Chapter 7

Question 1

Role of the IFRS Foundation

Answer 1

The IFRS Foundation develops global accounting standards through the International Accounting Standards Board (IASB)​

Question 2

Purpose of International Financial Reporting Standards (IFRS)

Answer 2

IFRS ensures financial statements are comparable, transparent, and globally consistent

Question 3

Key Features of the IFRS Framework

Answer 3

Includes accrual accounting, going concern assumption, and the requirement for financial statements to be understandable, relevant, reliable, and comparable​

Question 4

Statement of Financial Position Components

Answer 4

Assets, liabilities, and equity must be clearly presented under IFRS

Question 5

Statement of Profit or Loss

Answer 5

Reflects a company’s income and expenditure over a financial period​

Question 6

True and Fair’ Requirement (Companies Act 2006)

Answer 6

Directors must ensure financial statements give a true and fair view of the company’s financial position​

Question 7

IFRS 17 – Insurance Contracts

Answer 7

Introduced in 2023 to improve the transparency of insurance liabilities and profitability

Question 8

Claims Development Tables (CDTs)

Answer 8

Required under IFRS 17 to show how accurately past claims estimates were calculated

Question 9

UK Generally Accepted Accounting Principles (UK GAAP)

Answer 9

UK GAAP provides an alternative to IFRS and includes FRS 102, FRS 103 (for insurance), and FRS 105 (for micro-entities)

Question 10

FRS 103 – Insurance Contracts

Answer 10

Allows insurers to continue using existing accounting policies but may be updated following IFRS 17

Question 11

Challenges in Converting from UK GAAP to IFRS

Answer 11

Includes additional costs, staff training, and changes in financial reporting systems​

Question 12

Impairment Testing in IFRS 17

Answer 12

Requires insurers to test reinsurance assets for impairment to ensure accuracy​

Question 13

Insurance Liabilities and Offsetting

Answer 13

IFRS prohibits offsetting insurance liabilities against reinsurance assets​

Question 14

The Contractual Service Margin (CSM) in IFRS 17

Answer 14

Represents unearned profit in insurance contracts and is released over time

Question 15

Solvency and Regulatory Reporting under IFRS 17

Answer 15

Requires insurers to disclose risk management strategies and financial health indicators

Question 16

A UK insurer operates internationally and must prepare consolidated financial statements. Which standard must it follow?
a) US GAAP
b) UK GAAP
c) IFRS
d) Local accounting standards in each country

Answer 16

c) IFRS

Question 17

IFRS 17 and Profit Recognition
An insurer collects premiums upfront for multi-year policies. Under IFRS 17, when can profits be recognised?
a) Immediately upon receiving the premium
b) At the end of the policy term
c) Over the duration of the policy
d) Only when a claim occurs

Answer 17

c) Over the duration of the policy

Question 18

An insurer previously estimated reserves based on past trends. Under IFRS 17, what must now be included?
a) Only reported claims
b) A best estimate of future cash flows and risk adjustments
c) Policyholder satisfaction surveys
d) Historical profit margins

Answer 18

b) A best estimate of future cash flows and risk adjustments

Question 19

A company’s board is unsure whether their financial statements meet the ‘true and fair’ requirement. What must they ensure?
a) They comply with IFRS or UK GAAP
b) They use the same accounting practices as competitors
c) They maximise reported profits
d) They avoid showing financial losses

Answer 19

a) They comply with IFRS or UK GAAP

Question 20

A regulator requests an insurer’s Claims Development Table (CDT). What is its purpose?
a) To predict future claim payouts
b) To assess the accuracy of past claims reserves
c) To estimate marketing expenses
d) To track employee performance

Answer 20

b) To assess the accuracy of past claims reserves

Question 21

A small insurer is considering moving from UK GAAP to IFRS. What is a key challenge?
a) No differences between the two standards
b) Increased regulatory scrutiny
c) Fewer financial disclosures required
d) Immediate tax benefits

Answer 21

b) Increased regulatory scrutiny

Question 22

A reinsurer experiences financial difficulties, and an insurer holds significant reinsurance assets. Under IFRS 17, what must the insurer do?
a) Ignore the reinsurer’s financial health
b) Conduct an impairment test
c) Write off all reinsurance recoveries
d) Reduce premium income

Answer 22

b) Conduct an impairment test

Question 23

An insurer’s new policy portfolio includes a mix of profitable and unprofitable contracts. How should CSM be adjusted?
a) Profitable contracts increase CSM, while losses reduce it
b) CSM remains unchanged
c) All contracts are treated the same
d) Future profits are ignored

Answer 23

a) Profitable contracts increase CSM, while losses reduce it

Question 24

An insurer invests in volatile assets but does not disclose this in financial reports. What is the consequence under IFRS 17?
a) No consequence
b) Regulatory penalties for non-disclosure
c) Increased investment income
d) No impact unless investors complain

