Chapter 34: Reporting results

Question 1

Outline the emphasis of changes to accounting standards in recent years, and the consequences of using market value of assets in the financial statements of financial product providers.

Answer 1

In recent years, changes to accounting standards have placed a greater emphasis on neutrality rather than prudence. For trading companies, there has also been a move away from historical cost towards ‘fair value’.

Investment companies, including financial product providers, have prepared accounts using the market value of assets (or a proxy for it) for many years.

This means revaluing assets and liabilities at the end of each accounting period. Gains and losses on revaluation should be included in that period’s income statement.

A consequence of this, for a financial product provider, is volatile results if the assets and liabilities do not move consistently.

Question 2

List 11 accounting concepts

Answer 2

1. Cost
2. Money management
3. Going concern
4. Business entity
5. Realisation
6. Accruals
7. Matching
8. Dual aspect
9. Materiality
10. Prudence
11. Consistency

Question 3

Outline 7 important things that should be considered when analysing accounts

Answer 3

1. Strength of the bases used
2. The impact of business growth
3. The statutory and accounting rules that apply in the country concerned
4. Usually prepared on a going concern basis and give a true and fair view
5. Whether there have been any changes in accounting practice over the last year and what the effects of these changes are
6. The reports accompanying the accounts (including occurrence of exceptional events)
7. The effects of the underwriting cycle on insurance companies - should compare only against accounts of providers with similar business.

Question 4

List 6 additional reports that might accompany the accounts

Answer 4

CIRCUS

Chairperson’s / CEO’s statement
Investment report
Remuneration report
Corporate governance report
Uncertainty (risk) report
Strategic report

Question 5

List 4 accounting ratios that might be considered in analysing a general insurance company’s accounts

Answer 5

1. Incurred expenses to premium income
2. Commission to premium income
3. Operational ratio (total of incurred claims and expenses to premium income)
4. Outward reinsurance premium to gross premium income.

Question 6

List the reasons why disclosure of information to scheme beneficiaries and also to the provider or sponsor is important

Answer 6

SIMMERS

Sponsor is aware of financial significance of benefits
Informed decisions can be made
Mis-selling (or misleading beneficiaries) is avoided
Manages the expectations of members
Encourages take up
Regulatory requirement
Security of scheme improved as sponsor / trustees are made mroe accountable.

Question 7

When might disclosure of information to beneficiaries be required?

Answer 7

PRICE

Payments commencement
Request
Intervals
Combination
Entry

Question 8

List examples of information that may be disclosed to members of a benefit scheme

Answer 8

SCRIBE

Strategy for investment
Contribution obligations
Risks involved
Insolvency entitlement
Benefit entitlements
Expense charges

Question 9

Across different countries, a number of different accounting standards exist for benefit schemes. These have a number of common aims, what are they?

Answer 9

CARD

Consistency in the accounting treatment from year to year
Avoiding distortions resulting from contributions fluctuations
Recognising the realistic costs of accruing benefits
Disclosure of appropriate information.

Question 10

LIst 9 items that owners of benefit providers may be required to disclose in accounts

Answer 10

DIM CLAIMS

Director’s benefit cost over the year
Investment return achieved on the assets over the year
Membership movements
Change in the surplus / deficit over the year
Liabilities accruing over the year (value of)
Assumptions used
Increase in the past service liabilities over the year
Method used
Surplus / deficit