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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 30 / 51





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In developing the first of these elements the study builds on the ‘signalling’ objective emphasised in Horton & Macve (1995) and argues that it is important to resist the increasing danger that the rules imposed by accounting standards, nationally and internationally—which are not only themselves a form of regulation but also seem increasingly to be driven by regulators’ needs (as, in the USA, by the SEC and, internationally, by IOSCO)—will render insurers’ financial statements increasingly ritualistic and irrelevant, unless the opportunity is now taken to argue for a more flexible and informative approach.

There is no simple solution to many of the difficulties (e.g. Macve, 1997), but a hopeful way forward is that suggested by the ASB’s standard FRS10 (ASB, 1997) on goodwill accounting. This adopted what can be identified as a two-tier, information based approach which should set the model for other standards. At ‘level one’ there is a strict, ‘default’ rule (i.e. ‘capitalise and amortise goodwill over a maximum of 20 years’). This is the accounting that, prima facie, all companies are expected to adopt. However, if they are prepared to invest in information systems that allow them to track the goodwill and subject its value to ‘impairment’ tests (Arnold et al., 1992) they may move to ‘level two’ and continue to carry it at full value or for a longer period. This is not an ‘option’ to use an alternative policy simply because the company wishes to do so—the ‘level one’ (i.e. default) rule is clear and universal, and only if the company considers that it is worth providing its shareholders and other users with more informative accounts, and only if it puts resources into developing and maintaining its relevant information systems to a level that enables its auditors to be satisfied as to the reasonableness of the figures, may it not use the default rule but move to ‘level two’ reporting and provide accounts on a basis that more appropriately reflects its own commercial situation. (It is therefore to be regretted as a retrograde step, as argued by the two dissenting Board members, that the IASB has now followed the lead of the FASB and withdrawn the goodwill amortisation option in favour of solely an ‘impairment’ approach in IFRS3 (IASB, 2004c).)

This kind of two-tier approach already has parallels in banking and securities regulation (Macve and Jackson, 1991), where regulators supervising companies’ capital adequacy have initial ‘defaults’ of say 100% for every open position (both assets and liabilities), but will accept the evidence of sufficiently rigorous internal models of risk diversification to accept reductions for offsetting positions and overall portfolio structure (e.g. Vieten, 1996). 63

The study argues that it is therefore appropriate for the recent developments in UK life insurance accounting to continue. While initially, as currently envisaged by the ABI, the majority of listed companies may continue to develop supplementary ‘achieved profits’ accounting disclosures to their main MSSB accounts, some companies (including the bancassurance groups) have already begun to use alternative methodologies in the main consolidated accounts. More companies may do so when agreed guidance is available, as managers, as well as analysts, have a concern that there should be comparability of reporting, and the issuance of guidance may remove inhibitions on attempting individualistic reporting developments. This will be reinforced if the guidance is incorporated into a SORP issued by the ABI.

However, fundamental change to the ‘main’ accounts on the ‘two-tier’ information basis that is being argued for has to overcome the pressures that would inhibit such developments, both nationally and internationally, including taxation and

63 Or again, where the FSA now supplements its new standard ‘twin peaks’ approach to insurance regulation with ‘Individual Company Assessments’ (e.g. ASB, 2004a, Appendix IV, para. 3.19).


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