QBE Insurance Group Ltd v ASC

110 ALR 301
38 FCR 270; (1992) 10 ACLC 1490; (1992) 8 ACSR 631; (1992) 28 ALD 334; 1992 - 0923B - FCA; Nos. G 584 and 3143 of 1992 Fed No. 697

(Judgment by: Lockhart J)

Between: QBE Insurance Group Ltd
And: ASC

Court:
Federal Court of Australia New South Wales District Registry

Judge:
Lockhart J

Subject References:
Corporations
Management
Accounts
Accounting standards
Validity of AASB1023
Circulating capital as investment assets
Accounting for unrealised gains and losses on investments
Whether inconsistent with meaning of 'profits'
Whether gives a true and fair view of financial affairs
Principle that unrealised accretions available for dividends
profits

Legislative References:
Corporations Law - s 9; s 201; s 284; s 286A; s 292; s 293; s 297; s 298; s 299; s 313
Corporations Act 1989 (Cth) - s 32(1)
Corporations Regulations 1990 (Cth) - Sch 5; reg 3.6.02(2)

Case References:
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of SA Ltd (Carden's case) - (1938) 63 CLR 108 applied
GRE Insurance Ltd v FCT - 92 ATC 4089

Hearing date: 1 September 1992, 2 September 1992, 8 September 1992
Judgment date: 23 September 1992

Sydney

Judgment by:
Lockhart J

The question in this case is whether companies carrying on in Australia the business of general insurance are required to apply paragraph 23 of accounting standard AASB 1023 in the preparation of their profit and loss accounts for a financial year, so that they must bring to account unrealized gains and losses on investments at net market value as at balance date irrespective of whether the investments are short or long term investments and irrespective of whether the gains or losses are real and permanent.

The letters "AASB" stand for the Australian Accounting Standards Board, a statutory body established by s. 224 of the Australian Securities Commission Act 1989.  The predecessor of the AASB was the Australian Accounting Standards Review Board ("ASRB") which was established on 1 January 1984 under the former Companies Codes by the previous Ministerial Council for Companies and Securities.

On 27 December 1990 notice was published in the Commonwealth Government Gazette that the ASRB had approved accounting standard ASRB 1023.  Paragraph 23 of ASRB 1023 (now AASB 1023) appears in a section entitled "Assets" with a subheading entitled "Standards".  Paragraph 23 reads as follows: 

"Investments that are integral to the general insurance activities of the company or group of companies shall be measured at net market values as at balance date.  Any changes in the amounts at which such investments are measured shall be brought to account as revenue or expense in the profit and loss account in the financial year in which the changes occur.  Approved Accounting Standards ASRB 1010: Accounting for the Revaluation of Non-Current Assets and ASRB 1021: Depreciation of Non-Current Assets shall not apply to such investments."

The members of the ASRB which introduced the standard consisted of senior officers of large public companies in Australia, finance experts of government departments including the Treasury, the Director of the Australian Stock Exchange Limited, partners in financial, consulting or accounting divisions of prominent firms of chartered accountants, academics in the relevant field of accounting or administration, with certain observers representing the International Accounting Standards Committee and the International Federation of Accountants Public Sector Committee.  The membership of the AASB is drawn from substantially the same sources.

For some time before 27 December 1990 the ASRB had been considering the formulation of an approved accounting standard for financial reporting of general insurance activities.  It had been the subject of a project instituted as early as August 1975 by the Executive Committee of the Institute of Chartered Accountants in Australia.  The ASRB considered a proposed standard at a number of meetings between May 1989 and 13 December 1990.  At its meetings the ASRB considered submissions from various bodies and corporations including QBE Insurance Group Limited ("QBE"), NRMA Insurance Limited and the Insurance Council of Australia ("ICA") with respect to a proposed approved accounting standard.  The ICA is an industry body representing the insurance industry in Australia; its members comprise 96% of general insurers in the private sector (prior to the recent "privatization" of GIO Australia), a percentage calculated by reference to premium income. About 65% of the members of the ICA (calculated by reference to premium income) have expressed concern with respect to the effect of the application of paragraph 23 of AASB 1023 and the preparation of their accounts, and the ICA was informed by some 19 insurance groups, comprising approximately 37% of the membership of the ICA (calculated by reference to premium income), that they intended to take some form of proceeding with regard to the application of paragraph 23, either by applying to the Australian Securities Commission ("the ASC") for exemption from the requirements of paragraph 23 or by commencing proceedings pursuant to the Administrative Appeals Tribunal Act 1975 or the Administrative Decisions (Judicial Review) Act 1977.  Not all of the members of the ICA are directly affected by the operation of AASB 1023. It appears from the evidence that the great majority of the insurers who consider that their published financial results will be directly affected by the operation of paragraph 23 are either Australian public listed companies or Australian companies.  Companies which are either Australian subsidiary companies or subsidiaries of foreign companies or branch offices of foreign companies have their results consolidated with the results of their parent companies in their parent company's published financial statements; and those parent companies are not required to comply with AASB 1023.

It is plain that paragraph 23 of AASB 1023, which requires unrealized movements in the market values of investment assets to be included in the revenue accounts, has caused considerable apprehension in a major section of the general insurance industry in Australia. There has been a great deal of discussion between the AASB (and its predecessor, the ASRB), the ASC, the ICA and its various members including the applicant in each of the two matters presently before the Court, QBE and NRMA.

The ICA has stressed to the AASB and the ASC that insurance companies are highly dependent on "credibility" in that if there are wide and published fluctuations of a short term nature in their accounts this will cause serious "credibility" problems with customers, although they have no problems with those fluctuations being shown in the notes to the balance sheet, as indeed they have been hitherto.  The ICA emphasises that the main users of the accounts of insurance companies in Australia are overseas reinsurers (principally in the United Kingdom and the United States of America), overseas analysts, other overseas insurance companies, overseas insurance and reinsurance brokers and shareholders.  This is because of the uniquely international nature of general insurance.

On 16 December 1991, following a period of consultation between officers of the National Companies and Securities Commission and subsequently with its successor - the ASC, application was made by QBE to the ASC for relief from compliance with paragraph 23 of AASB 1023 pursuant to s. 313 of the Corporations Law.  Section 313 entitles directors of a company to apply to the Commission for an order relieving them or the company or its auditor from compliance with certain requirements of the Corporations Law, which it is common ground includes paragraph 23.  The ASC is empowered to make orders relieving the applicants from such compliance.  The application of 16 December 1991 was expressed to be made "until such time as a similar method of accounting for investments is to apply to other entities and industries."  The letter sets out the grounds on which QBE relied in support of its application for relief which in summary was because "we believe that compliance with the requirements of clause 23 of ASRB 1023 would render the accounts of this company misleading".  In the middle of April 1992 QBE was notified by the ASC that the requests for exemption from compliance with paragraph 23 had been declined.  A similar application was made by each of the other applicants within the QBE Group with the same result.

