would require the proposed capital position statement to include disclosure of regulatory capital requirements.
It would also require a table of movements in total available capital and regulatory capital requirements, setting out the main changes in the period.
Subject to certain transitional provisions it was intended that the proposed standard would be effective for accounting periods ending on or after 23 December 2004. FRED34 thereby sought to take advantage of a ‘window of opportunity’ in 2004, before IFRS4 comes into effect, during which the ASB could itself require changes in UK accounting policies (subject to the legal requirements of the Companies Act which also continue in force for 2004)35.
How do the ASB proposals differ from IFRS4? With regard to options and guarantees, at least for the with-profits funds within its scope, the ASB requires them to be valued at fair value (or failing that by an appropriate stochastic modelling technique), whereas IFRS4 only requires the related cash flows to ‘be considered’ as part of the liability adequacy test.
With regard to embedded values, IFRS4 would allow those already incorporating embedded values into their main accounts (including mainly UK banking groups but also Irish insurance groups) to continue to do so during ‘Phase I’, but would not normally allow those not already doing so (including UK insurance groups) to change to doing so unless restrictions were imposed to exclude investment risk margins and to avoid valuing future investment management fees at more than fair value. The ASB would require these restrictions to be introduced by those already reporting on an embedded value basis,36 and would not allow others to begin doing so ahead of IFRS4. It remains unclear what substantive differences remain between the proposed ‘realistic’ valuation of policy liabilities and the valuation basis implicit in an embedded value approach, in particular with regard to any implied profit on inception of a contract if/when the ‘realistic’ basis is extended to include changing the basis of profit measurement. 37
IFRS4 is premised on superseding the legal requirements of the Companies Act when it becomes an EU requirement for listed companies in 2005. The ASB seeks to work within the Companies Act requirements.
The major paradox of the ASB’s proposals is that, although it argues that an asset/liability model is needed to supplant the traditional deferral/matching model for life assurance accounting,38 and although major changes to the basis of measurement of the main business liability are proposed, there is to be no overall effect on profit measurement. It must be recognized that, without any clear concept of life assurance profitability, the usefulness of the accounts to users (shareholders and policyholders) will remain extremely limited. The Companies Act requires a ‘true and fair view’ both of the year-end net assets and of the profit for the year. The ASB proposals alter the
35 For those UK entities not adopting EU-adopted IFRS from 2005 the present legal requirements relating to MSSB will continue. In the face of concern from commentators on ED34 (e.g. Macve, 2004b), FRS27 (Appendix IV paras. 4.48ff.) indicates how the ASB has received legal advice and/or maintains that its own interpretation of these requirements is consistent with the accounting set out in the standard.
36 As noted above, FRS27 para.26 now only imposes the first of these restrictions—see Appendix IV para 7.19.
37 FRS27 Appendix IV para. 7.13 indicates areas where there may be differences between the approaches, although some of these appear to reflect possible misunderstandings in their current implementation. No quantification of the estimated magnitude of the possible differences is provided.
A similar observation to that made in FRED34 is made in FRS27 Appendix IV para. 11.3.