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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 28 / 51

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Yardley (1995) supports this move but criticises the attempted justification through focussing solely on the ‘signalling objective’. He sees the current trend as one where the different objectives are converging, and where, for example, both tax authorities and regulators may wish to see a greater convergence between the principles underlying the Companies Act accounts and the bases used for ‘property rights’ and ‘regulatory’ purposes: there is a useful tension which the conflicting objectives bring to financial reporting. Yardley also regards as ‘depressingly unambitious’ what he sees as the study’s concluding support merely for continuing experimentation with supplementary statements on an ‘achieved profits’ basis, which the study argued is to be both expected and encouraged as the most likely way forward. But he appears to miss the study’s stronger conclusion, which is that there is no impediment in the way of those companies that wish to incorporate the new ‘achieved profits’ basis into their main financial statements. As he says himself, ‘it is hard to see why they should not report on a common basis that is broadly consistent with methods used for internal management’. In this regard, the study also points out that issues that still need resolution include in particular the accounting for long-run investment returns and how this is best to be made compatible with the interrelated accounting for long-term insurance business—some ‘smoothing’ of returns may be conceptually appropriate although there are doubts about how useful this is to users in practice. Continuing professional guidance—both from the actuarial profession and from accounting standard setters—will be needed to determine the bounds on what are acceptable alternative approaches to profit measurement over the life of a long- term insurance policy.

Appendices review the main developments that have been occurring in other countries with regard to providing more realistic measures of life company performance.

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