Accounting framework: company law
The provisions of the IAD were implemented in Great Britain by the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993 (SI1993/3246). For insurance undertakings not formed and registered under the Companies Act (CA) 1985 (for example industrial and provident societies and Lloyd’s) implementation was by the Insurance Accounts Directive (Miscellaneous Insurance Undertakings) Regulations 1993 (SI1993/3245).
Under these regulations the old Schedule 9A CA 1985 was replaced by a new Schedule 9A, with effect for financial statements for financial years commencing on or after 23 December 1994.
Schedule 9A CA 1985 is entitled “Form and content of accounts of insurance companies and groups”. It follows the IAD closely, and is split into two parts. Part I covers individual accounts and Part II consolidated accounts. The material in Schedule 9A Companies Act 1985 is now found in Schedule 3 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI2008/410) (the ‘accounting Regulations’) made under the Companies Act 2006 which succeeded the 1985 Act. Particular points are as follows.
- Paragraph 6 (previously paragraph 4) provides that assets or items of income are to be shown gross and that there is to be no netting-off of reserves or expenses.
- Paragraphs 9 to 13 (Part 1 Section B; previously paragraphs 7 to 9) lay down, in detailed terms, the required formats for the balance sheet and profit and loss account. Notes on the formats are given and these define set items appearing in the financial statements and in some cases prescribe the accounting treatment to be applied. In accordance with the concept that there should be no ’netting-off’ of assets and liabilities, technical provisions are to be shown gross as a liability and amounts potentially recoverable from reinsurers as an asset.
- The profit and loss account for general insurance business is divided between the technical account and the non-technical account. The distinction is not precise, and there is a Member State option in the IAD, not exercised in the UK, to allow some companies to dispense with the non-technical account altogether. Broadly the technical account reflects, like a trading account, the underwriting result and was, before the implementation of Schedule 9A, sometimes referred to as the revenue account; while the non-technical account was referred to as a profit and loss account. The costs incurred in handling claims are treated as part of the cost of the claims themselves. The technical account includes as operating costs the costs of acquiring contracts, the change in deferred acquisition costs, and most administrative expenses, less a deduction for any reinsurance commissions receivable. The non-technical account brings in the balance on the general business technical account, miscellaneous income or expenses and the charge for taxation. Note (8) on the profit and loss account format provides that investment income, expenses and charges must either be disclosed in the non-technical account or attributed between the appropriate technical and non-technical accounts together with, where an attribution is made, an explanation. In the case of the remaining composite companies, which carry on both long-term and general business, the investment income, expenses and charges arising in the long-term fund are disclosed in the long-term business account.
Insurance undertakings are subject without modification to the provisions of sections 226(2) and 227(3) CA 1985, now section 393 CA 2006, which require their financial statements to show a true and fair view of the company’s assets, liabilities, financial position and profit and loss.