On 8 May 1992 the solicitors for the applicants in matter G584 of 1992 ("the QBE applicants") sent letters to the ASC requesting, pursuant to s. 28(1) of the Administrative Appeals Tribunal Act 1975, that the ASC furnish each of them with a statement in writing of the ASC's reasons, evidence and findings in support of its decision declining to grant the exemption.  On 28 May 1992 the solicitors for the QBE applicants received a letter dated 26 May 1992 from the ASC containing a statement of reasons.  In that statement the ASC said amongst other things: 

"1.
Companies and Groups from the General Insurance Industry have applied for relief from the requirements of Clause 23 (and consequential Clauses) of Applicable Accounting Standard AASB 1023, Financial Reporting of General Insurance Activities."
2.
In support of their applications all have argued that compliance with the requirements of AASB 1023 would render their accounts misleading. ...
6.
... They maintained that if Clause 23 (and consequential Clauses) of AASB 1023 were complied with, the accounts and group accounts, in particular the profit and loss as reported, would be misleading from the point of view that they would not be comparable: (a) with the profits and losses declared by companies in other industries in Australia ... (b) with profits and losses declared by insurance companies in other countries because accounting for investments internationally generally is on the historical cost basis, and those countries which do not permit non-current assets to be revalued require a similar accounting treatment in respect of revaluation increments and decrements as required by AASB 1010. ...
8.
Comparability to other industries within Australia is secondary to the need for comparability within the General Insurance Industry. Comparability with activities in other countries is not a relevant consideration.  There are approximately 160 insurance companies in Australia, and to date approximately 26 have applied for an exemption Australia-wide.  If the ASC were to grant relief from Clause 23 of AASB 1023 this would have the effect of rendering the accounts of General Insurance Companies which receive relief not comparable with other General Insurance Companies within Australia ... ...
11.
AASB 1023 was introduced following considerable consultation with the insurance industry, over a period spanning many years. Submissions were put by various interested parties to the Accounting Research Foundation and the Australian Accounting Standards Board raising similar arguments that have now been posed in seeking relief under s. 313 from AASB 1023.  The legislators were therefore well aware of the issues in the formulation and proclamation of the Standard. Notice of approval of this Standard was published in the Commonwealth of Australia Gazette on 27 December 1990.
...
12.
Although the General Insurance Industry argues it is being targeted for special treatment compared to other industries, the Australian Accounting Standards Board is currently developing a similar standard covering the investments of all other industries.  It was determined however, that the situation in the General Insurance Industry was of major concern, and therefore needed to be dealt with by the introduction of a standard as a priority."

Thereafter there were discussions between officers of QBE, the ASC and the AASB followed by a further application on 17 July 1992 by QBE to the ASC pursuant to s. 313 of the Corporations Law (the application being on behalf of itself and the other QBE applicants) which included a detailed statement of the grounds in support of the application.  This was followed by discussions between officers of QBE and the ASC and the provision of further information by QBE to the ASC.

The officer of the ASC who is the relevant decision maker swore an affidavit in which she said, in relation to this second application of the applicants for relief pursuant to s. 313, that she accepted that paragraph 23 of the Standard was a valid Standard and not inconsistent with any relevant provision of the Corporations Law.  She concluded that compliance with the relevant requirements of the Corporations Law would not have the result rendering any accounts misleading and that she rejected the application.  It is this decision that is the subject of the application for the review by the QBE applicants.

By letter dated 5 February 1992 from the NRMA to the ASC the NRMA applied to the ASC for relief from compliance with the requirements of clause 23 and consequential clauses of AASB 1023.  This application was sent under cover of a letter from the NRMA dated 7 February 1992.  By letter dated 13 April 1992 the ASC notified the NRMA that the ASC had declined to grant the relief sought.  By letter dated 29 May 1992 the ASC provided to the NRMA a statement of its reasons for its decision which were in essence the same as those furnished to the QBE applicants.

These decisions of the ASC are the subject of the applications by both the QBE applicants and the NRMA for review pursuant to the ADJR Act.

The ASC concedes that the QBE applicants and the NRMA are all person aggrieved by the relevant decisions of the ASC for the purposes of the ADJR Act.  In the application of the QBE applicants the decision of the ASC is challenged on a number of grounds.  First, it is said to involve an error of law, namely, that paragraph 23 of AASB 1023 is not an applicable accounting standard within the meaning of s. 298(1) of the Corporations Law and was ultra vires the power of the ASRB to approve it in that it was inconsistent with ss. 269 and 565 of the Companies Codes and presently inconsistent with ss. 201, 292 and 293 of the Corporations Law.  Second, the decision is attacked on the basis that, as paragraph 23 requires the QBE applicants to bring to account unrealized gains and losses on investments at net market value as at balance date irrespective of whether the investments are short or long term and irrespective of whether the gains or losses are clearly real and permanent, the accounting treatment of unrealised gains and losses in this manner would distort the accounts and balance sheet and prevent the QBE applicants from giving a true and fair view of the affairs of each company for the relevant year.

The QBE applicants claim a declaration that paragraphs 23 and consequential paragraphs of AASB 1023 are invalid; or, in the alternative, a declaration that paragraphs 23, 30(iv) are not applicable accounting standards within the meaning of the Corporations Law.  They also seek orders pursuant to s. 16(1)(a) of the ADJR Act setting aside the ASC's decision.

The NRMA challenges the decision of the ASC made with respect to its application for exemption on substantially similar grounds.  It seeks substantially the same relief.

