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Automating the Solvency II Balance Sheet from IFRS

Automation is good, so long as you know exactly where to put the machine.

Bill Gates

Introduction

Multi-GAAP reporting in CPM Consolidation systems has been around for many years. It’s well established that CPM applications have the capability to report under different accounting rules, either through dedicated GAAP, general multi-use or custom dimensions.

Looking at the example of reporting under both Local GAAP and IFRS, this can be achieved in several ways. A popular method is to load data to a ‘Local GAAP’ dimension member, post adjustments to an ‘Adjustments’ dimension member, and then calculate ‘IFRS’ as the sum of the two in a hierarchical structure.

This approach has been standard practice for years in CPM applications, regardless of the software being used.

The purpose of this article is to describe how this simple concept can be used to automate the calculation of the Solvency II Balance Sheet from the IFRS Balance Sheet in a CCH Tagetik CPM application. It’s worth noting that a similar approach is possible in a variety of applications, not just Tagetik.

IFRS to Solvency II

Insurance and reinsurance companies in the EU are required to report under the rules of Solvency II directive. For UK companies, this requires them to submit standard Solvency II reports to the Prudential Regulation Authority (PRA) at the Bank of England. This requirement means that these companies must prepare both IFRS and Solvency II versions of their Balance Sheet.

The production of a Solvency II Balance Sheet from a system perspective is a two-stage approach. It represents a different presentation compared to IFRS but also a different treatment for certain balances.

Stage 1

The first stage of presenting the Solvency II Balance Sheet can be accommodated by an alternate hierarchy in the Account dimension, which is quite straight-forward.

This takes the same base level accounts that make up the IFRS Balance Sheet and rolls them up into different parent accounts that represent the presentation required for Solvency II. See figure below:

Stage 2

The second stage is applying the revaluations and reclassifications required to adjust the IFRS balances to Solvency II balances, and this is where the approach mentioned previously comes into play.

The starting point is the Balance Sheet IFRS value, on top of which different adjustments are layered to eventually produce the Balance Sheet Solvency II value.

As an example, let’s assume there are only three types of adjustment that need to be made (although in reality, this could be 15-20 in different areas of the Balance Sheet and depending on the granularity required).

  • Adjustment 1: To eliminate Goodwill, Deferred acquisition costs and Intangible Assets – these are valued as nil under Solvency II.
  • Adjustment 2: To reclassify Property into ‘held for own use’ and ‘other than for own use’ – this is the split required for Solvency II.
  • Adjustment 3: To revalue Financial Investments to fair value as required by Solvency II.

This provides visibility of the journey from IFRS to Solvency II.

Adjustments

In CCH Tagetik, the adjustment elements would be configured as different members in the Category dimension. For reporting purposes, the selection of the appropriate level in the Category dimension will determine whether you are reporting IFRS or Solvency II values.

Taking this a stage further, a real value-add to the approach is to calculate the adjustments (where possible). This effectively automates a substantial part of the journey from IFRS to Solvency II.

In CCH Tagetik, it is also possible to make use of the Deferred Tax calculation functionality to automatically calculate the impact on Deferred Tax of the adjustments. This functionality caters for the different fiscal policies of reporting entities, by allowing different tax rates and different accounts to be in scope for Deferred Tax impact.

Considerations

Some of these adjustments (e.g. revaluation adjustments) may require additional data in order to be calculated and so this needs to be factored into any potential solution. In the example above, consider the following:

  • Where can the fair value for investments be sourced from in order to calculate the revaluation adjustments?
  • Where can the split of ‘Held for own use’ and ‘Other than for own use’ be sourced from?
  • Can this data be automatically loaded into the CPM application or does it have to be manually input?

The above example is simplified for illustration purposes and any solution will need to consider the requirement to post manual adjustments/overrides and deal with elements such as consolidation journals.

Why it works

This approach has been successfully deployed in CCH Tagetik for a global health insurer. By using MDX calculations, Deferred Tax functionality and collecting/importing some additional source data, a significant portion of the work to produce the Solvency II Balance Sheet from the IFRS Balance Sheet has been automated. The final Solvency II Balance Sheet is then simply transferred via ETL to the Solvency II application for regulatory reporting.

The benefits are plain to see. This approach helps:

  • Reduce the amount of manual input
  • Shrink the potential for errors
  • Accelerate the preparation time for the Solvency II Balance Sheet
  • Provide transparency in the journey from IFRS to Solvency II

We are living in exciting times, witnessing the growth and implementation of AI, Machine Learning and Process Automation. Yet, so often, automation can be achieved using current and immediately available technology. I hope this short article shines a light on how CPM technology can be exploited for this very purpose.

Carl Waller
With over 25 years’ experience in finance systems across multiple industries, Carl has a proven track record in successful systems design and implementation supported by high-quality development work. For the past decade and more, Carl has been working as a consultant for Consolidation and Solvency II Pillar 3 projects, providing services such as system design and development; data integration and migration; system administration and governance; end-user support and training.

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