8.1 The financial statements of life assurers are not easy to follow. Partly that is because life assurance is a complex business that has to date proved difficult to represent faithfully and simply in financial statements—the uncertainty of ownership of the estate is, for example, difficult to portray simply, as is the measurement uncertainty that is involved in any insurance entity. This is not a matter that is easily fixed. Partly the complexity stems from the unfamiliar technical jargon and formats used. However, for entities preparing their financial statements in accordance with UK standards and legal requirements, that terminology and those formats are largely dictated by law and the Board understands that there is no prospect of the law being changed in the near future. Entities preparing their financial statements in accordance with EU-adopted IFRS are not constrained in the same way, but the Board has no ability to mandate change for such entities.
8.2 For these reasons, the Board believes that there is little it can do about the unfamiliar technical jargon and formats used in the short-term.
8.3 Another source of complexity is the publication of multiple statements: the true and fair financial statements, the supplementary embedded value statements, and the regulatory returns—each of which is prepared on a different basis, designed to serve a distinct (but often unexplained) purpose, and all of which are typically presented with little or no means for the users to navigate their way from one statement to another. The complexity this creates was a particular concern noted in the Penrose Report. It is also an issue that the Board believes it can do something about.
8.4 The Penrose Report makes the case for convergence of true and fair financial statements with regulatory returns.
However, the statements and returns serve different
purposes—regulatory returns are primarily focused on solvency whereas true and fair financial statements have a broader remit—and statements that have different purposes will in their optimal form often involve different structures and bases. Therefore, although alignment of regulatory and financial reporting is desirable, this is best achieved through convergence around the structure and basis that are ‘right’
for the true and fair financial statements. The Board has been able to base so much of the FRS on the FSA’s methodology because that methodology is to some extent an attempt by the FSA to converge aspects of regulatory returns with the approach applied generally in financial statements.
8.5 Where differences between the statements remain, the Board’s preference is to seek to improve the clarity of the information provided by requiring reconciliations between the statements.
8.6 If two statements have been prepared on bases that have nothing in common, a reconciliation between them is not very useful because it tends to involve simply the substitution of one set of numbers with a second set.
Therefore, reconciliations between statements should be required only if they would be meaningful.
8.7 The Board believes that, although the various statements currently prepared are each serving a different purpose, there is an underlying convergence of approach which means that it is reasonable to expect reconciliations between the true and fair financial statements and the prudential returns to be meaningful. For example:
(a) apart from a few isolated exceptions, the same asset recognition and measurement model is used in all the statements;
(b) as a result of the changes in the liability model required by the FRS, the same basic liability model will underlie the big UK with-profits funds’ policyholder liability
numbers in the true and fair financial statements, the regulatory returns, and in many cases (depending on the exact methodology used) the embedded value information; and
(c) embedded value methodology seems to be developing in the direction of valuing options and guarantees written in policies in a manner consistent with that required for ‘realistic’ balance sheets (ie on a fair value or stochastic basis).
8.8 These developments mean that reconciliations can provide a useful service in highlighting the remaining issues of difference between the various statements. On implementing the FRS, the main areas of difference would be:
(a) any adjustments to asset valuation required by solvency regulation; and
(b) the treatment as a liability for RBS regulatory returns of the shareholders’ share of future bonus.
8.9 The Board believes that the proposed capital statement lends itself well to a reconciliation requirement, which is why paragraph 37 of the FRS requires the aggregate amount of the capital resources included in the capital statement to be reconciled to the shareholders’ funds, FFA and other amounts shown in the entity’s balance sheet. The effect is that the capital statement provides a reconciliation between regulatory and financial reporting at the available capital level.
8.10 The Board has not included in the FRS any requirement to provide a reconciliation between the supplementary embedded value information and the other statements.
That is primarily it seems likely that such a reconciliation would have to be included in the supplementary information rather than the financial statements (because otherwise at least some of the embedded value information
would be brought within the scope of the true and fair view requirement and the implications of that have not yet been fully explored). The Board has no means of insisting on a reconciliation if it is not to be included in the financial statements.
OTHER ISSUES ARISING FROM THE FRED 34