necessarily be subject to the restrictions set out in IFRS4 with respect to investment risk margins and future management fees.48 It is also intended that the SORP will be revised to reflect the requirements of FRS27 (MoU para.7 and FRS27 Appendix IV, para.9.19).
c) IASB’s insurance project Phase II IFRS4—based on ‘Phase I’ of its project (IASB 2004a)— while requiring extensive additional disclosure, leaves most of current practice for life insurance accounting unchanged (e.g. Altenburger, 2005). It passed on a majority vote of only 8 to 6 Board members. The major problematic issues have been further deferred to ‘Phase II’ of the project, on which FASB staff are observers and which, subject only to the constraint of the IASB’s Framework (which as we have noted above is itself under re- consideration), is based on a ‘fresh look’ approach.49 A new working group, in which FASB staff are also involved, was appointed in September 200450 and Board discussions have also continued. No timetable has yet been set for completion of Phase II. Anecdotally, the former Finance Director (CFO) of a major British insurance group, who has been closely involved in the debates in recent years, has said to us that ‘we won’t see a resolution of this in my lifetime’.
One of the major outstanding issues is ‘how far is life insurance (and therefore its accounting) ‘different’ from other businesses? Insurance, including life insurance, is normally excluded from most ‘GAAP guides’ as belonging to the ‘specialist industry’ category. Similarly accounting and valuation textbooks (like most theoretical and empirical research) focus on ‘ordinary’ companies and exclude financial institutions such as insurers, leaving them to advanced, specialist courses. But we would argue (e.g. Horton & Macve, 2005) that an understanding of the difficulties facing standard setters in resolving life insurance accounting and reporting issues can give important insights into the problems faced in resolving the ‘fundamental’ issues relating to ‘ordinary’ enterprises that are currently facing the standard-setting Boards. True there are specialist technical issues to be resolved: but in general these are not the issues that have stalled progress on the insurance project to date. At root, the problems of life insurance accounting and reporting are the same as those of any other industry. Moreover, managers have been involved in the restructuring and takeovers that have characterized the industry in recent years, whereby e.g. several large life insurers are now owned by banks—so that it is necessary for insurers’ accounts to be consolidated consistently with those of other group companies. And portfolio investors too hold shares in life insurance companies alongside shares in ‘ordinary’ companies and have similar information needs for comparative monitoring and valuation purposes. So the first step should be to explore how far insurers’ accounts can be made comparable to those of ‘ordinary’ companies.
Traditionally the ‘differences’ have been identified as including:
the length of time involved in life insurance policy contracts
the interrelationship between the insurance results and the insurer’s investment
48 49 The first of these restrictions is also covered by FRS27 para. 26. http://www.iasb.org/news/index.asp?showPageContent=no&xml=10_215_25_21092004_31122009.h tm (accessed 28 April 2005). http://www.iasb.org/uploaded_files/documents/16_18_iwg-members.pdf (accessed 2 May 2005) 50