For the purpose of disposing of what the parties perceive to be the primary questions they agreed that the only questions to be determined by the Court at this stage are those arising from grounds 1 and 2 of the amended application of the QBE applicants which are in the following terms: 

"The grounds of the application are:
1.
That the decision involves an error of law.
Particulars

(a)
AASB 1023 is not an applicable accounting standard within the meaning of s 298(1) of the Corporations Law in that it does not have effect as if it were an accounting standard pursuant to s 9 of the Corporations Law and thus is of no effect for the reason that it was not, at the commencement of Part 3.6 of the Corporations Law, an approved accounting standard within the meaning of the Companies (New South Wales) Code ("Code") as it was ultra vires the powers of the Accounting Standards Review Board under s 266B of the Code to approve accounting standards in that it was:

(i)
inconsistent with ss 269 and 565 of the Code;
(ii)
unreasonable;

(b)
AASB 1023 is invalid in that it is:

(i)
inconsistent with ss 201, 292 and 293 of the Corporations Law;
(ii)
unreasonable;

(c)
If the applicants were required to apply AASB 1023 in the preparation of their accounts and financial statements for the year in question, they would be required to bring to account unrealised gains and losses on investments at net market value as at balance date irrespective of whether such investments are short or long term investments and irrespective of whether such gains or losses are clearly real and permanent (AASB 1023 par 7, par 23, par 30(iv)). Accounting treatment of unrealised gains and losses in this manner would distort the balance sheet and profit and loss accounts of the applicants, thereby preventing them from giving a true and fair view of the affairs of each company for the year in question.  Its application would also lead to the profit and loss account showing profits available for dividend which are not properly available.
(d)
The effect of fluctuations in market value of investments can be disclosed in a note to the accounts thereby avoiding the distortions referred to in sub-paragraph
(c)
.  The applicants have undertaken to the respondent to make such disclosure.
(e)
The applicants rely upon the affidavits which they have filed.

2.
The decision was otherwise contrary to law."

All other issues in the case are, by consent of the parties, to be determined later.

What this means in essence is that the questions presently for determination are (a) whether paragraph 23 of AASB 1023 is inconsistent with ss. 201(1), 292 and 293 of the Corporations Law and therefore invalid and (b) whether, by requiring the applicants to apply paragraph 23 in the preparation of their accounts and financial statements for the year ended 30 June 1992 and thus requiring them to bring to account unrealized gains and losses on investments at net market value as at balance date irrespective of whether such investments are short or long term investments and irrespective of whether gains or losses are clearly real and permanent, the balance sheet and profit and loss accounts of the applicants are distorted thereby preventing them from giving a true and fair view of the affairs of each company for the year in question and lead to the profit and loss accounts showing profits available for dividends which are not properly available, all in the context where the effect of fluctuations in market value of investments can be disclosed in a note to the accounts, thereby avoiding those distortions and the applicants have undertaken to the ASC to make such disclosure.  The NRMA's interest in the second question is different from the interest of the QBE applicants because the NRMA is a mutual company owned by policyholders rather than shareholders.  Consequently it does not pay dividends.

On 1 September 1992 the Court ordered that those questions be decided separately from all other issues raised by the amended applications and that the determination of those other issues be stood over to a date to be fixed. The Court also ordered, pursuant to Order 29 rule 5(a), that the two applications be heard together so far as the questions presently before the Court are concerned.

The evidence is primarily documentary, but some oral evidence was given. Nothing turns on the credibility of any witness.

The business of the QBE applicants is insurance and reinsurance. The QBE Group expects to collect this year insurance premiums totalling approximately $1 billion from its worldwide operations.  The principal operations of the QBE Group are concerned with the selling and writing of insurance policies, the receipt of premiums and the processing of policyholders' claims.  The investment of funds is only one aspect of its business operations.  The QBE Group has approximately 2,000 employees.  Only 17 of those employees are engaged in the Group's investment activities.  The QBE applicants invest shareholders funds and premium and other income.  Investments held by the QBE insurance group include government securities, shares in companies, debentures, bonds and notes, mortgages, loans, deposits and properties.

The QBE Insurance Group's investment portfolio is split into two categories: the investment of shareholders' funds and the investment of funds to meet liabilities to policyholders.  Funds set aside to meet liabilities to policyholders are invested in high quality, fixed interest securities, with the object of reducing the risk of capital loss on those investments.  The QBE applicants adopt a strategy of matching the maturity patterns of those investments with estimated payments of claims by policyholders.  Accordingly, the QBE applicants' overall investment policy is not to sell those investments but to retain them to maturity and the proceeds are used to settle insurance claims.

Investments derived from shareholders' funds are also mainly long term investments.  The QBE applicants' investment policy in relation to such investments is to ensure that shareholders receive a return over the long term that would be higher than the return on low risk securities which are held primarily to meet policyholders' claims.  The majority of the investments of the QBE applicants are held for the long term.  A large proportion of the QBE applicants' investments comprise equities and fixed interest securities so that very minor fluctuations in their current market values will considerably affect the QBE applicants' reported profits if paragraph 23 is applied in the preparation of their accounts.

Prior to the year ended 30 June 1990 the QBE applicants prepared their profit and loss statements on an historical cost basis in which only realised gains and losses on investments and properties were taken to profit.  Since 1 July 1990 the QBE applicants have adopted a policy of accounting for realised and unrealised net gains on equities and properties arising within a particular accounting period by amortising such gains over a period of seven years.  This is referred to as the "directors' preferred policy".  The application of the directors' preferred policy and the reasons for its adoption by the QBE applicants are set out in note 1(j) to the 1990 financial statements of QBE.  That note reads as follows: 

"Gains and Deficits on Investments and Properties
Realised and unrealised net gains on equities and properties arising during the year are brought to account in the profit and loss statement evenly over seven years.  Realised and unrealised gains and losses net of income tax not yet brought to account in the profit and loss statement have been included in the balance sheet as Deferred Investment Gains.  This is a departure from Approved Accounting Standard ASRB 1010: Revaluation of Non Current Assets which requires that increments on revaluation of investments and properties be taken directly to the Asset Revaluation Reserve. The impending accounting standard for general insurance companies requires investments integral to the general insurance activities to be included in the balance sheet and profit and loss statement at net market values.  It is generally the policy of the Group to invest shareholders' funds in equities and properties and to hold funds derived from insurance operations in fixed interest or liquid securities to meet insurance liabilities.  In the opinion of the directors, the historical cost and revaluation of properties method of accounting previously adopted by the Group no longer gives a true and fair view of the profit for the year.
In view of the material investment in equities and properties, the directors believe it prudent to adopt a policy that reflects the substance and commercial outcome of their investment philosophy by spreading of net gains in the profit and loss statement.  Investment performance, involving short and long term investment decisions, cannot be adequately measured by historic cost methods or the more volatile approach of changes in net market values as at the Group's financial year end. The policy adopted represents a change from the previous year where realised net gains arising from the sale of properties were included in the profit and loss statement as an extraordinary item, realised net gains on the sale of equities were included in investment income and unrealised gains on both equities and properties were not brought to account in the profit and loss statement.  The opening effect of the gain arising from the change in accounting policy is disclosed in the profit and loss statement as an Abnormal Item - Prior Years and the gain attributable to the current year is disclosed as an Abnormal Item - Current Year and amounts to $7,245,000 after income tax of $4,610,000.
The effect of compliance with ASRB 1010 would be that:

