classification of elements of the liabilities as between the TPLB and the FFA but do not themselves alter liabilities overall,39 so there is no overall effect on the ‘bottom line’ of profit and net assets.40 The proposals cannot therefore assist users to understand the profitability of life assurers,41 although the capital position statement may give some further insight into solvency and capital adequacy. Given the European industry’s own efforts to develop appropriate performance measures (e.g. the European Embedded Value Principles issued by the European CFO Forum in May 2004 referred to at FRED34 Appendix IV paras. 2.19 and 7.8)42 it therefore seems inappropriate for ASB not to allow those entities who are not already doing so to adopt embedded value for their mainstream reporting for 2004 if they wish to.
A further issue arises with regards to mutuals, where the ASB proposed (FRED34 paras. 5 and 16 and Appendix IV para.4.42)43 that the adjustments be transferred to ‘retained surplus’44 as ‘reserves movements’. This seems likely to cause unnecessary confusion. Leading mutuals such as Standard Life do not show a retained surplus but do show an FFA (with the annual transfer to/from the FFA being the ‘bottom line’ of their technical (P&L) account): so for them the adjustment should be as for proprietary companies with the overall effect that total liabilities and net assets are unchanged. If companies use an account described as ‘retained surplus’ (which has the appearance of equity, albeit policyholders’ equity as members of the mutual (FRED34 para. 33(b)45), this will appear to frustrate the intention of the standard not to change the profit recognition model (FRED34 Appendix IV, para. 5.9c)46.
Finally the ‘added value’ of the ASB’s proposals is limited given that the disclosures of ‘realistic liabilities’ will anyway be published in the returns to be made by life insurers to the FSA from 2004 under the ‘twin peaks’ regulatory regime.
Following the consultation on FRED34, FRS27 was issued in December 2004 (totalling 158 pages). In all major respects it follows FRED34’s proposals except that its implementation has been deferred to 2005. While this means that listed insurers then moving to EU-adopted IFRS would no longer be subject to FRS27 with regard to making changes to their accounting policies, compliance has been secured through a Memorandum of Understanding (‘MoU’) negotiated between ASB and the industry’s leaders (ASB, 2004c) which also includes an undertaking to disclose relevant information from 2004 (normally in the OFR (para.5(a)). The MoU’s major exemption from FRS27 is that insurers have reserved the option to adopt embedded value in their main statements from 2005 (MoU para. 5 (b) (i)47)—this would however
39 The Companies Act currently requires the FFA to be shown as a liability. FRS27 will require it to be continue to be shown separately from the ‘realistic’ TPLB after 2004 but (like IFRS4) does not itself require (although it permits) any part (or indeed all) of it to be shown as equity as the consequence would be ‘a fundamental change to the profit recognition model’ (Appendix IV, para. 5.7(c)).
40 Provided the adjustment to TPLB does not exceed the available FFA (as it appears it would have done in the case of the Equitable (Penrose, 2004: tables 6.21 and 19.1)). Where the FFA becomes negative FRS27 para. 23 now requires that if that balance is not eliminated (presumably by write-off to P&L account) there must be explanation in the notes of the negative balance and why no action to eliminate it has been considered necessary. [cf. IFRS4’s requirement for a ‘liability adequacy test’.]
41 There will be (unspecified) changes to some line items in the technical accounts/P&L (FRS27 para. 17).
42 43 44 and FRS27 Appendix IV para.7.3. now FRS27 para. 8 The wording in para.5 of Fred34/ para. 4 of FRS27 does not make clear that this is ‘FFA or retained surplus’ although this is implied by FRS27 para.18
45 46 47
now FRS27 para.18 now FRS27 Appendix IV paras. 2.11 and 5.7(c). The MoU here refers to para.26 of FRS27: this should be para.28.