FRS 102 Revenue Recognition: Insurance Intermediaries

Introduction

In March 2024, the FRC made amendments to FRS 102. These include a new model of revenue recognition based on IFRS 15, a new model of lease accounting based on IFRS 16 and various other incremental improvements and clarifications – all of which will impact insurance intermediaries. The revised standard is applicable from 1 January 2026.

Revenue recognition

Revenue recognition will potentially have the biggest impact on insurance intermediaries. Under the FRS 102 amendments, you will need to assess contracts to determine the timing and amount of revenue to be recognised as follows:

Services, other than contract placement ie underwriting and claims handling will need to be identified and documented, and revenue allocated to those separate services

Revenue recognition may be accelerated in instances where an intermediary is entitled to contingent or renewal commissions, and there are no further contractual or implied services to be performed in the renewal periods

In instances where intermediaries perform ongoing post-placement services such as claims management, policy administration and customer care, recognition of all the commissions up-front at initial placement would be inappropriate

Under certain broking arrangements such as marine, reinsurance excess of loss and quota share treaties, there will be a need for the best estimate of profit and volume-based commission to be determined up-front and included in the transaction price

Incremental costs to obtain a contract are likely to be an area of judgment if the entity elects to capitalise those costs.

The impact

As a result, insurance intermediaries’ reported
results will change, impacting EBITDA and
therefore commercial considerations such
as staff bonus arrangements, loan covenant
compliance, deferred consideration calculations,
valuation and investor performance reviews.

These changes are significant, and management
should consider performing an impact
assessment, engaging with investors and other
business partners to understand the impact
of revenue recognition changes to contractual
terms, and consider the data requirements.

The five-step model

Under the FRS 102 amendments insurance Intermediaries will need to assess their contracts to determine the timing and amount of revenue to recognise. The key change is the introduction of a single comprehensive
five-step model for revenue recognition for all contracts with customers broadly aligned with IFRS 15, but with some simplifications. The five steps are:

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

FRS 102: Allocate the transaction price to the performance obligations

4. Allocate the transaction price to the performance obligations

5. Recognise revenue when (or as) the entity satisfies a performance obligation

Your experts

PKF is ready to support you

PKF is ready to support insurance intermediaries. We can help you evaluate the impact of the impending changes on your financial reporting and your business, navigate the transition to FRS 102 and beyond, drawing on our technical accounting expertise and in-depth understanding of the insurance intermediary market.

Financial Accounting Advisory Services (FAAS) team

We provide a wide range of accounting advice, assistance with implementation of new accounting standards, transaction support and technical training services to support your business in an increasingly demanding financial reporting environment.

With an unprecedented era of regulatory change and enhanced reporting requirements, the need for transparency for investors, owners and regulators has never been more important.