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FRS 18 ’Accounting policies’

FRS 18 FRS 18 sets out the principles to be followed in selecting accounting policies and the disclosures needed to help

users to understand the accounting policies adopted and how they have been applied. FRS 18 distinguishes between accounting policies and estimation techniques:

FRS 18, 4 Accounting policies are those principles, bases, conventions, rules and practices applied by an entity that specify

how the effects of transactions and other events are to be reflected in its financial statements through (i) recognising;

(ii) selecting measurement bases for; and (iii) presenting;

assets, liabilities, gains, losses and changes to shareholders’ funds. Accounting policies do not include estimation techniques.

Accounting policies define the process whereby transactions and other events are reflected in financial statements.

FRS 18, 4 Estimation techniques are the methods adopted by an entity to arrive at estimated monetary amounts,

corresponding to the measurement bases selected, for assets, liabilities, gains, losses and changes to shareholders’ funds.

Estimation techniques implement the measurement aspects of accounting policies. An accounting policy will specify the basis on which an item is to be measured; where there is uncertainty over the monetary amount corresponding to that basis, the amount will be arrived at by using an estimation technique.

FRS 18, 14-17 Accounting policies should be consistent with accounting standards, UITF Abstracts and companies’ legislation.

Where this requirement allows a choice, the FRS requires an entity to select those accounting policies judged to be most appropriate to its particular circumstances for the purpose of giving a true and fair view.

FRS 18, 30-31 An entity should judge the appropriateness of accounting policies to its particular circumstances against the

objectives of relevance, reliability, comparability and understandability. The constraints that an entity should take into account are the need to balance the different objectives, and the need to balance the cost of providing information with the likely benefit of such information to users of the entity’s financial statements.

FRS 18, 51 Where it is necessary to choose between estimation techniques, an entity should select whichever of those

estimation techniques is judged by the entity to be most appropriate to its particular circumstances for the purpose of giving a true and fair view.

FRS 18, 45 An entity’s accounting policies should be reviewed regularly to ensure that they remain the most appropriate to

its particular circumstances. An entity should implement a new accounting policy if it is judged more appropriate to the entity’s particular circumstances than the present accounting policy.

Disclosure requirements

FRS 18, 55 The FRS requires specific disclosures about the accounting policies followed and changes to those policies. The

following information should be disclosed:

FRS 18, 51 (a) a description of each of the accounting policies that is material in the context of the financial statements;

(c) details of any changes to the accounting policies that were followed in preparing financial statements for the preceding period, including:

(i) an explanation of why each new accounting policy is thought more appropriate; (ii) where practicable, the effect of a prior period adjustment on the results for the preceding

period, in accordance with FRS 3; and

(iii) where practicable, an indication of the effect of a change in accounting policy on the results for the current period.

Where it is not practicable to make the disclosures described in (ii) or (iii), that fact, together with the reasons, should be stated; and

(d) where the effect of a change to an estimation technique is material, a description of the change and, where practicable, the effect on the results for the current period.

FRS 18, 58 Where an entity’s financial statements fall within the scope of a SORP, the entity should state the title of the

SORP and whether its financial statements have been prepared in accordance with the provisions of the SORPs currently in effect. In the event of a departure, disclosure is required of how the financial statements depart from the recommended practice set out in the SORP. This disclosure should include:

(a) for any treatment that is not in accordance with the SORP, the reasons why the treatment adopted is judged more appropriate to the entity’s particular circumstances; and

(b) details of any disclosures recommended by the SORP that have not been provided, and the reasons why they have not been provided.

FRS 18, 62 For any material departure from the requirements of an accounting standard, a UITF Abstract or companies

legislation, particulars of the departure, the reasons for it and its effect should be disclosed. The disclosure should include:

(a) a clear statement that there has been a departure from the requirements of an accounting standard, a UITF Abstract or companies’ legislation, and that the departure is necessary to give a true and fair view; (b) a statement of the treatment that the accounting standard, UITF Abstract or companies legislation would

normally require in the circumstances and a description of the treatment actually adopted; (c) a statement of why the treatment prescribed would not give a true and fair view; and

(d) a description of how the position shown in the financial statements is different as a result of the departure, normally with quantification. Quantification is not required where it is already evident in the financial statements themselves or where the effect cannot reasonably be quantified, in which case the circumstances should be explained.

Estimation techniques

Clearly in the case of insurance there is often uncertainty over the monetary amount corresponding to the recognition and measurement of claims. Accordingly the requirements of FRS 18 in connection with estimation

FRS 18 paragraph 57 explains that:

FRS 18, 57 ABI, 243

 Although many estimation techniques are used in preparing financial statements, most do not require disclosure because, in most instances, the monetary amounts that might reasonably be ascribed to an item will fall within a relatively narrow range. An estimation technique is significant for the purposes of paragraph 55 (b) only if the range of reasonable monetary amounts is so large that the use of a different amount from within that range could materially affect the view shown by the entity’s financial statements.  To judge whether disclosures are required in respect of a particular estimation technique, an entity will

consider the impact of varying the assumptions underlying that technique.

 The description of a significant estimation technique will include details of those underlying assumptions to which the monetary amount is particularly sensitive.

PwC In respect of general insurance business, the estimation techniques for determining the provision for

outstanding claims are likely to be significant. Accordingly, FRS 18 requires a description of the estimation techniques employed including details as to those individual underlying assumptions to which the claims provisions amounts are particularly sensitive.

It may be necessary for general insurers in specific circumstances to give further details of the estimation techniques used to set their claims provisions and the assumptions used/factors taken into account in determining the overall level of claims provisions. Where there is significant uncertainty, or the impact on the financial statements is significant, greater disclosure is likely to be appropriate.

The ABI SORP provides guidance on the disclosure of uncertainties and estimation techniques in respect of insurance contracts.

ABI, 239, 242 There is inherent uncertainty in estimating many of the technical provisions in respect of liabilities arising from

insurance business. They can be classified as:

 general uncertainties with “normal” ranges of outcomes. These should be described in the accounting policies and periodically reviewed;

 specific uncertainties which are material and subject to an unusually wide ranges of outcomes. When the possibility of a range of outcomes is outside the “normal” range, separate disclosure should be made. Disclosure should include the circumstances, indication of uncertainties, amount and timing of the outflows and the possibility of any related reimbursements;

 uncertainties in areas where FRS 12 does not require a provision to be established but where that standard may require contingent liability disclosure.

ABI, 240 FRS 18 requires the following disclosures in the accounts:

 a broad description of the factors giving rise to the uncertainty;

 a description of those items to which significant estimation techniques have been applied;  a description of the estimation techniques used;

 details of the significant assumptions made and information used in forming the estimates; and  a note of those factors to which the estimation technique is particularly sensitive.

ABI, 245-247 Provisions, contingent liabilities and contingent assets arising from insurance contracts with policyholders are

exempt from the requirements of FRS 12 and, in the majority of circumstances, the level of disclosure required by FRS 18 will be appropriate. However, where a specific material contingent liability exists in respect of which no provision has been made in the financial statements, and the prospect of this resulting in a transfer of economic benefits is more than remote, it will be appropriate to give the level of disclosure that would be