Financial Sector (Collection of Data) (reporting standard) determination No. 61 of 2008 GRS 120.0 (2008) Determination of Capital Base (Cth)
Financial Sector (Collection of Data) (reporting standard) determination No. 61 of 2008
Reporting Standard GRS 120.0 (2008) Determination of Capital Base
Financial Sector (Collection of Data) Act 2001
I, Charles Watts Littrell, a delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (the Act) and subsection 33(3) of the Acts Interpretation Act 1901:
REVOKE Reporting Standard GRS 120.0 (2007) Determination of Capital Base which is in force as at the date of this determination (the old standard); and
DETERMINE Reporting Standard GRS 120.0 (2008) Determination of Capital Base in the form set out in the Schedule (the new standard), which applies to the financial sector entities referred to in paragraph 2 of the new standard.
Under section 15 of the Act, I DECLARE that the new standard shall begin to apply, and the old standard shall cease to apply, on the date of registration of this instrument on the Federal Register of Legislative Instruments.
Dated 16 October 2008
[Signed]
Charles Littrell
Executive General Manager
Policy, Research and Statistics
Interpretation
In this Determination
APRA means the Australian Prudential Regulation Authority.
Federal Register of Legislative Instruments means the register established under section 20 of the Legislative Instruments Act 2003.
Schedule
Reporting Standard GRS 120.0 (2008) Determination of Capital Base comprises the 25 pages commencing on the next page.
Reporting Standard GRS 120.0 (2008)
Determination of Capital Base
Objective of this reporting standard
This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001 (the Collection of Data Act). It requires general insurers (insurers), other than foreign general insurers, to report to APRA, generally on a quarterly and annual basis, in relation to their Minimum Capital Requirement calculated in accordance with Prudential Standard GPS 110 Capital Adequacy.
This reporting standard outlines the overall requirements for the provision of this information to APRA. It should be read in conjunction with:
Form GRF 120.0 Determination of Capital Base (Form GRF 120.0) and the instructions to that form (which are attached and form part of this reporting standard); and
any prudential standards referenced in the attached instructions
Purpose
Data collected in Form GRF 120.0 is used by APRA for the purpose of prudential supervision including assessing an insurer’s compliance with the capital standards..
Application and commencement
This reporting standard applies to all insurers for reporting periods commencing on or after 1 July 2008.
Information required
An insurer must provide APRA with the information required by Form GRF 120.0 for each reporting period.
Forms and method of submission
The information required by this reporting standard must be given to APRA either:
(a)in electronic form using the ‘Direct to APRA’ application, applying one of the electronic submission mechanisms under that application; or
(b)by manually completing Form GRF 120.0 on paper and mailing the completed form to APRA’s head office at Level 26, 400 George Street, Sydney, New South Wales.
Where the information is submitted by means of an agent to whom the insurer has outsourced the function of providing the information on the insurer’s behalf, the agent may only provide the information in accordance with subparagraph 4(b) if the agent has contacted APRA and advised that the agent cannot submit the information in electronic form under subparagraph 4(a).
Note: the Direct to APRA application software and paper forms may be obtained from APRA.
Reporting periods and due dates
Subject to paragraph 6, an insurer must provide the information required by this reporting standard:
(a)in respect of each quarter based on the financial year (within the meaning of the Corporations Act 2001) of the insurer; and
(b)in respect of each financial year (within the meaning of the Corporations Act 2001) of the insurer.
Note: The annual information required from an insurer by paragraph 3 read with subparagraph 5(b), together with certain annual information required by other reporting standards, will form part of the insurer’s yearly statutory accounts within the meaning of section 3 of the Insurance Act 1973 (the Insurance Act). This means that the information must be audited in accordance with paragraph 49J(1)(a) of the Insurance Act. Under subsection 49J(3), the auditor must give the insurer a certificate relating to the yearly statutory accounts, and that certificate must specify the matters provided for in the prudential standards.
APRA may, by notice in writing, change the reporting periods, or specified reporting periods, for a particular insurer to require it to provide the information:
(a)more frequently (if, having regard to the particular circumstances of the insurer, APRA considers it necessary or desirable to obtain information more frequently for the purposes of the prudential supervision of the insurer); or
(b)less frequently (if, having regard to the particular circumstances of the insurer and the extent to which it requires prudential supervision, APRA considers it unnecessary to require the insurer to provide the information as frequently as provided by subparagraph 5(a) or (b)).
The information required by paragraph 3 of this reporting standard from an insurer must be provided to APRA by the following times:
(a)in the case of the quarterly information required by subparagraph 5(a) – 20 business days after the end of the reporting period to which the information relates; and
(b)in the case of the annual information required by subparagraph 5(b) – 4 months after the end of the reporting period to which the information relates.