(a)
  Deferred Investment Gains would not be recognised in the Balance Sheet.
(b)
  The Abnormal Items would not be recognised in the profit and loss statement and operating profit would be $40,106,000 after income tax of $5,283,000 and minorities of $759,000.
(c)
  The unrealised gains of $92,633,000 on revaluation of equities and properties less deferred income tax of $36,109,000 would be reflected in the Asset Revaluation Reserve. Deferred investment gains net of tax will be released to profit as follows:

$'000
1990/91 10,676
1991/92 9,221
1992/93 7,700
1993/94 4,535
1994/95 3,608
1995/96 2,345
38,085"

A table was tendered in evidence by the QBE applicants.  It sets out after tax figures for the profits of QBE on a half yearly basis and yearly basis from 31 December 1988 to 31 December 1991.  The profit figures were prepared on three alternative bases, namely, historical cost, directors' preferred policy and compliance with AASB 1023.  The table shows that the points in dispute in this case have real practical significance to the QBE applicants.  I shall set out the table below.

TABLE OMITTED.

The NRMA carries on business as a general insurer.  The NRMA already discloses the net market value of its portfolio of investments as at or near balance date by way of notes to its accounts.  The premium income of the NRMA for the year ended 30 June 1991 was $1,064m.  The NRMA makes profits only to ensure its continued financial security. There are thus two profit constraints.  First, there is the minimum level which is necessary to fund future liabilities to policyholders and, second, there is a maximum level above which profits would exceed the NRMA's requirements for the future.  With respect to the year ended 30 June 1991 the directors of the NRMA determined that the investment of the company be valued at net market values at 30 June 1991.  Note (n) to the accounts of the NRMA as at 30 June 1991 stated as follows: 

"Revaluation of Investments
Non-current investments are stated at net recoverable amount which comprises net market value less the estimate of taxation potentially payable on capital gains should the investments be sold at balance date at these values. Net market values are determined as follows:

-
government and listed securities by reference to market quotations;
-
unlisted securities by Directors' valuation based on current economic conditions and the latest available information on the investments.

The Group has not had a policy of regular revaluation of its non-current investments. Such revaluations have been carried out occasionally for equity investments as the Directors deemed appropriate.
ASRB 1023 'Financial Reporting of General Insurance Activities' has been gazetted during the year.  It does not apply to the accounts of the Company until June 1992, however at that date it would require the restatement of the Group's investments at 30 June, 1991 at net market value and recognition of the taxation potentially payable, should the investments be sold at balance date at these values.  That basis is to be used in all subsequent periods.
The Directors, therefore, believe it appropriate to value investments on this basis at 30 June, 1991."

It is convenient to state the relevant legislative framework in which AASB 1023 finds its place.  Section 32 of the Corporations Act 1989 empowers the AASB to make accounting standards.  It provides as follows:

"32(1)
The Australian Accounting Standards Board may make for the purposes of Part 3.6 and 3.7 of the Corporations Law of the Capital Territory a written accounting standard that is not inconsistent with that Law or the Corporations Regulations of that Territory."

Section 286A of the Corporations Law is in the following terms: 

"286A(1)
An accounting standard is to be interpreted subject to this Law. 286A(2)  It is intended that where, but for this section, an accounting standard would have been interpreted as being inconsistent with this Law, the accounting standard is nevertheless to be valid in so far as it is not so inconsistent."

Section 9 of the Corporations Law is its "dictionary" and a number of definitions are relevant.  "Accounting standard" is defined relevantly as meaning "an instrument in force under s. 32 of the Corporations Act 1989, as the instrument has effect for the purposes of Parts 3.6 and 3.7 of the Corporations Law ..."

The word "accounts" is defined in s. 9 as meaning

"'accounts', in relation to an entity within the meaning of Parts 3.6 and 3.7, means, in this Part and those Parts, all of the following:

(a)
a profit and loss account of the entity for a period;
(b)
a balance-sheet of the entity as at the end of that period;
(c)
statements, reports and notes, other than a directors' report or an auditor's report, attached to, or intending to be read with, that profit and loss account or balance-sheet;"

"Profit and loss account" is defined as including "income and expenditure account, revenue account or any other account showing the results of the business of a person or body for a period ..."

"Profit or loss" are defined as meaning:

" 'profit or loss', in Parts 3.6 and 3.7, means:

(a)
in relation to a company - the profit or loss resulting from operations of the company; and
(b)
in relation to an entity within the meaning of Parts 3.6 and 3.7 - the profit or loss resulting from operations of the entity; and
(c)
in relation to 2 or more such entities, or in relation to an economic entity, within the meaning of Parts 3.6 and 3.7, constituted by 2 or more such entities - the profit or loss resulting from operations of those entities;"

Section 201(1) provides that "no dividend shall be payable to a shareholder of a company except out of profits or under s. 191" (which relates to share premium accounts and may be ignored for present purposes).

Section 284 deals with the application of accounting standards. It provides as follows:

"284(1)
An accounting standard may be expressed so as to apply in relation to all companies or specified companies.
(2)
Accounting standards may be of general or specially limited applications and may differ according to differences in time, locality, place or circumstance."

The relevance of s. 284 is that AASB 1023 applies to a particular class of company, namely, companies carrying on general insurance business.

Section 292 is an important section.  It provides:

"A company's directors shall, before the deadline after a financial year, cause to be made out a profit and loss account for that financial year that gives a true and fair view of the company's profit or loss for that financial year."

"Deadline" is defined in s. 9 in relation to a financial year of a company as the period before the expiration of the period within which the company is required to hold an annual general meeting in relation to a particular financial year.

Section 293 imposes an obligation upon the directors of a company with respect to its balance sheet in similar terms to s. 292.

37. Section 297 provides:   

"297(1)
A company's directors shall ensure that the company's financial statements for a financial year comply with such of the prescribed requirements as are relevant to the financial statements.
(2)
(Omitted by No. 110 of 1991, Sch 3 (effective 1 August 1991).)"

38.  Section 298 states: 

"298(1)
Subject to s. 297, a company's directors shall ensure that the company's financial statements for a financial year are made out in accordance with applicable accounting standards.
(2)
(Omitted by No. 110 of 1991, Sch 3 (effective 1 August 1991).)"

