Financial Sector (Collection of Data) (reporting standard) determination No. 67 of 2008 - GRS 140.1 (2008) - Investments - Direct Equity Holdings and Risk charge
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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 140.1 Investments – Direct Equity Holdings and Risk Charge.
Basis of preparation
In completing this form unless otherwise specifically stated below, it is recommended that general insurers follow the Australian accounting standards where possible, regarding the interpretation, recognition and measurement of investments notably AASB 1023 ‘General Insurance Contracts’.
The aggregate value of investments disclosed in the forms listed below must agree to the total of amounts reported as both current and non-current assets in items 3 and 8 of GRF 300.0 Statement of Financial Position.
GRF 140.0 Investments – Direct Interest Rate Holdings and Risk Charge
GRF 140.1 Investments – Direct Equity Holdings and Risk Charge
GRF 140.2 Investments – Direct Property Holdings and Risk Charge
GRF 140.3 Investments – Loans and Advances and Risk Charge
GRF 140.4 Investments – Indirectly Held by the Insurer and Risk Charge
APRA applies the notion of activities integral to insurance operations for its regulatory reporting.[4] APRA does not follow the classification basis in AASB 1023 ‘General Insurance Contracts’. Therefore, the value of these investments reported in this form (and all the above forms) may or may not equate to the value of investments deemed to be assets backing insurance liabilities. For APRA regulatory reporting purposes, investments integral to the entity's general insurance activities means[5] investments that are controlled by the entity in the conduct of its general insurance activities.
Investments reported in this form (and other forms listed above) that are integral to the entity's general insurance activities must be measured at fair value. These investments must not be valued at cost. Fair value has the same meaning as defined in the AASB 132 ‘Financial Instruments: Presentation’, that is, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction, and is determined as follows:
The quoted market price (i.e. bid or ask price) in an active and liquid market; or
When there is infrequent activity in a market, and the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available – a realistic estimate of fair value on the basis of the results of a valuation technique that makes maximum use of market inputs, and relies as little as possible on entity-specific inputs.
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Derivative instruments that are used to hedge investments (other than for listed equity investments) that are included in the above forms are not to be reported in these forms, they are to be reported in GRF 160.0 Derivatives Activity and Risk Charge.
Derivatives are generally defined as those instruments or contracts, where the value is based on other products, either financial or real, and/or on prices associated with financial products.
Derivative contracts involve:
Future delivery, receipt or exchange of financial items such as cash or another derivative instrument, or
Future exchange of real assets for financial items where the contract may be tradeable and has a market value.
The contracts can either be binding on both parties (e.g. as with a currency swap) or subject to the exercise by one party of a right contained in the contract (as with options).
Where the insurer holds derivatives over listed equities, the investment risk capital charge applicable to all holdings of listed equities under paragraph 10 of GPS 114 is replaced with the equity market risk component. The equity market risk component is equal to 16 per cent of the absolute value of the net exposure to listed equities and derivatives over listed equities (where the derivatives exposure for options is calculated on a delta-weighted basis).
The equity basis risk component applies only to derivatives over listed equities for which the notional equity position is negative and will be a specified percentage of the absolute value of the notional equity position. The percentage is the lesser of eight per cent and 16 x (100 per cent – overlap percentage). The overlap percentage measures the effectiveness of the hedge between the derivative and the physical portfolio it is being used to hedge and is equal to the sum of the lesser of A and B for each stock in that portfolio where:
(a) A is the stock’s proportionate weight in that portfolio; and
(b) B is the stock’s proportionate weight in the index on which the derivative is based.
A derivative that is not being used to hedge a portfolio will have a basis risk percentage of eight per cent. A portfolio may consist of one or more stocks.
The equity market risk component and the equity basis risk components are to be calculated under GRF 140.1 Investments – Direct Equity Holdings and Risk Charge, regardless of whether they are held directly or indirectly (where the insurer has elected to apply the look-through basis for indirectly held listed equities). The counterparty risk component relating to derivatives are required to be calculated using GRF 160.0 Derivative Activity and Risk Charges.
For investments reported in this form, changes in the values at which such investments are measured must be recognised as revenues (or losses) in GRF 310.0 Statement of Financial Performance and GRF 310.3 Investment and Operating Income and Expense in the reporting period in which the changes occur.
Accounting Standard AASB 116 ‘Property, Plant and Equipment’ does not apply to such investments.
