Ch17: Practice Question 4(ii)

[kntg24]

The question is asking if the company would want to continue to use accounting policies based on Solvency I methodologies or change to Solvency II methodologies. However, the solution given mentioned under Continue using Solvency I methodology section, "The company may have employed all of its resources to gain approval for its internal model and complete the move to the Solvency II regime..." Doesn't this mean the company chose to use Solvency II methodology?


And, it mentioned IFRS 17 which I don't get the relationship here. Eg. "...and so may chose not to adopt this voluntary change in IFRS reporting methodology.", "...timeframes required to complete the financial accounts, under IFRS 17, will be different from those of Solvency II....".

 

[Lindsay Smitherman]

Hi - I think you mean PQ 5(ii) rather than 4(ii)? (Make sure you are using the most recent or an updated version of the course notes)

You seem to be confusing the basis used for supervisory reporting (which would have to be Solvency II for this company) and the basis used for completing statutory accounts. The question is asking about what it would choose to use for the latter, since it is permitted under IFRS 4 either to use local GAAP (which is based on Solvency I) or to move to another approach such as a Solvency II-style approach - but only for the period before IFRS 17 becomes mandatory.

So the first answer point that you mention above is saying: it might have been really busy implementing Solvency II for the supervisor and tidying up those processes (eg getting internal model approval if it didn't do so originally) and so decided to just keep its accounting processes the same as they were before (ie local GAAP).

The final point that you quote relates to the idea that going from Solvency I (local GAAP) to Solvency II to IFRS 17 over a period of a few years might be considered too much hassle, so it might prefer just to stick with local GAAP and then move to IFRS 17 when that becomes mandatory. Moving to using a Solvency II approach temporarily for accounting purposes isn't necessarily as straightforward as it might sound. Even though it will be using that for its supervisory reporting, it could well be the case that accounts are required to be submitted more quickly after the year end than supervisory reports, particularly for listed companies, and so that models might have to be adjusted to allow that (eg grouping and approximations).