Newspaper article The Evening Standard (London, England)

An Accounting Change Too Far

Newspaper article The Evening Standard (London, England)

An Accounting Change Too Far

Article excerpt

Byline: ANTHONY HILTON

WHAT would you say about a proposed accounting change which is value destroying, detached from reality, undermines confidence in the financial institutions using it, and spreads confusion? Par for the course, probably, given the furore over the use of fair-value accounting.

This time though it is not the accountants who are in the driving seat and it is not banks and pension funds in the firing line. The coming change under discussion is the proposal that the life assurance companies should from late next year use new standards to replace or rather enhance their embedded value approach to calculating profit with something called MCEV, market consistent embedded value.

The motive is honourable enough. The accounts of life offices are like the Schleswig Holstein question beloved of 19th-century historians, which was said to be understood by only three people one dead, one mad, and one who had forgotten. The core problem is that life assurance is a long-term business, and it is only when the contract matures after 25 years that the company can genuinely say how profitable it has been. To overcome this, various accounting techniques have been developed to assess and recognise implied profit throughout the life of the contract. Unfortunately, the resultant accounts are complex, the jargon impenetrable and the permitted variations so considerable that even the best analysts find it difficult to compare one life assurer with another.

Thus for the best of intentions the chief financial officers' forum a club of the senior financial executives from European firms decided they should overlay this with a new measure which in essence grafts fair value accounting on to what they do at present by marking all the long-term assets to market.

This might have seemed a good idea at the time, but as implementation looms next spring a lot of British companies are getting cold feet. Not surprising, since it will have a devastating effect on declared profitability. …

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