Note: Paragraph 49L(1)(a) of the Insurance Act provides that the auditor’s certificate required under subsection 49J(3) of that Act must be lodged with APRA in accordance with the prudential standards. The prudential standards provide that the certificate must be submitted to APRA together with the yearly statutory accounts. Accordingly, the auditor’s certificate in relation to the annual information required by paragraph 3 read with subparagraph 5(b) must be provided to APRA by the time specified in subparagraph 7(b) of this reporting standard (unless an extension is granted under paragraph 8).
APRA may grant an insurer an extension of a due date in writing, in which case the new due date for the provision of the information will be the date on the notice of extension.
Quality control
The information provided by an insurer under this reporting standard must be the product of processes and controls that have been reviewed and tested by the appointed auditor of the insurer. This will require the auditor to review and test the systems, processes and controls supporting the reporting of the information to ensure that they produce accurate data and are otherwise reliable. This review and testing must be done on an annual basis or more frequently if necessary to enable the appointed auditor to form an opinion on the accuracy and reliability of the data.
The information provided by an insurer under this reporting standard must be subject to processes and controls developed by the insurer for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the insurer to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.
Authorisation
If the officer of an insurer provides the information required by this reporting standard:
(a)under subparagraph 4(a), the officer must digitally sign, authorise and encrypt the information (for which purpose APRA’s certificate authority will issue digital certificates, for use with the ‘Direct to APRA’ application, to officers of the insurer who have authority from the insurer to transmit data to APRA); or
(b)under subparagraph 4(b), the completed form must be signed in accordance with paragraph 13.
If an insurer provides the information required by this reporting standard through an agent under either subparagraph 4(a) or (b), the agent will not be required to sign or authorise the information. However, the insurer must:
(a)obtain from the agent a paper copy of the completed form as provided to APRA (whether it was provided under subparagraph 4(a) or (b)); and
(b)cause the paper copy to be signed in accordance with paragraph 13; and
(c)lodge the signed paper copy with APRA by mailing the completed form to APRA’s head office at Level 26, 400 George Street, Sydney, New South Wales, by the relevant due date (unless APRA, in writing, waives the requirement to lodge the signed paper copy with APRA by varying this reporting standard in relation to the insurer).
Note: APRA may, for example, determine to waive the requirement under subparagraph 12(c) where an insurer has undertaken to retain the signed copy of the completed form for an agreed period of time.
If information under this reporting standard is provided in paper form, it must be signed on the front page of the relevant completed form by either:
(a)the Principal Executive Officer of the insurer; or
(b)the Chief Financial Officer of the insurer (whatever his or her official title may be).
Minor alterations to forms and instructions
APRA may make minor variations to the instructions to a form, to clarify their application to the form without changing any substantive requirement in the form or instructions.
If APRA makes such a variation it must notify insurers in writing.
Transition
An insurer must report in relation to a reporting period ending prior to 1 July 2008 in accordance with the reporting standard that this reporting standard replaced.
Interpretation
In this reporting standard:
appointed auditor means an auditor appointed under paragraph 39(1)(a) of the Insurance Act;
business days means ordinary business days, exclusive of Saturdays, Sundays and public holidays;
capital standards means the prudential standards which relate to capital adequacy as defined in Prudential Standard GPS 001 Definitions;
Insurance Act means the Insurance Act 1973;
insurer means a general insurer within the meaning of the Insurance Act;
Note: In the forms and instructions, a reference to an ‘authorised insurer’, ‘authorised insurance entity’ or ‘licensed insurer’ is a reference to an insurer, and a reference to an ‘authorised reinsurance entity’ is a reference to an insurer whose business consists only of undertaking liability by way of reinsurance.
Principal Executive Officer means the principal executive officer of the insurer for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the insurer;
reporting period means a period mentioned in subparagraph 5(a) or (b) or, if applicable, paragraph 6.
A reference to a prudential standard means the prudential standard, made under section 32 of the Insurance Act, mentioned in the reference, as amended from time to time. If the prudential standard has been revoked and replaced, the reference shall be taken to be to the prudential standard that has replaced it.
Reporting Form GRF 120.0
Determination of Capital Base
Instruction Guide
Introduction
This form collects information for the calculation of the capital base of licensed insurers for the purposes of deriving a capital adequacy measure and to gauge compliance with the Minimum Capital Requirement (MCR) in accordance with the Capital standards[1].
[1] Capital Standards has the same meaning as in GPS 001 Definitions where it refers collectively to prudential standards relating to capital adequacy.
GPS 112 Capital Adequacy: Measurement of Capital (GPS 112) specifies the methodology for the measurement of an insurer’s capital base. The range of instruments that are eligible for inclusion in the capital base of an insurer are also outlined in GPS 112.
Audit requirements
The form relating to authorised insurance entities and reinsurance entities is required to be subject to audit review and testing.
The scope and nature of audit testing required is outlined in the applicable Auditing and Assurance Guidance Statement issued by the Auditing and Assurance Standards Board.
