Ch 13 - Group accounts and insurance company accounts Flashcards
Parent & subsidiary
Parent co: co which holds the controlling interest in others
Subsidiary: co which are controlled by the parent co
(together the parent + subsidiary = group)
How could controlling interest arise?
1) through majority of voting rights owned
2) parent co could hold less than half of the voting shares but still have the right to appoint or remove directors holding a majority of the voting rights at board meetings or it could have some other right to exercise a dominant influence over a subsidiary.
Why is a parent co required to publish a set of consolidated financials?
This is to reflect the economic reality of the group’s existence.
(consolidated SPL & SFP)
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Many business activities are done as a group (i.e supplying g+s or manufacturing etc.)
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>It would be illogical for most purposes to view the group as being anything other than a single economic entity (SH of the parent would certainly be more interested in the performance of the group as a whole than the parent on its own)
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Need to cancel out any internal relationships which arise within the group (for the financial statements)
Goodwill
Goodwill = cost of acquisition - BV of shares acquired
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cost of acquisition is the value of any cash paid out + market value of any shares or debt paid out to the co’s subsidiary SH’s
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BV of shares acquired is the value of the proportion of share capital & reserves that co H owns as a result of the acquisition
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def: any amount paid in excess of nominal value of the shares & reserves acquired by a parent
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amount which the parent is paying for such intangibles as:
> reputation of the subsidiary
> its customer base
> its loyal workforce
Non-controlling interest
def: value of share capital & reserves provided by the subsidiary’s minority SH’s
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parent co will have control if it owns 50% or more of the shares or if it can otherwise control the subsidiary (doesn’t have to be all)
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shown in equity section of SFP
Associated undertaking
def: one which is not a subsidiary, but which is subject to significant influence (but not control) by the parent.
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significant influence would normally arise if the parent owned between 20-50% of the associate’s voting rights.
How are the associate & parent’s results treated in the consolidated SPL & SFP?
SPL: parent’s share of the associate results are included regardless of whether it receives these by the way of dividend.
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SFP: includes parent’s share of the associate’s assets & liabilities
The preparation of insurers accounts is complicated by two special features:
i) the underlying contracts (liabilities) fall due outside the accounting period and are uncertain in size
ii) premature transfer of ‘profit’ to shareholders may endanger the financial stability of the company and the ability to meet future liabilities
Explain the liabilities & timing of profit for an insurer
Estimated values for future liabilities must be assessed, either on a statistical basis or by expert judgement. Premiums already received in respect of such liabilities need to be identified and held until the liabilities have expired.
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Additional sums may have to be set aside to meet any anticipated worsening in claims experience or failure by third parties to honour their commitments towards meeting eventual liabilities
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Provisions made for future liabilities are likely to be conservative in nature, with the result that current profit is under-stated. This conflicts ‘true & fair’ view of the position of the co.
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feature is exacerbated by NBS (new business strain)… where the profit profile of LT contracts, written initially causes a financial strain due to costs of setting up the contracts and establishing adequate initial reserves. (aim is that costs are recovered over period of business)
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a further problem is introduced by the tax environment whereby particular classes of business may operate under different tax rules. (may require sub-funds for tax purposes)
How is the SPL for an insurer divided up into?
i) technical account: relating to the main insurance business (split in 2 for general insurance & LT insurance)
ii) non-technical: profits from the 2 types of businesses & adds in any profit made on other non-insurance business
Technical account (revenue a/c)
Earned premiums (net of reinsurance)
+ Investment income
+ Realised capital gains
- Claims incurred (net of reinsurance) or benefits payable
- Net operating expenses incurred (incl. investm exp)
= Balance on revenue a/c
For the revenue account (technical accounts), there are 2 types of additional items needed depending on standards or practices:
For G.I -> change in equalisation provision (type of reserve used to smooth out fluctuations in claims from y2y)
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For LT -> fund for future appropriations (all fund the allocation of which - either to PH or SH - that have not been determined by the end of the financial year)
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possibly for both, they could incl. ‘unrealised gains or losses on investments’
Technical account (revenue a/c)
Balance on G.I revenue a/c
+ balance on LT insurance revenue a/c
+ Investment income
+ Realised & unrealised gains (losses) on investments
+ P/L from other ordinary activities before tax
= P/L for financial year
Assets for an insurer
> those held to cover insurance liabilities
those representing free reserves
reinsurers’ share of technical provisions
prepayments & accrued income
Liabilities for an insurer
> Fund for future appropriations
Technical provisions:
- LT insurance (including actuarially estimated value of co’s liabilities)
-GI (including unexpired risk reserves & outstanding claims reserve)
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[Also o/s claims reserve is to cover the claims & expenses for all o/s claims that have not yet been settled]
