Question ID: 99
Regulation Reference: Guidelines on submission of information to NCAs (Preparatory phase)
Article: 35
Template: S.06.02
Status: Final
Date of submission: 25 Jun 2014
Question
Please can you clarify the definition of acquisition price as shown in cell A25 on the S.06.02 template, specifically the treatment of transaction costs associated with the purchase.
Within the insurance entity’s statutory financial statements under IFRS the capitalised cost of a financial instrument purchase can vary due to the treatment of the associated transaction costs. If the asset is classified as Available for Sale the transaction costs are included in the capitalised book cost of the asset whilst if the asset is classified as Fair Value through Profit and Loss the transaction costs should be expensed.
Should the acquisition price in A25 on S.02.06 exclude transaction costs regardless of the insurance entity’s financial statement’s treatment?
Please also clarify the treatment of transaction costs when considering the gain/loss value in cell A15 on the D3 template. The associate log description for cell A15 indicates that the gains and losses are calculated as the difference between the selling value and Solvency II value at the end of the prior reporting period (or, in case of investments acquired during the period, the acquisition value).
Which of the following should be used as the acquisition value in the gain/loss value calculation reported in A15 on D3?
1) the insurance entity's IFRS financial statements treatment of the transaction costs based on their IFRS category assignment; or
2) include transaction costs on ALL purchases; or
3) exclude transaction costs on ALL purchases.
EIOPA answer
IAS 39 Financial Instruments defines transaction costs as incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (see Appendix A, paragraph AG13). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
According to IAS 39 transaction costs may or may not be added to the fair value of a financial instrument according to the relevant category.
Solvency II asks for a market-consistent valuation of assets, which would translate in “fair value” according to IAS 39. Transaction costs are - by definition – not part of a fair value. Accordingly, in order to achieve a fair comparison of actual Solvency II values and historical acquisition values/acquisition prices it only makes sense not to include transaction costs in those values/prices.