Information provided in the form in respect of a financial year of an insurer forms part of the insurer’s ‘yearly statutory accounts’ within the meaning of section 3 of the Insurance Act 1973. This means that:
the completed form for the financial year must be audited by the Appointed Auditor of the insurer (see paragraph 49J(1)(a) of the Act);
the insurer must make such arrangements as to enable the auditor to do this (subsection 49J(2));
the auditor must give the insurer a certificate relating to the completed form (and other completed forms that are part of the insurer’s yearly statutory accounts), which must contain statements of the auditor’s opinion on the matters required by the prudential standards to be dealt with in the certificate (subsection 49J(3));
the certificate must be lodged with APRA as provided for in the prudential standards (paragraph 49L(1)(a)), namely by the due date for lodging the form in respect of the financial year for the insurer.
Reporting entity
This form is not applicable to licensed branch (Category C) insurers.
Forms are to be completed for the following reporting entities where appropriate:
Authorised insurance entities including a mutual (refer to form ‘Licensed Insurer’); and
Authorised reinsurance entities (refer to form ‘Licensed Insurer’).
Definitions
Definitions for data reporting items required by this form have been provided where possible in the instructions under the section headed ‘Specific Instructions’.
Unit of measurement
Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.
The general requirements of AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ for translation are:
Foreign currency monetary items[2] outstanding at the reporting date must be translated at the spot rate[3] at the reporting date.
[2] Monetary items are defined to mean units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
[3] Spot rate means the exchange rate for immediate delivery.
Foreign currency non-monetary items[4] that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction.
[4] Examples of non-monetary items include amounts prepaid for goods and services (e.g. prepaid rent); goodwill; intangible assets; physical assets; and provisions that are to be settled by the delivery of a non-monetary asset.
Foreign currency non-monetary items that are measured at fair value will be translated at the exchange rate at the date when fair value was determined.
Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with AASB 139 ‘Financial Instruments: Recognition and Measurement’. However, those foreign currency derivatives that are not within the scope of AASB 139 ‘Financial Instruments: Recognition and Measurement’ (e.g. some foreign currency derivatives that are embedded in other contracts) remain within the scope of AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.
For APRA purposes equity items must be translated using the foreign currency exchange rate at the date of investment or acquisition. Post acquisition changes in equity are required to be translated on the date of the movement.
As foreign currency derivatives are measured at fair value, the currency derivative contracts are translated at the spot rate at the reporting date.
Exchange differences should be recognised in profit and loss in the period which they arise. For foreign currency derivatives, the exchange differences would be recognised immediately in profit and loss if the hedging instrument is a fair value hedge. For derivatives used in a cash flow hedge, the exchange differences should be recognised directly in equity.
The ineffective portion of the exchange differences in all hedges would be recognised in profit and loss.
Translation of financial reports of foreign operations.
A foreign operation is defined in AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ as meaning an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.
·Exchange differences relating to foreign currency monetary items that form part of the net investment of an entity in a foreign operation, must be recognised as a separate component of equity.
·Translation of financial reports should otherwise follow the requirements in AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.
Reporting period
Insurers are required to report the information in the reporting form on a quarterly and annual basis.
The quarterly information is to be completed in respect of each quarter based on the financial year of the insurer, not the calendar year.
The annual information is to be completed in respect of the financial year of the insurer.
The financial information requested in this form is to be reported as at the last day of the reporting period on a financial year to date basis of the insurer.
Reporting lag
This form must be lodged for each of the reporting units within the number of business days after the end of the quarter as set out in Reporting Standard GRS 120.0 Determination of Capital Base.
Specific instructions
To calculate the eligible capital base, enter a value in the column headed ‘Value’ for each line item applicable to the insurer. The form will calculate the amount eligible for inclusion in the column headed ‘Eligible Capital’. Total Tier 1, Tier 2 and Total capital is also calculated.
Refer to GPS 112 for further information on the method of calculation and definitions.
Note: An insurer must ensure that any ‘component of capital’[5] included in the insurer’s capital satisfies, in both form and substance, all applicable requirements of GPS 112 for the particular category of capital in which it is included. An insurer must not incorporate a component of capital as part of its capital base where that component does not meet, or is inconsistent with the requirements of GPS 112.
[5] Component of capital has the same meaning as in GPS 112, where it is any form of capital defined in GPS 112 as eligible for inclusion in Tier 1 capital or Tier 2 capital.
An insurer must not include a component of capital in a particular category[6] of its capital base if that component, when considered in conjunction with other related transactions that affect its overall economic substance, could be reasonably considered not to satisfy fully the requirements of GPS 112 for components of that category of capital.
[6] Category of capital has the same meaning as in GPS 112. It refers to a group of components of capital, namely Fundamental Tier 1 capital, Residual Tier 1 capital (both Non-innovative Residual Tier 1 capital and Innovative Tier 1 capital), Upper Tier 2 capital and Lower Tier 2 capital, as appropriate.
Tier 1 capital
Tier 1 capital comprises the highest quality capital elements, including the proceeds of instruments that are both permanent and non-cumulative in nature. Tier 1 capital (net of required deductions) must constitute at least 50% of an insurer’s capital base.
