Section Specific instructions - Financial Sector (Collection of Data) (reporting standard) determination No. 61 of 2008 - GRS 120.0 (2008) - Determination of Capital Base - Specific instructions | Zoe
Financial Sector (Collection of Data) (reporting standard) determination No. 61 of 2008 - GRS 120.0 (2008) - Determination of Capital Base
Specific instructionsSpecific instructions
Start here
Get a plain-English read of Specific instructions
Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 61 of 2008 - GRS 120.0 (2008) - Determination of Capital Base.
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.
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.
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.
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:
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.
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.
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.
2.2.3 Any 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”.