Holding of Units in Unit Trusts
Where the insurer’s investments are represented by holdings of units in unlisted or listed managed investment vehicles/entities, the following reporting is required:
Units are to be reported in GRF 140.4 Investments – Indirectly Held by the Insurer and Risk Charge. This form requires amongst other things, disclosure of the value of the unit holding according to the nature of the underlying market exposure (i.e. interest rate related, equity related, property related). If the units are held in a diversified or balanced trust, the investment holding is to be disclosure in accordance with the funds advised asset allocation.
Holding must be disclosed as unlisted or listed units.
Exception
If the units are held in a related/controlled entity of the insurer (i.e. a dedicated investment management entity for the Insurer), the Insurer may apply to APRA to have such entities approved as part of its Extended Licensed Entity (ELE). This is set out in GPS 114. Once approved by APRA this will allow the insurer to look through the legal structures involved and to consolidate the balance sheet of the related entity with its own for the purposes of determining the Investment Risk Capital Charge. If the insurer has an approved ELE, the underlying individual securities/investments supporting the units held by the licensed insurer are to be disclosed in the investment returns.
Look-through Basis
For assets of an insurer or its ELE held under a trust (other than a cash management trust), the insurer may apply the Investment Capital Factors applicable to the underlying assets (including derivatives) of the trust, if the insurer has information on the underlying assets.
Where the insurer has elected to apply the look-through basis to calculate the investment capital factors and the underlying assets of the trust includes listed equities; then the investment capital factors associated with the insurer’s share of the listed equities are to be calculated in GRF 140.1 Investments – Direct Equity Holdings and Risk Charge.
APRA may require an insurer to apply different Investment Capital Factors to different components of a hybrid instrument (with both equity and debt features such as embedded derivatives).
Securities Purchased (Sold) under agreements to resell (repurchase) and stock lending/borrowing
Treatment is to be consistent with AASB 139 ‘Financial Instruments: Recognition and Measurement’
Where the transferee of the security effectively receives a lender’s rate of return, or a return that does not correlate with ownership of the securities (i.e. the risks and rewards of ownership of the underlying securities is not effectively transferred), these transactions are to be accounted for as collateralised borrowing or lending activities.
Under this method of accounting for transactions that satisfy the above, do not adjust (i.e. increase or decrease) the physical Investment security holdings/portfolios (interest rate and equity investments) for the securities that are subject to these agreements. For the required prudential treatment for securities meeting the above conditions, refer to treatment as noted in the instructions for GRF 300.0 Statement of Financial Position.
Securities Transacted not Settled (i.e. trade date accounting)
For the purpose of the APRA forms, include market related securities that are recorded on a trade date basis and transacted in accordance with accepted financial market settlements periods. Such securities are to be included in the respective investments forms. These do not constitute forward asset purchases for the purposes of GRF 130.0 Off Balance Sheet Business – Credit Substitutes Provided and Risk Charge.
Securities Listed on a Recognised Exchange
It will generally be appropriate to treat an exchange organisation as ‘recognised’ where it meets the following criteria:
it is subject to authorisation, licensing or other means of recognition by a government or other competent authority;
it has rules, issued or approved, by the government or other competent authority defining the conditions:
for the operation of the exchange;
for access to the exchange; and
that must be satisfied by a contract before it can be dealt on the exchange;
it has a clearing mechanism that provides for contracts dealt through the exchange;
it functions regularly;
the exchange has a prudent and frequent margining system where relevant;
the exchange requirements settlement on a particular day as applicable;
members of the exchange are themselves subject to supervision by the exchange or a competent authority; and
the operations of the exchange in turn are supervised by government or other competent authority.
Related parties
Where this term is used or referenced in these forms, Related Parties is to be interpreted consistently with its definition and meaning as contained in AASB 124 ‘Related Party Disclosures’.
In accordance with AASB 124, related party means a party that directly or indirectly through one or more intermediaries:
(a) controls, is controlled by or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries);
(b) has significant influence over the entity or has joint control over the entity; or
(c) is an associate (as defined in AASB 128 ‘Investments in Associates’) of the entity; or
(d) is a joint venture in which the entity is a venturer (see AASB 131 ‘Interests in Joint Ventures’); or
(e) is a member of the key management personnel of the entity or its parent; or
(f) is a close member of the family of any individual referred to in (a), (b) or (e); or
(g) is an entity that its controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (e) or in (f); or
(h) is a post-employment benefit plan for the benefit of the employees of the entity, or of any entity that is a related party of the entity.
Fair Value
Investments reported in this form that are integral to the entity's general insurance activities must be measured at fair value.
Investment Capital Factor %
This column for each form discloses the appropriate investment capital factor for the asset type in accordance with GPS 114.
Investment Risk Charge
This column for each form will calculate the appropriate investment risk charge in accordance with GPS 114.