1.1.Fundamental Tier 1 capital
1.1.1.Paid-up ordinary shares
This item must correspond to paid-up ordinary share capital on issue reported in GRF 300.0 Statement of Financial Position.
1.1.2.Reserves
This item must correspond to the difference between the items ‘Total Reserves’ and ‘Total Asset revaluation reserve’ reported in GRF 300.0 Statement of Financial Position. Do not use the figures that are disclosed in the reporting insurers annual financial accounts prepared in accordance with Australian accounting standards.
1.1.3.Retained profits or accumulated losses at end of Reporting Period
This item must equal Retained profits or accumulated losses at end of Reporting Period as disclosed in GRF 310.0 Statement of Financial Performance.
This includes the current year’s earnings net of expected dividends and tax expenses as reported in GRF 310.0 Statement of Financial Performance.
1.1.4.Technical provisions in excess of liability valuation
Include in this item the value of technical insurance provisions (net Premium Liabilities and Outstanding Claims Liabilities) that are recognised in GRF 300.0 Statement of Financial Position, that are in excess of the technical provisions required by GPS 310 Audit and Actuarial Reporting and Valuation. This is calculated on a net basis as per the following:
Calculate the total OCP and Premium Liabilities net of Reinsurance and Non Reinsurance Recoveries (including input tax credits) as reported in GRF 300.0 Statement of Financial Position (GRF 300.0) and GRF 301.0 Reinsurance Assets and Risk Charge (GRF 301.0) as under:
·Sum of the insurance liabilities:
Current Liabilities
· Item 18. (GRF 300.0) “Outstanding Claims Provision”; plus
· Item 19. (GRF 300.0) “Premium Liabilities”; plus
Non-Current Liabilities
· Item 27. (GRF 300.0) “Outstanding Claims Provision”; plus
· Item 28. (GRF 300.0) “Premium Liabilities”;
·Less sum of reinsurance recoveries and non reinsurance recoveries (including input tax credits):
· Item 2.4.1 and item 7.3.1 (GRF 300.0) Total net amounts recoverable on reinsurance contracts reported in item 2.4 and item 7.3 (GRF 300.0) respectively, that relate to claims recognised in the calculation of the OCP (i.e. other than reinsurance recoveries relating to claims that have been paid); plus
· Item 2.5 and item 7.4 (GRF 300.0) Expected reinsurance recoveries on premium liabilities; plus
· Item 2.2.2.1. (GRF 300.0) Total net amounts recoverable (other than reinsurance recoveries receivable) that are reported in item 2.2.2 and that do relate to claims recognised in the calculation of insurance liabilities that have not been paid– relating to OCP – Current Assets; plus
· Item 7.1.2.1. (GRF 300.0) Total net amounts recoverable (other than reinsurance recoveries receivable) that are reported in item 7.1.2 and that do relate to claims recognised in the calculation of insurance liabilities that have not been paid.– relating to OCP – Non-current Assets; plus
· Item 2.2.2.2 (GRF 300.0) Total net amounts recoverable (other than reinsurance recoveries receivable) that are reported in item 2.2.2 and that do relate to claims recognised in the calculation of insurance liabilities that have not been paid – Premium Liabilities – Current Assets; plus
· Item 7.1.2.2 (GRF 300.0) Total net amounts recoverable (other than reinsurance recoveries receivable) that are reported in item 7.1.2 and that do relate to claims recognised in the calculation of insurance liabilities that have not been paid – Premium Liabilities – Current Assets; plus
·Less the sum of the insurance liabilities net of reinsurance and non reinsurance recoveries as reported in GRF 210.0 Outstanding Claims Provision – Insurance Risk Charge and GRF 210.1 Premium Liabilities – Insurance Risk Charge:
· GRF 210.0 Outstanding Claims Provision - Insurance Risk Charge – ‘Total "Net" OCP’ (OCP Net of Reinsurance and Non Reinsurance Recoveries) for all classes of business; plus
· GRF 210.1 Premium Liabilities - Insurance Risk Charge - ‘Total "Net" Premium Liabilities’ (Premium Liabilities Net of Expected Reinsurance and Non Reinsurance Recoveries) for all classes of business.
Where the excess is positive, this is reported in Item 1.1.4 of GRF 120.0 Determination of Capital Base - Technical provisions in excess of liability valuation.
Essentially the total of net OCP and net Premium Liabilities recognised in GRF 300.0 Statement of Financial Position – Licensed Insurer cannot be less than the total of net OCP and net Premium Liabilities per GRF 210.0 Outstanding Claims Provision - Insurance Risk Charge and GRF 210.1 Premium Liabilities – Insurance Risk Charge respectively.
