Fred 34 - Life Assurance
Comments from
October 2004
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above exposure draft which was considered recently by ACCA's Financial Reporting Committee and I am writing to give you their views. The Committee is composed of ACCA members who represent a wide range of interests in financial reporting generally and are not insurance industry specialists, but did take views from members who are more directly involved with the sector. We have chosen on this occasion not to answer ASB's specific detailed questions in FRED34, but to give our views on four more general questions which are set out below.
Is a new standard on this subject needed?
Yes. The case for some standardisation and improvement of financial reporting by the life assurance sector seems clear. The findings of the enquiry into Equitable Life and the imminent move of listed life insurance companies to International Financial Reporting Standards in 2005 make this clear. The change in reporting requirements of the regulator makes this possible.
Does the proposed accounting and disclosures represent sufficient improvement in financial reporting?
On balance we have concluded that it does. Financial reporting standards often represent compromises to some extent between high quality accounting standards and the practical considerations of costs/benefits in complying and providing the information. FRED34 represents greater concessions to practical considerations than perhaps is true of most standards. The proposals could be criticised in a number of ways.
- The accounting improvement and changes are not a comprehensive revision of liability accounting by life insurers. This will not produce a realistic balance sheet, just a more realistic one.
- The scope of application will not be complete by any means. It will only apply to major UK life funds and not to overseas funds consolidated into the same set of accounts, nor to smaller UK funds.
- Comparative figures will not be properly restated and the effect of restatements will not affect reported profits.
- �Grandfathering' has had to be resorted to for embedded values.
On the other hand we noted that FRED34 would
- Move liability accounting by these funds closer to the general model of reporting by all companies
- Provide policy holders with a very helpful presentation of information on the company/fund's capital and financial strength in the capital position statement.
We also accept that the timescale for implementation of FRED34 justify the greater concessions to practical difficulties.
Are the disclosures required a reasonable balance between policy-holders needs and commercial sensitivities of the companies?
Yes, we think that they are. The disclosures in the capital position statement of the regulatory capital requirements and their reconciliation to the balance sheet numbers look very helpful, in the context of a regulated industry such as life assurance. We noted that most of the disclosures of regulatory capital are in other public statements and that generally what will be required will not be so much new information, but more its presentation in one place and in a clearer and more intelligible form.
Some concerns were expressed that this new regime will be more transparent than that required of insurance companies in other countries, putting UK life insurers at a competitive disadvantage. Our chief conclusion is that this points up the importance of the need for progress with the IASB's insurance project, because any levelling of the �playing field� should be up to a high level and not down to the lowest.
Is the timescale of the change justified?
FRED34 is intended to apply to accounting periods ending December 2004, which means in effect retrospective application. ASB is allowing a very short comment period on the proposals and an unusually swift application.
We have, however, noted the concessions on restatement of previous years figures and the need to put the standard in place before the transition to IFRS. Our conclusion is that the information should be available and the timescale is possible to achieve and therefore justified.
If there are any matters arising from the above on which further information would be helpful, please be in touch with me.