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. The 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 gives 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

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

These additional reports might disclose information such as commentary on:
* The performance of the company against key objectives
* The company’s investment strategy and investment performance
* The progress of the company against its long-term and short-term strategic objectives
* The company’s attitude to risk, the key risks it faces, and how it manages and mitigates those risks
* The company’s governance arrangements and how the board assures itself of independence

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

• 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 more accountable

Question 7

When might disclosure of information to beneficiaries be required?

Answer 7

• On entry
• At regular intervals
• Once payment commence
• On request
• A combination of these

Question 8

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

Answer 8

• 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

• Recognising the realistic costs of accruing benefits
• Avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
• Consistency in the accounting treatment from year to year
• Disclosure of appropriate information

Question 10

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

Answer 10

• Assumptions used
• Actuarial method used
• Value of liabilities accruing over the year
• Increase in the past service liabilities over the year
• Investment return achieved on the assets over the year
• Surplus / deficit
• Change in the surplus / deficit over the year
• Benefit cost over the year in respect of any directors
• Membership movements