Note: If the technical insurance provisions recognised by the insurer in GRF 300.0 Statement of Financial Position are less than the value required by GPS 310 Audit and Actuarial Reporting and Valuation (as reported in GRF 210.0 Outstanding Claims Provision – Insurance Risk Charge and GRF 210.1 Premium Liabilities – Insurance Risk Charge), the amount of the deficiency must be recognised in GRF 310.0 Statement of Financial Performance as a claims expense (either relating to Premium Liabilities or Outstanding Claims Provision). The reduction in current year profit from GRF 310.0 Statement of Financial Performance is then reflected in Tier 1 capital.
1.1.5.Tax effect of excess technical provision (do not deduct tax effect if a Deferred tax asset has been recognised in relation to the excess technical provision)
Any excess of technical insurance provisions added back to Tier 1 capital must be adjusted for the tax effect (i.e. the corporate tax rate multiplied by the amount added back).
Note: this requirement is not mandating the recognition of a deferred tax asset in GRF 300.0 Statement of Financial Position.
The adjustment for the tax effect is not required where the excess technical insurance provision has been included in the recognition of a deferred tax asset associated with the recognition of Premium Liabilities and Outstanding Claims Liabilities in GRF 300.0 Statement of Financial Position. Deducting the tax effect in this case would constitute double counting, as Deferred Tax Assets (DTA) are deducted from Tier 1 capital (net of any Deferred Tax Liabilities).
1.1.6.Total Fundamental Tier 1 capital
This represents the total of items 1.1.1 – 1.1.5.
1.2.Residual Tier 1 capital
1.2.1.Non-innovative residual Tier 1 capital instruments
This item includes the perpetual non-cumulative preference shares that satisfy the relevant criteria set out in GPS 112.
1.2.2.Innovative Tier 1 capital instruments
This item includes all other residual Tier 1 capital instruments that satisfy the relevant criteria set out in GPS 112.
1.2.3.Total Residual Tier 1 capital
This represents the total of Items “1.2.1 and 1.2.2” and will be automatically calculated.
Limitations – in accordance with GPS 112
The amount of Tier 1 capital included in an insurer’s capital base is subject to the following limits:
(a)Fundamental Tier 1 capital must constitute at least 75 percent of net Tier 1 capital, defined as the sum of Fundamental Tier 1 and Residual Tier 1 capital less Tier 1 deductions.
(b)Residual Tier 1 capital is limited to 25 per cent of net Tier 1 capital. Any excess amount is counted as Upper Tier 2 capital.
Innovative Tier 1 capital is limited to 15 percent of net Tier 1 capital, except for insurers that are subject to APRA-approved transition arrangements. Any excess amount is counted as Upper Tier 2 capital.
1.3.Tier 1 capital (before deductions)
This figure is automatically calculated and represents the total Tier 1 capital before deductions (i.e. total of items 1.1.6 and 1.2.3). Item 1.2.3 will automatically adjust for the 25% limit on Residual Tier 1 capital that is included in Tier 1 capital.
1.4.Deductions from Tier 1 capital
The amount of Tier 1 capital to be included in an insurer’s capital base will be net of the following deductions:
Goodwill;
Other intangible assets;
Deferred tax assets (net of any deferred tax liabilities);
Surplus in defined benefit superannuation fund;
Deficit in defined benefit superannuation fund;
Holdings of own Tier 1 capital instruments;
Net unrealised fair value gains (losses) from changes in the GI's own credit worthiness;
Net unrealised gains (losses) on effective cash flow hedges;
Reinsurance recoveries related to reinsurance contracts that do not meet the reinsurance document test;
Reinsurance assets receivable under reinsurance contracts that do not meet governing law requirements;
For inwards reinsurance business – Profits on proportional reinsurance treaties for which the underlying risks have not been accepted by the direct insurer and the treaties are subject to the premium receivables deduction;
Other deductions;
Variation in deduction by other adjustments approved by APRA.
These are explained further below:
1.4.1.Goodwill
The value of goodwill that is to be disclosed in this line item is the sum of the following:
·The total amortised value of goodwill (unidentifiable intangible asset) as recognised in item 11.1 minus item 11.2 in GRF 300.0 Statement of Financial Position; plus
·The component of the value of ‘Total other investments’ (i.e. investments in controlled entities) which represents purchased goodwill and other intangible assets (i.e. current value less value of identifiable net tangible assets). This is reported in line items 9.5.1.1. and 9.5.2.1 of GRF 300.0 Statement of Financial Position; plus
·The component of the value of ‘Unlisted equities – direct holdings’ which represents purchased goodwill and other intangible assets (i.e. current value less value of identifiable net tangible assets) in relation to the acquisition of controlled entities. This is reported in item 5.1 of GRF 140.1 Investments – Direct Equity Holdings and Risk Charge.
1.4.2.Other intangible assets
Disclose the value of identifiable intangible assets after amortisation and impairment recognised in item 11.5 of GRF 300.0 Statement of Financial Position.