39.  Section 299 provides:   

"299(1)
If a company's financial statements for a financial year, as prepared in accordance with sections 297 and 298, would not otherwise give a true and fair view of the matters with which this Part requires them to deal, the directors must add such information and explanations as will give a true and fair view of those matters.
(2)
Nothing in subsection (1), or in section 297 or 298, limits the generality of a provision of this Division or of Division 4 or 4A, other than this section or section 297 or 298."

Regulation 3.6.02(2) of the Corporations Regulations provides that for the purposes of s. 297(1) of the Corporations Law, the prescribed requirements are set out in Schedule 5.

The format of the profit and loss account is set out in clause 6(1) of Schedule 5 to the Corporations Regulations which states that a profit and loss account must have the following format:

"Operating profit or loss;
Income tax attributable to operating profit or loss;
Operating profit or loss after income tax;
Profit or loss on extraordinary items;
Income tax attributable to profit or loss on extraordinary items;
Profit or loss on extraordinary items after income tax;
Operating profit or loss and extraordinary items after income tax;
Outside equity interests in operating profit or loss and extraordinary items after income tax;
Operating profit or loss and extraordinary items after income tax attributable to members of the chief entity;
Retained profits or accumulated losses at the beginning of the financial year;
Aggregate of amounts transferred from reserves;
Total available for appropriation;
Dividends provided for or paid;
Aggregation of amounts transferred to reserves;
Other appropriations;
Retained profits or accumulated losses at the end of the financial year."

Clause 1(1) of Schedule 5, is an interpretation clause, and defines "profit and loss account" as not including the notes to a profit and loss account.

Section 313(1) has already been mentioned; it is not necessary to set out its provisions.  Unless the company or its directors have been relieved from the requirements to comply with ss. 297 and 298 by reason of an application for relief under s. 313, they must comply with those requirements.

44. I turn to the submissions of the parties.

QBE and the NRMA do not seek to impugn the whole of AASB 1023. Their attack is confined to paragraph 23 and the incidental or consequential paragraph 30(iv), though the argument  was devoted entirely to paragraph 23.

The argument commenced with s. 32(1) of the Corporations Act 1989. It was submitted that the power conferred by sub-s. (1) is a limited power granted to the AASB of making standards.  The AASB may say what the format of the accounts is to be; but it cannot say what profit is because profit is what the Corporations Law say it is as interpreted by the courts.  In short, there is a distinction between what profit is and what procedural devices may be employed to determine how it may be calculated, the former being a matter of law and the second a matter of procedure, namely, the determination of an accounting standard.  It was not contemplated by Parliament when enacting the Corporations Law that accounting standards could alter the law.  This point was said to be exemplified by s. 286A of the Corporations Law.

It was argued that paragraph 23 in substance goes beyond this adjectival function and performs the substantive function of determining the content of profit and what it means.  It was said that it is impossible for an accounting standard to say that the profit and loss account shall contain something which is not in fact profit or loss.

Counsel for the applicants submitted that as s. 201 of the Corporations Law (like its predecessor, s. 565 of the Companies Codes) prohibits companies from paying dividends except out of profits and that profits cannot include unrealised increases in the market value of assets.  Reference was made to various judgments including Webb v The Australian Deposit and Mortgage Bank Limited (1910) 11 CLR 223 especially at 232, 233, 234, 237, 245; Westburn Sugar Refineries Limited v Inland Revenue Commissioners (1960) SLT 297 at 304; Dimbula Valley (Ceylon) Tea Company Limited v Laurie (1961) Ch 353 at 372-3; Blackburn v Industrial Equity Limited (1977) ACLC 40-324; Industrial Equity Limited v Blackburn (1977) 137 CLR 567 at 580; and Marra Developments Limited v B W Rofe Pty Limited (1977) 2 NSWLR 616 at 628.  Strong reliance was placed upon Blackburn v Industrial Equity Limited where the Court of Appeal of New South Wales considered s. 376(1) of the Companies Act 1961 (which was in similar terms to the provisions of s. 201 of the Corporations Law).  It was said to be authority for the proposition that unrealised profits cannot be transferred to the profit and loss account and used as the source of dividends (especially per Glass J.A.).

Counsel for the applicants drew attention to the fact that the prescribed format (under the Corporations Regulations) for a profit and loss account makes no provisions for bringing to account changes in the value of investments as revenue or expense in the financial year in which the changes occur, and that the prescribed format for a profit and loss account makes no distinction between realised profit and unrealised profit.  Counsel argued that traditional accounting concepts distinguish between capital account and revenue account so that in a broad sense the balance sheets reflect the capital and the profit and loss statement the revenue.  The distinction between capital and revenue is reflected in the Corporations Law by the distinction between distributions of capital (by way of reduction of capital) pursuant to s. 195 and distributions of income (revenue) pursuant to s. 201. In accordance with ordinary accounting principles, increases in the value of unrealised assets are reflected in the balance sheet by increasing the carried forward value of the assets on the "assets" side and increasing the shareholders of funds on the "liabilities" side by the creation of or addition to an asset revaluation reserve.  It was conceded that it was possible for a company to bring increases in the value of unrealised assets to account through the company's profit and loss statement, but in limited circumstances. Pursuant to AASB 1023 this was an option open to the company, but it is now mandatory that the company adopt this course.  It was submitted that, as a consequence of the compulsory bringing to account of changes in the net market value of assets, the company's "profits" will be inflated or deflated arbitrarily.  Once the company's "profit" has been determined by reference to the prescribed format for the profit and loss account, it is open to the company to deal with that "profit" in any one or more of the following ways:

•
by declaring dividends;
•
by transfering the whole or part of the profit to a capital reserve;
•
by retention of profits.

It was conceded that in certain circumstances capital profits may be distributed as dividends (see Marra Developments Limited v B.W. Rofe Pty Limited (1977) 2 NSWLR 616 at 629), but this is a rare case.

The QBE applicants and the NRMA contended that, if the applicants are required to make out their financial statements in accordance with paragraph 23 of AASB 1023, profits will be reported which:-

(a)
are misleading to potential readers of the accounts in that such profits will not properly reflect on a going concern basis the actual trading results of the company derived during the accounting period from their operations which are the businesses of insurance and reinsurance;
(b)
will fluctuate widely as a result of relatively small percentage changes in the market value of the investments of the companies which will affect a single item in the companies' profit and loss statement;
(c)
will frequently not be available in their entirety for dividend because dividends must be declared solely out of profits; and
(d)
will adversely affect financial market perceptions of the performance of the applicants and the perceptions of policyholders and reinsurers with whom the applicants deal.

