In March 2004 the Financial Secretary to the Treasury asked the ASB to carry out an urgent study of with-profits life assurance accounting, following the issue of the Penrose report into Equitable Life. In December 2004 the ASB issued one part of its response to this request, FRS 27 'Life Assurance', and in June 2005 it completed its project by issuing a report to the Treasury on life assurance financial reporting.

The report notes that financial reporting for life assurance - and with-profits business in particular - is inherently difficult. The business is generally longterm, and market conditions may change significantly over the life of a policy; there is a wide variety of product types; and the business is subject to changing regulatory requirements. More fundamentally, though, many aspects of life assurance business, including the determination and allocation of profits, are at the discretion of the management of the company.

The report summarises the needs of the different users of the financial statements of life assurance entities, and the substantial improvements introduced in FRS 27 to meet those needs, particularly in relation to the measurement of liabilities and the introduction of disclosures relating to capital of life assurance business.

The ASB, in developing FRS 27, was constrained by the need to act in a timely manner. It adopted a pragmatic approach of adopting the regulatory 'realistic balance sheet' methodology for measurement of liabilities that was developed by the regulator, to avoid asking preparers to make further major changes in a short timescale. It also applied the key requirements of FRS 27 to larger with-profits life assurance entities only, and not to smaller entities that were not required to adopt the new regulatory approach.

The ASB would like to see FRS 27 applied in full by all UK life-assurance entities, but this would best be achieved when and if the regulator extends the realistic liabilities regime to these entities. However, if the regulator does not propose to do this, the ASB may consider consulting on extending the scope of FRS 27.

Although FRS 27 addressed important aspects of life assurance accounting, there remain more complex issues that the ASB was not able to address in the timescale. The report analyses four such issues:

• the principles of liability measurement, and consistency with those applying to liabilities generally (for example, FRS 12) - particular difficulties arise with the role of management discretion in determining bonus policy and thus the obligation to policyholders, and whether the obligation needs to be measured by projecting the outcome of the policy through its life, including the expected receipt of future premium;
• the best basis of profit recognition for these long-term contracts, and whether this should be based on measuring changes in assets and liabilities from one balance sheet date to the next;
• the nature of surpluses in life funds that have not yet been allocated to policyholders or shareholders, and whether these should be classified as liabilities or equity;
• the role of embedded value information in financial reports, and whether this should be incorporated into the financial statements or reported as supplementary information.

The ASB has concluded that these issues are best addressed in the context of the IASB's comprehensive project on insurance accounting, and does not intend to address them by developing FRS 27. Instead, it will continue to be involved in the development of the IASB project, and that the detailed analysis in the report will be a helpful contribution to that debate.

Copies of the report can be downloaded, free of charge, from the ASB's website.