1.4.3.Deferred tax assets (net of any deferred tax liabilities)
Disclose the value of Deferred Tax Assets (DTA) recognised in items 4.4 and 12.4 of GRF 300.0 Statement of Financial Position, net of any Deferred Tax Liabilities (DTL) that are also recognised in items 21.2 and 30.1 of GRF 300.0 Statement of Financial Position. The value disclosed must not be negative (i.e. a net DTL balance after deducting DTA). Accordingly if the balance of DTL exceeds DTA, zero must be disclosed.
1.4.4.Surplus in defined benefit superannuation fund
Disclose the value of any surplus, net of deferred tax liabilities, in any defined benefit superannuation fund of which the insurer is an employer-sponsor, unless otherwise approved, in writing, by APRA. Any excluded surplus must reverse any associated deferred tax liability from Tier 1 capital. The amount reported in GRF 120.0 Determination of Capital Base must not be greater than the amount reported in item 13.2 of GRF 300.0 Statement of Financial Position.
DTL should not be counted twice in 1.4.3 and at 1.4.4.
1.4.5.Deficits in defined benefit superannuation fund
Report the value of any deficit in a defined benefit superannuation fund of which the insurer is an employer-sponsor and that is not already reflected in Tier 1 capital.
The amount reported in GRF 120.0 Determination of Capital Base must only include deficits not already disclosed in items 23.2 plus item 33.2 of GRF 300.0 Statement of Financial Position.
1.4.6.Holdings of own Tier 1 capital instruments
Disclose the value of holdings of own Tier 1 capital instruments of the insurer.
1.4.7.Net unrealised fair value gains (losses) from changes in the GI's own credit worthiness
This item only applies to general insurers that have designated their own debt instruments at fair value under the fair value option in AASB 139.
Deduct/(add back) any unrealised fair value gains/(losses) included in Tier 1 capital (before deductions) arising from changes in the reporting of GI’s own credit worthiness (e.g. reduction in fair value of the GI’s outstanding debt due to change in credit rating).
1.4.8.Net unrealised gains (losses) on effective cash flow hedges
Disclose the value of cumulative fair value gains and losses on effective cash flow hedges reflected in retained earnings or reserves included in Tier 1 capital which do not offset gains or losses on revaluations in reserves included in Tier 1 capital. Deduct the gains on hedges and add back the losses.
1.4.9. Reinsurance recoveries related to reinsurance contracts that do not meet the reinsurance documentation test
If the insurer has not complied with the threshold levels of reinsurance documentation set out in paragraph 35(b) of GPS 112, during the first and second transition periods, then all reinsurance assets[7] will be deducted from the Tier 1 capital of an insurer.
[7] Reinsurance assets has the same meaning as in GPS 001 and refers to reinsurance assets net of doubtful debts.
Compliance with the thresholds is assessed by calculating the percentage of reinsurance recoveries that are derived from reinsurance arrangements meeting the reinsurance documentation test compared with total reinsurance recoveries.
A reinsurance arrangement meets the reinsurance documentation test if the arrangement:
(a)complies with the two month rule and six month rule under GPS 230 Reinsurance Management;
(b)fails to comply with the those rules as at the date of the relevant deadline but:
(i) subsequent to the deadline specified under the two month rule, the reinsurance arrangement is documented in accordance with the other requirements of the two month rule (in which case the reinsurance arrangement is treated as meeting the reinsurance documentation test until the reinsurance arrangements fail the six month rule); or
(ii) subsequent to the deadline specified under the six month rule, the reinsurance arrangement is documented in accordance with the other requirements of the six month rule; or
(c)is otherwise treated by APRA under GPS 230 Reinsurance Management as complying with the two month rule and six month rule.
After the second transition period, reinsurance recoveries receivable under each reinsurance arrangement that does not meet the reinsurance documentation test will be deducted from the Tier 1 capital of the insurer.
The key dates in the transition periods, in relation to an insurer, are as follows:
Table 1
| Balance Dates | 30 June | 30 September | 30 November | 1 December | 31 December | 31 March |
| First day of first transition period | 30 June 2007 | 30 September 2007 | 30 November 2007 | 1 December 2007 | 31 December 2007 | 31 March 2008 |
| Last day of first transition period | 29 June 2008 | 29 September 2008 | 29 November 2008 | 30 November 2008 | 30 December 2008 | 30 March 2009 |
| First day of second transition period | 30 June 2008 | 30 September 2008 | 30 November 2008 | 1 December 2008 | 31 December 2008 | 31 March 2009 |
| Last day of second transition period | 29 June 2009 | 29 September 2009 | 29 November 2009 | 30 November 2009 | 30 December 2009 | 30 March 2010 |
The threshold levels of reinsurance documentation are as follows:
Table 2
| Threshold level of reinsurance documentation | Application period |
| 60 per cent of reinsurance recoveries receivable by value must be derived from reinsurance arrangements that meet the reinsurance documentation test | First transition period |
| 80 per cent of the reinsurance recoveries receivable by value must be derived from reinsurance arrangements that meet the reinsurance documentation test | Second transition period |
The figure for Reinsurance recoveries related to reinsurance contracts that do not meet the reinsurance documentation test represents the value of item 1.8 plus item 2.6 plus item 3.6 recognised in GRF 301.0 Reinsurance Assets and Risk Charge.
