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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 27 / 51





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4. Accounting-based academic research Our overall comment: There has been only a limited amount of specifically insurance focussed research, and additional work, both conceptual and empirical is needed. But an important contribution lies in linking the problems of life insurance accounting to those that are common to all accounting standards, in particular in the context of a general trend towards greater reliance on ‘fair values’.

a) Horton & Macve, 1995 Accounting Principles for Life Insurance: A True and

Fair View? This study is divided into two parts (Yardley, 1995). The first part focuses on the changes introduced into UK Company Law in order to implement the EU Insurance Accounts Directive (‘IAD’) with effect from 1.1.1995. It explores whether the MSSB thereby introduced could be considered to meet the new requirement under the IAD that audit reports state whether insurers’ accounts give a ‘true and fair view’. Noting that ‘true and fair’ is a dynamic concept whose meaning evolves over time as ideas and practices change, the study distinguishes two major meanings of ‘true and fair’: ‘true and fair (actual)’ and ‘true and fair (ideal)’. ‘True and fair (actual)’ is a ‘legal term of art reflecting only what a court would regard as an acceptable basis of accounting in the light of current statutory requirements and accounting standards taken together with established practice.’ By contrast, ‘true and fair (ideal)’ reflects ‘desirable developments in accounting practice towards more realistic representation on financial performance and position.’ On this basis it is argued that the traditional basis can be used in ‘true and fair (actual)’ accounts and, while the MSSB would require companies to change the presentation of their accounts, it would not generally require them to change the principles on which their accounts are based.

The second part of the study moves on to the wider question of whether the new methods being proposed by various sectors of the industry (such as embedded values or the ‘accruals basis’)60 could be regarded as compatible with the general framework of accounting principles and as capable of giving a ‘true and fair’ view, and what further developments may be desirable. It identifies three major objectives of financial reporting: ‘signalling’ expectations to investors to assist shareholders (and, where relevant, policyholders) in appraising the company’s financial position, performance and prospects; establishing ‘property rights’ (e.g. policyholder bonuses, dividends, taxation, management bonuses); and ‘regulatory’ (monitoring of solvency etc.). It argues that the property rights and regulatory objectives can be dealt with by the separate regulatory returns which insurers have to provide to the DTI61 and publish annually under the ICA, and which distinguish them from ‘ordinary’ companies where the Companies Act accounts have to serve these other purposes too. So for insurers the Companies Act accounts can focus on giving a ‘true and fair’ view for the purposes of the signalling objective, which implies that, in determining what may be included in the primary financial statements, ‘relevance’ can be given a greater emphasis over ‘reliability’ than is conventional in accounting for other enterprises. This means that companies that wish to incorporate a basis such as the ‘achieved profits’ basis into their main financial statements (as several bancassurers and some stand-alone insurers had already started to do) may legitimately do so: which in turn may raise questions about the bases on which other financial institutions prepare their accounts.

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Later the two approaches were given the generic title of ‘achieved profits’ (ABI 2001). Now to the FSA.


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