Answer 24

b) Regulatory penalties for non-disclosure

Question 25

A small general insurer wants to use the Premium Allocation Approach (PAA) under IFRS 17. When is this permitted? a) For short-term policies under one year b) For long-term life policies c) For any insurance contract d) Only for reinsurance contracts

Answer 25

For short-term policies under one year

Question 26

What does PAA stand for

Answer 26

Premium allocation approach

Question 27

An insurer’s Solvency II ratio falls below the required threshold due to higher-than-expected claims and investment losses. What is the most immediate action required? a) Continue business as usual and hope market conditions improve b) Notify the regulator and submit a recovery plan to restore solvency c) Stop issuing new policies and lay off staff to cut costs d) Shift all investments to high-risk assets to recover losses quickly

Answer 27

b) Notify the regulator and submit a recovery plan to restore solvency

Question 28

An insurer estimates its future claims liabilities but does not include a risk adjustment. What is the consequence of this under IFRS 17? a) No impact on financial statements b) Understatement of liabilities, leading to misleading profitability figures c) Reduction in the insurer’s required capital d) Immediate regulatory exemption from IFRS reporting

Answer 28

b) Understatement of liabilities, leading to misleading profitability figures

Question 29

An insurer has significant reinsurance recoverables from a financially unstable reinsurer. Under IFRS 17, what must the insurer do? a) Assume full recovery and continue business as usual b) Perform an impairment test and adjust financial statements accordingly c) Move all reinsurance assets off the balance sheet d) Request additional funding from policyholders to cover potential losses

Answer 29

b) Perform an impairment test and adjust financial statements accordingly

Question 30

An insurer invests heavily in long-term corporate bonds. Due to rising interest rates, the bond values decline significantly. How does this affect the insurer’s financial statements? a) Asset values decrease, potentially leading to solvency concerns b) The insurer benefits from higher returns and stronger liquidity c) No impact as investments are unrelated to solvency requirements d) The insurer can ignore the losses since bonds will eventually mature

Answer 30

a) Asset values decrease, potentially leading to solvency concerns

Question 31

A life insurance company inflates the estimated future cash inflows from policies to improve financial results. What are the potential consequences under IFRS 17? a) Regulatory fines, restatement of financials, and reputational damage b) Increased investor confidence and higher share prices c) The insurer will receive an award for financial creativity d) No impact unless a competitor files a complaint

Answer 31

a) Regulatory fines, restatement of financials, and reputational damage

Question 32

An insurer wants to net off reinsurance recoverables against its claims liabilities in the financial statements to improve its balance sheet. Under IFRS 17, is this allowed? a) Yes, if both amounts are related to the same policy b) No, IFRS 17 prohibits offsetting liabilities against reinsurance assets c) Yes, if the insurer receives permission from the regulator d) No, unless the policyholder consents to the adjustment

Answer 32

b) No, IFRS 17 prohibits offsetting liabilities against reinsurance assets

Question 33

An insurer writes a long-term health policy portfolio with a significant expected profit. Under IFRS 17, how should this be accounted for? a) Recognise all profits immediately b) Recognise profits gradually over the policy period as services are provided c) Defer profits until all claims are settled d) Ignore CSM and report only claims data

Answer 33

b) Recognise profits gradually over the policy period as services are provided

Question 34

An insurer underreports its liabilities in regulatory filings to maintain a high solvency ratio. What is the likely consequence? a) Regulatory fines, potential license revocation, and criminal charges b) Increased investor confidence and lower capital requirements c) No impact as long as the company remains profitable d) Higher bonuses for executives due to improved financial ratios

Answer 34

a) Regulatory fines, potential license revocation, and criminal charges

Question 35

A small insurer with short-term policies is struggling to implement IFRS 17 due to high compliance costs. What approach might they take? a) Apply the Premium Allocation Approach (PAA) to simplify reporting b) Ignore IFRS 17 and continue using previous accounting standards c) Merge with a larger insurer to avoid compliance obligations d) Lobby regulators for a complete exemption from IFRS

Answer 35

a) Apply the Premium Allocation Approach (PAA) to simplify reporting

Question 36

An insurer's asset portfolio consists mainly of equities, which are experiencing extreme volatility. How does this impact Solvency II capital requirements? a) The insurer must hold higher capital reserves to cover market risk b) The insurer’s required capital remains unchanged c) The regulator will reduce capital requirements to encourage investment d) The insurer can shift the risk to policyholders without additional capital

Answer 36

a) The insurer must hold higher capital reserves to cover market risk

Question 38

IFRS 17 introduces the CSM (Contractual Service Margin). What does this represent? A) Outstanding premiums B) Insurer’s expected profit on future services C) Tax provision D) Broker commission margin

Answer 38

Answer: B) Insurer’s expected profit on future services Explanation: CSM is the unearned profit from insurance contracts under IFRS 17