This figure needs to be manually entered into this data field in GRF 110.0 Minimum Capital Requirement.
1.4.10.Reinsurance assets receivable under reinsurance contracts that do not meet governing law requirements
Report all reinsurance assets receivable under each reinsurance contract entered into by the insurer incepting on or after 31 December 2008 that do not meet the requirements of paragraph 31 of Prudential Standard GPS 230 Reinsurance Management.
This figure needs to be manually entered into this data field in GRF 120.0 Determination of Capital Base. The amount should represent the value of item 1.9 plus item 2.7 plus item 3.7 recognised in GRF 301.0 Reinsurance Assets and Risk Charge.
1.4.11.Profits on proportional reinsurance treaties for which the underlying risks have not been accepted by the direct insurer and the treaties are subject to the premium receivable deduction – (applicable only for reinsurance business)
GPS 112 states that the amount of Tier 1 capital to be included in an insurer’s capital base will be net of ‘Premium receivables deduction’. This deduction is applicable for proportional reinsurance treaties underwritten by a reinsurer where the underlying risks have not yet been accepted by the direct insurer.
The premiums receivable deduction is calculated in the following manner:
Premium receivables deduction = [(Net premium receivables[8] - net premiums liabilities[9]) * (1 –tax rate[10])] – [(net premiums liabilities * premiums liability risk capital factor * capital buffer factor (if applicable)].
[8] For the purposes of this equation, “net premium receivables” is the premium receivables net of doubtful debts, premium paid/payable for retrocession and exchange commissions.
[9] For the purposes of this equation, “net premiums liabilities” is the premiums liabilities net of recoveries.
[10] The tax rate is the corporate taxation rate applying to the proportional reinsurance contract (in Australia or a foreign country).
An insurer may apply to APRA for a capital buffer factor to be used in the determination of its premium receivables deduction. APRA will consider the application and may determine an appropriate capital buffer factor in writing.
Each item in this equation relates only to the relevant fraction[11] of the portfolio of proportional reinsurance treaties for which underlying risks have not yet been accepted by the direct insurer. A negative premium receivables deduction is not to be taken into account.
[11] The relevant fraction is: (expected direct premium under the treaty until the next review date less direct premium written under the treaty) divided by expected direct premium under the treaty until the next review date. The relevant fraction cannot be less than zero.
1.4.12. Other deductions
Disclose any other Tier 1 capital deductions (refer GPS 112) including:
·Undistributed profit or loss in an associate.
Disclose any portion of current year earnings or retained earnings which represents any amounts deriving from the insurer’s share of undistributed profits or loss in an associate, under equity accounting. This amount must be included in Upper Tier 2 capital.
·Negative movement over the amount available in the revaluation reserve
Disclose any deficit after taking into account adjustments in the amount available in the respective revaluation reserves for the following items, to the extent not already accounted for in current year earnings or retained earnings:
§Property not held at fair value;
§Investments in subsidiaries not held at fair value; or
§Investment in associates, including any excess of the share of losses in associates under equity accounting.
·Identified impairment of certain assets.
Disclose any identified impairment of an asset where the impairment has not already been taken into account in profit or loss or the impairment has been incorporated in fair value changes captured in an asset revaluation reserve included in Upper Tier 2 capital. This will include the value of any deficit in asset revaluation reserves included in Upper Tier 2 capital after taking into account all adjustments.
·Revaluation reserves included in Upper Tier 2 capital
Disclose any amounts included in revaluation reserves in Upper Tier 2 capital which would otherwise have been included in Tier 1 capital.
·Shortfalls in Tier 2 capital
Disclose an amount equivalent to the shortfall in the insurer’s Tier 2 capital, where the insurer does not hold sufficient capital to absorb required deductions from Tier 2 capital in accordance with GPS 112.
1.4.13. Variation in deductions by other adjustments approved by APRA
Include any additions to Tier 1 capital or reduction in deductions that have been approved by APRA, including transition amounts affecting Tier 1 capital.
1.4.14. Total deductions from Tier 1 capital
This item represents the total of items 1.4.1 to 1.4.13 and is automatically calculated by the form.
1.5.Tier 1 capital (net of deductions)
This figure is automatically calculated and represents ‘Tier 1 capital (before deductions)’ less ‘Total Deductions from Tier 1 capital’.
Net Tier 1 capital must constitute at least 50% of an insurer’s required capital base.
Tier 2 capital
Limitations – in accordance with GPS 112
Tier 2 capital is divided into Upper Tier 2 and Lower Tier 2 capital. Total Tier 2 capital, net of all specified deductions and amortisation, is limited to a maximum of 100 per cent of an insurer’s net Tier 1 capital.
Total Lower Tier 2 capital, net of all specified deductions and amortisation, is limited to a maximum of 50 per cent of an insurer’s net Tier 1 capital.
