GIM2190 - Accounting framework: investment income
Investment return - realised and unrealised gains to Profit and Loss account
The most significant class of assets on a general insurer’s balance sheet will be the investments which are held as backing for the company’s outstanding liabilities and to meet regulatory prudential standards (see GIM3120).
The IAD brought more consistency to the treatment of investment return among insurers based in different EU States. Company law made following the Directive requires investment income (and related expenses) to be disclosed in the non-technical account or attributed (with an explanation) between the appropriate technical and non-technical accounts.
Realised gains or losses on investments are treated in the same way as income. As investments must generally be shown at market value in the balance sheet (see below) there will also be unrealised gains or losses each year.
Until the 1998 ABI SORP, these unrealised gains and losses could be carried to a revaluation reserve in the balance sheet or disclosed in the non-technical account. This SORP marked an important development when it was finally determined that the distinction between realised and unrealised gains and losses on readily marketable products is largely irrelevant. Accordingly all such realised and unrealised gains and losses should be taken to the profit and loss account. Paragraph 285 of the 2005 ABI SORP gives more detail.
Investment return - ‘mark to market’ basis
Paragraphs 22 onwards of Schedule 3 to the accounting Regulations provide the basic rule that all investments of an insurer are to be shown in the balance sheet at their ‘current value’. This generally means market value at the balance sheet date. Market value at an earlier date is permitted in the case of land and buildings, provided that they are properly valued at least once every five years and account is taken of any diminution in value since the last valuation. Where an asset has been, or is about to be, sold when the accounts are drawn up the valuation must be reduced by the costs of realisation. In the case of debt securities the market value is required, by implication, to be a ‘clean’ value, excluding the value of any accrued interest: such interest is shown separately on the face of the balance sheet.
Companies accounting in accordance with FRS 26 will value their investment securities at ‘bid’ rather than ‘mid market’ value.
Investment return - amortised cost basis
An alternative treatment is permitted for fixed-income securities by paragraph 24 of Schedule 3 to the Regulations. Instead of marking these to market a company may amortise the difference between the purchase price and the amount payable on the redemption of the security over the period to the redemption date. The 2005 ABI SORP, paragraph 279, remarks that use of the amortised cost basis is appropriate for redeemable fixed income securities held as part of a portfolio of such securities intended to be held on an ongoing basis. Irredeemable fixed interest stocks should be accounted for at current value.