It was contended that the reported profit resulting from the application of paragraph 23 will frequently not be true and fair and accordingly, in accordance with obligations imposed upon them under the Corporations Law, the directors of the applicants will be required to express a qualified opinion with regard to the profit and loss statements in the statements by directors attached to the financial statements.  Two results are said to follow.  First, paragraph 23 is said to be invalid on the ground of inconsistency between paragraph 23 and s. 201(1).  Second it was argued that the directors would not be able to comply with their obligation under s. 292 of ensuring that the profit and loss account gives a true and fair view of the profit or loss of the companies.

The central question is the meaning of "profits" in the context of the Corporations Law.  It is an elusive concept and though discussed in many reported cases has not been extensively analysed or comprehensively defined. The reason is because the word is used in different contexts (income tax law is a notable illustration) and reliance is placed by the courts upon the opinions of accountants and men of business to determine the application of the expression.  Changes in accountancy concepts and business needs are reflected in the evolving standards by which "profits" are determined.  It is a fine line that divides the meaning of profits from the standards by which they are to be measured.  As Gibbs C.J. observed in Federal Commissioner of Taxation v Slater Holdings Limited (1984) 156 CLR 447 at 460: 

"It is not always easy to determine what are profits out of which dividends ought to be paid."

A useful starting point is the well known passage from the judgment of Fletcher Moulton L.J. in Re Spanish Prospecting Co Limited (1911) 1 Ch 92 at 98:

"The word 'profits' has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification.  'Profit.' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year.  This can only be ascertained by a comparison of the assets of the business at the two dates."

This passage was cited with approval by Gibbs C.J. in Slater Holdings (Mason, Brennan and Deane JJ. agreed with the judgment of the Chief Justice), though the Chief Justice qualified his agreement by saying that the passage is not of universal application and each case must depend upon its own circumstances.  He preferred to take the definition of Fletcher Moulton L.J. as a "guide" (at 460).  This method of ascertaining profit was criticised by Professor H.A.J. Ford in Principles of Corporations Law, 6th ed., 1992 at para. 1009 as being "too crude".  Professor Ford said: 

"For example, it fails to distinguish between, on the one hand, trading gains in the value of assets which are due to trading activity of the company (such as gains made by buying and selling stock on advantageous terms) and, on the other, capital gains in the value of fixed assets which have been acquired to be held rather than for constant turnover.  Moreover, it would count as profit an unrealized gain on a fixed asset and, conversely, a decline in value of such an asset would reduce profits."

An important analysis of the meaning of "profits" was made by Higgins J. in Webb v Australian Deposit and Mortgage Bank Limited (1910) 11 CLR 223 at 241 where his Honour said: 

"The Commissioner, however, points out that the capital has been reduced; that the liability of the company 'to capital' is therefore less; and he urges that the word 'profits' means the excess of the value of the net assets over liability to capital.  It is not disputed that the other assets would amply meet the liability to capital.  It does not follow, however, that because the difference between assets and liabilities is in some cases to be treated as profits, it is to be so treated in all cases. As Farwell J. said in Bond v Barrow Haematite Steel Co: 'there is no hard and fast rule by which the Court can determine what is capital and what is profit'.  We must consider, inter alia, the mode and manner in which a business is carried on (per Lord Halsbury L.C. in Dovey v Cory).  The truth is, that the meaning of 'profits' is not rigid and absolute; it is flexible and relative - relative to each company; and in ascertaining the meaning of the word in any context, we must consider the whole context."

The approach of Fletcher Moulton L.J. in Spanish Prospecting to the meaning of profit underlies paragraph 23 of AASB 1023.  It is true that the customary method of determining profit of a business is to take the total trading revenue over a given period, that is the receipts arising from dealings in the normal course of the carrying on of the company's business, and then setting off against it expenditure incurred over the same period referable to the usual conduct of the company's business affairs (for example, wages), then to compare the value of so many of the assets as have been turned over in the course of the carrying on of the company's business which are held by the company at the beginning of the period with the value of the similar assets held at the end of the period, with the difference being added or deducted as the case may be from the difference between trading receipts and trading expenditure.  This method is the subject of comment by Professor Ford also at para. 1009.  But though this is the usual method of determining profits of a business it is not the sole method.

Profit refers to a comparison between the state of a business at the beginning and end of the relevant financial period.  It is the amount of gain made by the business during the year or the net balance of all gains earned and losses incurred during a relevant accounting year (see Slater, Law and Taxation of Company Distributions in Australia, paras. 600 - 685).  The statement of principle that profit should be calculated by reference to changes in the value of assets of a business during the relevant financial period in Re Spanish Prospecting is as valid today as it was in 1911 when expounded.

This case is concerned primarily with the question of meaning of profits available for the declaration and payment of dividends, so it is to s. 201 of the Corporations Law that I now turn.

Section 201(1) prohibits the payment of dividends to shareholders of companies except out of profits (or under s. 191 which is immaterial for present purposes).  As Mason J. observed in Industrial Equity Limited v Blackburn (1977) 137 CLR 567 at 576 with respect to s. 376(1) of the Companies Act 1961 (NSW) (s. 201 of the Corporations Law is its successor),

"the sub-section is not a recent innovation.  It has a history in Australian company law dating back to s. 48 of the Companies Act 1896 (Vict), long before consolidated or group accounts became a gleam in the draftsman's eye."

His Honour observed (at 576) that the section is designed to protect creditors and shareholders: 

"more particularly where there is more than one class of shareholder in a company ... it is founded on the proposition recognized in Trevor v Whitworth (1887) 12 App Cas 409 that a reduction of capital can only be effected in accordance with the statutory procedure and that there can be no return of capital except in accordance with that procedure - In re Exchange Banking Co (Flitcroft's Case) (1882) 21 Ch D 519 at 533.  The rule is frequently expressed, as here, in the form of a prohibition against dividends being payable except out of profits."

