WRITTEN QUESTION P-2507/02

by Georges Berthu (NI) to the Commission

(3 September 2002)

Subject: Future accounting standards in the insurance sector

A recent article (30 April 2002) in the French daily Correspondance économique highlighted the fact that the international accounting standards prepared for the insurance sector by the International Accounting Standards Board (IASB) could result in a company's balance sheet showing an annual profit equal to the anticipated variation, in future years, of the value of the policies that company holds.

At present, in many countries, including France, a much more prudent rule is applied: the balance sheet shows only the actual profit generated for the financial year in question and, as far as the future is concerned, provision is made for possible losses, but likely profits are not entered in advance.

The recent stock-market problems affecting major companies have shown just how the immediate incorporation of future profits into the accounts creates scope for speculative interpretations and, in some cases, even manipulation.

Since this matter is still under discussion in international bodies, does the Commission intend to advocate a cautious approach?

Answer given by Mr Bolkestein on behalf of the Commission

(15 October 2002)

Regulation (EC) No 1606/2002 of the Parliament and of the Council of 19 July 2002 on the application of international accounting standards(1), adopted on 7 June 2002, will require all Union listed companies to prepare their consolidated accounts in accordance with adopted International Accounting Standards (IAS) from 2005. IAS are primarily developed to meet the needs of the users of general purpose financial statements, notably the financial markets, and do therefore reflect mainly the needs of market participants.

The International Accounting Standards Board (IASB) has been working on a standard for insurance contracts since 1997, and the work is not yet finalised. An informal preparatory text (Draft Statement of Principles) is currently being discussed in the IASB Board. Based upon discussions in the Board to date it is not yet clear what profit recognition model will be proposed. The appropriate recognition of profits, including the issue of profit at inception is a key element of those discussions.

Any future proposals from IASB will be considered by the European Financial Regulatory Advisory Group (EFRAG) and the Commission. Any future IAS dealing with this topic must be formally adopted as required by the IAS Regulation before becoming mandatory in the Community.

Where the main purpose under IAS of general purpose financial statements is to address the needs of market participants, i.e. investors and shareholders, the objective of prudential rules is to safeguard the interests of the policyholders. These may be based on financial reporting figures, but the figures may be amended to be suitable for prudential purposes. Insurance regulators could still require for example extra safety margins from an insurance company to accommodate prudential concerns they may have. The Commission has stated previously that any apparent reduction in the degree of prudence in the financial statements should not lead to less prudence in the prudential regulation of relevant entities.

(1) OJ L 243, 11.9.2002.