under Solvency I Pillar 1.