Thus dividends may be paid out of all assets of a company which are profits in the legal sense.  When dividends are declared there must be profits to meet them.  When s. 201 uses the words "payable ... out of profits" it does not require the existence of a separate fund from which the profits are to be extracted for the purpose of the payment of dividends.  All it requires is that at the date of declaration of the dividend the company's profit and loss account must disclose profits out of which the dividend can be paid.  I agree with the analysis of Hutley J.A. in Marra Developments Limited v B W  Rofe Pty Limited (1977) 2 NSWLR 616 (at 622).  I also agree with the following passage from the reasons for judgment of Mahoney J.A. (at 628):

"It is not necessary, for present purposes, to consider whether the principle (that is that dividends may not be paid except out of profits) is more accurately stated in terms of the existence of available profits, or as a proscription upon payments of dividends out of capital or paid up capital: cf. the observations of Mason J. in Industrial Equity Limited v Blackburn (1977) 52 ALJR 89; see also Dovey v Cory (1901) AC 477 at 486-7; Verner v General and Commercial Investment Trust (1894) 2 Ch 239 at 266; Buckley on the Companies Acts, 12th ed, p 902.  I doubt that a particular case is to be solved merely by adopting one or other formulation of the principle and then by attempting to deduce the result from the terms of it.  Whichever formulation be adopted, it is then necessary to enter upon an examination of the terms involved in it to establish, for the purposes of the application of that formulation of the principle, what is an available profit and what is or represents capital or paid up capital.  I am inclined to think that what may or may not be done by way of distributing moneys to shareholders cannot be stated in terms of a single formula of this kind, and that the matter is to be governed by distinct rules, applicable according to the nature of the case: see Dovey v Cory; Bond v Barrow Haematite Steel Co (1902) 1 Ch 353 at 365."

Plainly profits of a company available for dividend may be trading profits derived during the relevant financial year.  Also, it is well established that capital profits, in the sense of profits earned on the realization of capital assets, may be available for dividend provided there has been an accretion to the paid up capital: see Australasian Oil Exploration Limited v Lachburg (1958) 101 CLR 119 at 133 and the cases there cited and Marra Developments per Mahoney J.A. at 629.

The position with respect to unrealized accretions to the value of assets has been considered, though to a limited extent, in certain of the authorities.  It has been held that unrealized accretions to the value of a company's capital assets may be available for dividend where it is clear (and, by inference, only where it is clear) that the accretion in value is of a permanent character: see Dimbula Valley (Ceylon) Tea Co Limited v Laurie (1961) Ch 353 at 371-72; Marra Developments at 629.  In Blackburn v Industrial Equity Jacobs J. said at 580 that the reasoning of Buckley J. in Dimbula "correctly stated the law", though his Honour made this observation in a context not directly in point in this case.  However, the authorities attach the rider that capital profits of this kind cannot be utilized for payment of dividend unless its paid up capital is intact.  There must upon a balance of account be an accretion to the paid up capital: Lachburg (at 133) and Marra (at 630).

The present case is concerned, however, with assets and profits of a kind different to those which were involved in the cases to which reference has just been made.  The assets of the QBE applicants and of the NRMA with which this case is concerned, though not trading stock, are nevertheless assets held for the purposes of investment.  I note, with interest, that the seven year smoothing method adopted by QBE at present is itself based on the premise that unrealized gains and losses on investments should be brought to account notwithstanding that it is spread over a period of seven years rather than one year, thus recognizing in principle that assets held for investment by companies carrying on general insurance activities may be brought to account.

Profits of companies carrying on general insurance business (and the profits of banks) are derived from the investment of their circulating capital (I take into account Mason J.'s comment in Industrial Equity Limited v Blackburn at 576 that "the obscure distinction taken between fixed and circulating capital ... lies at the heart of some of the statements" (in certain of the cases)): see Colonial Mutual Life Assurance Society Limited v Federal Commissioner of Taxation (1946) 73 CLR 604 at 615-616; The National Bank of Australasia Limited v Federal Commissioner of Taxation (1969) 118 CLR 529 per Kitto J. at 537; London Australia Investment Co Limited v Federal Commissioner of Taxation (1977) 138 CLR 106 .  In Colonial Mutual Life Latham C.J., Dixon and Williams JJ. said at 618:   ." .. the sounder view is that profits and losses on the realization of investments of the funds of an insurance company should usually be taken into account in the determination of the profits and gains of the business." In London Australia Jacobs J. said at 129-130: 

"The nature of a banking or insurance business, as part of its putting of money as circulating capital to use, involves not only occasional acquisition of property in satisfaction of advances, as in the situation to which Kitto J. was referring, but also and more commonly the purchase and sale of various kinds of property whereby moneys which are obtained as part of the business but which form no part of the original capital structure of the bank or insurance company, or of that structure enhanced by accumulated net profits, are put to use short term or long term.  All profits arising from that activity are profits of the business of banking or insurance."

As to the circumstances where insurance companies have funds that may be described as "circulating capital" see GRE Insurance Limited v Federal Commissioner of Taxation (1992) 92 ATC 4089 per Northrop, Davies and Jenkinson JJ. at 4091-4092 and the cases cited at 4092.  These cases to which reference has been made are decisions with respect to the profits of insurance companies in the context of income tax legislation, but nevertheless they are appropriate for consideration with respect to the question that arises in the present case.  The investment assets of the applicants with which this case is concerned in my view constitute their circulating capital.  This case is therefore distinguishable from cases which apply the principle that unrealized accretions to the value of a company's capital assets may be available for dividend only where it is clear that the accretion in value is of a permanent character.

It is important to realize that it does not follow from the requirement in Schedule 5 to the corporations regulations that the format of a profit and loss account show profits available for "appropriation", that the appropriation must be in the form of dividends.  Certainly it conveys the impression that the profits may be available for this purpose, but not that they must be appropriated for dividends.  Appropriation may be made to a number of accounts and for a variety of purposes.  Profits may be appropriated to various reserves, for example, a reserve to provide for the replacement of wasting assets or a reserve to provide against contingencies relating to legal proceedings.  The profit and loss account is not an indication of what will be paid as dividends.  Its primary purpose is to report on the results of the company for the relevant financial period, and in particular the results of its operations during that period.

Another point of significance is that the payment of dividends is always discretionary.  The directors are not obliged to make payments of dividends out of profits as profits may be used for a variety of purposes, of which dividends is but one.

Additionally, directors would be in breach of their duties, both statutory and under the general law to the company, if dividends were declared or paid if the result is that the company would be insolvent: see Gower, The Principles of Modern Company Law, 3rd Ed., 1969 (at 117) who described this as an "overriding condition of solvency" and cites Peter Buchanan Limited v McVey (1955) AC 516n as authority for the proposition.  See also the 5th edition of Gower, 1992, p 258 note 96. (The 5th edition demonstrates the considerable import upon the Corporations Law of the United Kingdom caused by its membership of the European Community, and the care with which cases decided in the United Kingdom after the commencement of the Companies Acts of 1980, 1981 and 1989 (UK) must be treated in Australia.)  See also Ford, Principles of Corporations Law para. 1008 and the cases there cited.  Certainly a company may borrow funds in order to obtain the cash necessary to pay a dividend (Stringer's Case (1869) LR 4 Ch App 475; Mills v Northern Railway of Buenos Ayres Co (1870) LR 5 Ch App 621), but the money so borrowed together with the funds of the company in hand must be sufficient to cover the dividends and all other liabilities then presently due and payable.