An insurer that does not hold sufficient capital to absorb required deductions from Tier 2 capital must deduct an amount equivalent to the shortfall in its Tier 2 capital from its Tier 1 capital.
2.1.Upper Tier 2 capital
2.1.1.Ineligible Tier 1 capital
This item includes any capital amounts otherwise meeting APRA’s requirements for Tier 1 capital instruments (specified in GPS 112) that are ineligible for inclusion as Tier 1 capital due to the limits specified in GPS 112. This amount is calculated automatically.
2.1.2.Asset revaluation reserve
Upper Tier 2 capital includes:
45 per cent of pre-tax revaluation reserves of:
(a)Property not held at fair value;
(b)Investments in subsidiaries not held at fair value, other than subsidiaries that APRA deems part of an Extended Licensed Entity (refer to GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114)); and
(c)Post-acquisition reserves of associates:[12] This includes, under equity accounting, an insurer’s share of undistributed profits, plus any share of asset revaluations in associates or any other revaluation of investments in associates. The amount recognised must be net of fair value gains and losses and any gains or losses on hedges offsetting revaluation of investment in associates included in reserves.
[12] Associates as defined in the Australian Accounting Standards.
The amount of these reserves to be included in Upper Tier 2 is limited to 45% of pre-tax revaluation reserves.
The pre-tax revaluation reserve as described above includes cumulative unrealised gains or losses on effective cash flow hedges. Where a revaluation is calculated net of hedges, the amount of hedges concerned must be excluded from reported Tier 1 capital, that is, the gains or losses on hedges must be deducted from or added back to Tier 1 capital.
The amount recognised in Upper Tier 2 capital must be net of fair value gains and losses and any gains or losses on hedges offsetting revaluation of investment in associates included in reserves.
2.1.3.Other Tier 2 capital approved by APRA
Include any other item specified in GPS 112 eligible for inclusion in Upper Tier 2 capital.
2.1.4.Perpetual cumulative preference shares
Perpetual cumulative preference shares must satisfy the relevant criteria set out in GPS 112 for inclusion as Upper Tier 2 capital.
2.1.5.Mandatory convertible notes and similar capital instruments
Perpetual cumulative mandatory convertible notes must satisfy the relevant criteria set out in GPS 112 for inclusion as Upper Tier 2 capital.
2.1.6.Perpetual subordinated debt
Perpetual cumulative subordinated debt must satisfy the relevant criteria set out in GPS 112 for inclusion as Upper Tier 2 capital.
2.1.7.Other approved instruments of a permanent nature
Disclose the value of any other hybrid capital instruments of a permanent nature approved by APRA.
2.1.8.Deductions
2.1.8.1 Holdings of own Upper Tier 2 capital instruments
Disclose the value of own holdings of Upper Tier 2 capital instruments.
2.1.9.Total Upper Tier 2 capital
This item represents the total of items 2.1.1 – 2.1.7 less deductions reported in 2.1.8, and is automatically calculated by the form.
2.2.Lower Tier 2 capital
Limitations – in accordance with GPS 112
Total Lower Tier 2 capital, net of all specified deductions and amortisation, is limited to a maximum of 50 per cent of an insurer’s net Tier 1 capital. This limit is automatically calculated by the form.
2.2.1.Term subordinated debt
Term subordinated debt must satisfy the relevant criteria set out in GPS 112 for inclusion as Lower Tier 2 capital.
2.2.2.Limited life redeemable preference shares
Limited life redeemable preference shares must satisfy the relevant criteria set out in GPS 112 for inclusion as Lower Tier 2 capital.
2.2.3Any other similar limited life capital instrument
These instruments must satisfy the relevant criteria set out in GPS 112 for inclusion as Lower Tier 2 capital.
The amount of the instrument eligible for inclusion in Lower Tier 2 capital is to be amortised on a straight line basis at a rate of 20 per cent per annum over the last four years to maturity as follows:
| Years to maturity | Amount eligible for inclusion in Lower Tier 2 capital |
| More than 4 | 100% |
| Less than and including 4 but more than 3 | 80% |
| Less than and including 3 but more than 2 | 60% |
| Less than and including 2 but more than 1 | 40% |
| Less than and including 1 | 20% |
2.2.4. Deductions
2.2.4.1 Holdings of own Lower Tier 2 capital instruments
Disclose the value of own holdings of Lower Tier 2 capital instruments.
2.2.5. Total Lower Tier 2 Capital
Represents the total of items 2.2.1 – 2.2.3 less deductions reported in 2.2.4. This limit is automatically calculated by the form.
2.3 Total Tier 2 Capital
Represents the total of items 2.1.9 “Total Upper Tier 2 capital” and item 2.2.5 “Total Lower Tier 2 Capital”.
Total Capital Base
Represents the total of items 1.5 “Tier 1 capital (net of deductions)” and 2.3 “Total Tier 2 Capital”.
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