It is widely acknowledged that, at present, statutory insurance accounting in the UK may not provide the most useful possible information for users to assess the financial position, performance and cash flows of entities conducting insurance business. A general lack of satisfaction with the present models for insurance accounting world-wide (all different) has been the major driving force behind the support for an IASB project on accounting for insurance contracts.
The IASB inherited this project from its predecessor body, which delegated work on insurance accounting to a Steering Committee which published in 1999 an ‘Issues’ paper. That paper approached insurance accounting with a clean sheet and worked to identify all the relevant issues and to devise accounting solutions in line with the IASC’s ‘Framework for the Preparation and Presentation of Financial Statements’. The Steering Committee also nearly completed a Draft Statement of Principles (DSOP) revising the proposals in the ‘Issues’ paper in the light of the comments received. In accordance with IASB’s new methods of working, the Steering Committee has now become an Advisory Group (with some additional members) and the IASB has taken insurance accounting onto its own agenda.
The IASB has been discussing insurance issues for over a year now and has covered the many difficult issues of definition, measurement and recognition (particularly profit recognition). It has now announced that it will not be able to produce a full high quality standard in time for the EU and Australian 2005 deadline. This reflects the complexity of many of the issues raised by insurance accounting and the knock-on effect of any decisions reached for other areas of accounting. A temporary, Phase I, solution is being developed to enable those with insurance business to comply with international standards from the transition date. This announcement means that the IASB has now to decide what will fall into Phase I and Phase II of the insurance project.
Phase I is likely to cover:
- what must be done by 2005 to make it possible for insurance companies to meet the EU and Australian requirements of applying IAS by 2005; and
- whether any improvements in insurance accounting can be made at that stage before final decisions are taken on the difficult issues such as the measurement objective and reliability, which will be deferred to Phase II.
Phase I is likely to include guidance for insurance companies on applying IAS 32 and 39 to their non-insurance contracts and on issues which are not presently covered directly by IAS. In Phase I the IASB is also likely to consider whether any general improvements to insurance accounting can be made before making the decisions deferred to Phase II. For example, could catastrophe and equalisation provisions be banned in Phase I because they would not meet the definition as liabilities? Another matter to be considered is disclosure. An IASB exposure draft for Phase I is expected in the first quarter of 2003 with a final standard in 2004.
Meanwhile, ASB has been discussing with the Association of British Insurers (ABI) the updating of its 1999 Statement of Recommended Practice (SORP) setting out recommended accounting for insurance businesses to produce financial statements on the Modified Statutory Solvency Basis (MSSB) as required in the UK.
The ABI has been working to update its SORP since 2001. The earlier SORP often permitted several different ways of accounting for or measuring the same item, such as permitting both the net and gross method of measuring premium income. With the ASB’s encouragement, the ABI has worked to produce a draft SORP that would reduce alternatives in insurance accounting and improve the information given. Topics under debate have included accounting on a three year fund basis, financial reinsurance, the disclosure of contingent liabilities and the merits of including amounts on an achieved profits basis in the statutory financial statements of insurance companies.
The ABI has also separately produced guidance on the voluntary reporting of achieved profits figures in supplementary statements.