The meaning of the word "profits" is for the courts to determine. But the identification of what in relation to the affairs of a particular company constitutes its profits is determined by the courts with close regard to the views of the accountancy profession.  The courts are influenced strongly by the views adopted by professional accountancy bodies  and men of business and the evidence of accountants is given great weight by the courts: Commissioner of Taxes (SA) v Executor Trustee and Agency Co of SA Limited (Carden's Case) (1938) 63 CLR 108 per Dixon J. (at 153-4):

"The tendency of judicial decision has been to place an increasing reliance upon the conceptions of business and the principles of commercial accountancy ... the process by which the principles and practices evolved in business or general affairs are drawn upon for the solution of questions presented to courts of law almost inevitably leads to a development in the law itself.  For, under our system of precedents, a decision adopting or resorting to any given accounting principle or application of principle is almost bound to settle for the future the rule to be observed and the rule thus comes to look very much like a proposition of law."

As Lord Reid said in Duple Motor Bodies Limited v Inland Revenue Commissioners [1961] 1 WLR 739 (at 753):

"Normally, a court attaches great weight to the view of the accountancy profession, though the court must always have the last word..."

In Odeon Associated Theatres Limited v Jones [1971] 1 WLR 442 Pennycuick V.C. said at 454:

"In so ascertaining the true profit of a trade the court applies the correct principles of the prevailing system of commercial accountancy.  I use the word 'correct' deliberately.  In order to ascertain what are the correct principles it has recourse to the evidence of accountants. That evidence is conclusive on the practice of accountants in the sense of the principles upon which accountants act in practice.  That is a question of pure fact, the court itself has to make a final decision as to whether that practice corresponds to the correct principles of commercial accountancy.  No doubt in the vast proportion of cases the court will agree with the accountants but it will not necessarily do so."

These views were approved by the English Court of Appeal (1973) 1 Ch 288 (at 299).  Buckley L.J. observed:

"Accountants are, after all, the persons best qualified by training and practical experience to suggest answers to the many difficult problems that can arise in this field."

See also Heather v P-E Consulting Group Limited (1973) 1 Ch 189 per Denning M.R. (at 217).

72. In Marra Mahoney J.A. said (at 629): 

"It has been said that this (matters that may be taken into account in determining revenue profit) is to be determined by 'men of busines.' and, presumably, those advising them in the keeping of their accounts ... but this does not depend upon, e.g., the whim or idiosyncracy (sic)of the persons concerned, and no doubt the court will, in an appropriate case, hold that particular item should have been brought to account in determining whether a revenue profit has been earned, or earned in a particular period."

See also Sun Insurance Office v Clark (1912) AC 443 and Gresham Life Assurance Society v Styles (1892) AC 309.

In the present case, perhaps because of the speed with which the case was prepared for hearing, expert evidence of accountants has not been led; although the Court does have the benefit of the accounting standards themselves including paragraph 23 of AASB 1023.

If in the opinion of the directors of any of the applicants the profit and loss account, prepared in compliance with paragraph 23, would not give a true and fair view of the company's profit or loss for the relevant financial year, they may add information or appropriate notes, thus complying with the direction of s. 299(1) of the Corporations Law to "add such information and explanations as will give a true and fair view of those matters" (i.e. the matters with which Part 3.6 of the Corporations Law requires them to deal). The duty imposed upon directors by s. 292 to cause to be made out a profit and loss account that gives a true and fair view of the company's profit or loss for the relevant year is not imposed in a legislative vacuum; rather it arises from s. 292 which is placed in Division 4 of Part 3.6 of the Corporations Law relating to accounts and the same division includes s. 297, 298 and 299.  It follows from s. 299(1) that the legislature has envisaged the possibility of a company's financial statements being prepared in accordance with ss. 297 and 298 not giving a true and fair view of relevant matters unless the directors add information or explanations that will give a true and fair view of those matters even if the profit and loss account does not technically include notes to it (because of the definition of "profit and loss account" in the interpretation clause in Schedule 5 of the Corporations Regulations). Regard must be had to those notes to determine whether those directors have complied with their statutory obligations imposed by s. 292 of causing the profit and loss account to give a true and fair view of the company's profit or loss.

Although accounts prepared in accordance with paragraph 23 are not inconsistent with s. 201 and are not false and misleading; to the extent that directors feel obliged to add explanations or notes to give a true and fair view of the relevant matters they are at liberty to do so. Notes of this kind are not contradictory of the profit and loss account itself but rather simply a further explanation of them.

It is interesting to note that there is wide divergence in accounting practices throughout the world with respect to the treatment of the operating results of insurance companies.  They are discussed in the Report of the Working Group on Accounting Standards No. 4, Operating Results of Insurance Companies, Current Practices in OECD Companies, Paris 1988.  See also, especially with respect to the practices in the United States as to the reporting of insurance companies, Miller's Comprehensive GAAP Guide, 1989, 65.01-65.35; and see Palmer's Company Law current loose leaf edition, Dividends and Profit, (9.701 - 9.717) and profits available for distribution, (9.801 - 9.832).

Paragraph 23 of AASB 1023 does not have the effect of converting into profits something which is not capable of such conversion.  It is an accounting standard intended by the AASB (represented by the second respondent) to require companies carrying on the business of general insurance to bring to account unrealized gains or losses on investments. I reject the argument that the standard is bad in law as being inconsistent with s. 201 and as creating a misleading effect.

It is essential to keep in mind at all times when considering the questions with which this case is concerned that the Court is not considering whether the accounting practice inherent in paragraph 23 of AASB 1023 is the most acceptable or the wisest standard; the question is whether it is valid in law.  Obviously accountants and men of business differ as to the desirability of bringing to account unrealized gains and losses of the investments of a company carrying on the business of general insurance; but the proposition cannot be supported that the standard is contrary to the requirements of the law.

It may be that paragraph 23 reflects a standard that was viewed by some as introducing radical change in the principles and practices of accounting; but I do not discern in it elements which vitiate the standard in law.

I would dismiss both applications with costs.

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