Question 38

A UK-based insurer prepares its financial statements for international investors. Which accounting framework is most appropriate? A) UK GAAP B) Solvency II C) IFRS D) GAAS

Answer 38

Answer: C) IFRS Explanation: IFRS is required for listed companies and widely used globally for transparency

Question 39

What is the role of the IFRS Foundation in global financial reporting? A) To supervise auditors B) To manage shareholder disputes C) To set and maintain IFRS standards D) To determine taxation rules

Answer 39

Answer: C) To set and maintain IFRS standards Explanation: The IFRS Foundation develops globally accepted accounting rules​

Question 40

A UK mutual insurer wants to adopt a simpler reporting framework. Which is most suitable? A) IFRS B) Solvency II C) UK GAAP (FRS 102) D) Basel III

Answer 40

Answer: C) UK GAAP (FRS 102) Explanation: Smaller or non-listed companies may opt for UK GAAP, particularly FRS 102

Question 41

What is a key difference between UK GAAP and IFRS for insurers? A) Tax rules B) Currency used C) Level of detail and disclosures D) Use of cash basis

Answer 41

Answer: C) Level of detail and disclosures Explanation: IFRS requires broader disclosures, particularly under IFRS 17

Question 42

Under IFRS 17, which financial statement would show a release of CSM? A) Balance sheet B) Statement of changes in equity C) Statement of profit or loss D) Cash flow statement

Answer 42

Answer: C) Statement of profit or loss Explanation: Profit is recognised as services are provided, reducing the CSM over time

Question 43

IFRS 17 requires reinsurance contracts to be reported: A) Net with premiums B) Separately from direct insurance contracts C) Only in the notes to accounts D) After taxes

Answer 43

Answer: B) Separately from direct insurance contracts Explanation: Reinsurance is treated distinctly to give a clearer picture of gross vs. ceded risks

Question 44

Why might an insurer continue using UK GAAP instead of adopting IFRS? A) IFRS is illegal in the UK B) IFRS only applies to reinsurers C) UK GAAP is more suited to smaller, private firms D) IFRS is not accepted by regulators

Answer 44

Answer: C) UK GAAP is more suited to smaller, private firms Explanation: UK GAAP (like FRS 102) is designed for entities without public accountability

Question 45

Which of the following is not a key IFRS 17 building block? A) Risk adjustment B) Contractual service margin C) Coverage ratio D) Discounted cash flows

Answer 45

Answer: C) Coverage ratio Explanation: The three key blocks are: discounted cash flows, risk adjustment, and CSM​

Question 46

An insurer values its assets and liabilities using market value principles. Which regulatory approach does this resemble? A) Solvency II B) FRS 105 C) IFRS 4 D) Historical cost convention

Answer 46

Answer: A) Solvency II Explanation: Solvency II and IFRS 17 both emphasise economic or market-consistent valuation​

Question 47

What is the purpose of the risk adjustment under IFRS 17? A) To absorb dividend volatility B) To ensure minimum profit C) To reflect uncertainty in cash flows D) To increase claims reserves

Answer 47

Answer: C) To reflect uncertainty in cash flows Explanation: The risk adjustment compensates for non-financial risk variability

Question 48

Under IFRS 17, a group of contracts must be measured: A) Individually B) As a whole portfolio C) By line of business only D) At a future value

Answer 48

Answer: B) As a whole portfolio Explanation: Contracts are grouped by similar risks and managed together

Question 49

What is one disadvantage of IFRS for insurers? A) Poor comparability B) Lack of consistency C) Higher implementation complexity and cost D) No investor trust

Answer 49

Answer: C) Higher implementation complexity and cost Explanation: Adopting IFRS 17 is costly and time-consuming due to its complexity

Question 50

A firm reports using both Solvency II and IFRS. What is the likely difference in focus? A) Both focus on tax strategy B) IFRS is forward-looking only C) Solvency II focuses on regulatory solvency; IFRS on performance D) IFRS ignores claims reserves

Answer 50

Answer: C) Solvency II focuses on regulatory solvency; IFRS on performance Explanation: Solvency II focuses on capital adequacy; IFRS focuses on profit and disclosure​

Question 51

What role does the IASB play in insurance accounting? A) Enforces insurance pricing B) Sets financial reporting standards like IFRS 17 C) Approves company audits D) Defines actuarial assumptions

Answer 51

Answer: B) Sets financial reporting standards like IFRS 17 Explanation: The IASB is the IFRS standard-setting body under the IFRS Foundation

Question 52

What is the objective of IFRS 17? A) Minimise taxes B) Delay recognition of liabilities C) Ensure consistent recognition, measurement and disclosure of insurance contracts D) Improve asset rotation

Answer 52

Answer: C) Ensure consistent recognition, measurement and disclosure of insurance contracts Explanation: IFRS 17 creates global consistency in reporting insurance liabilities and profits

Question 53

Which of the following are included in the measurement of an insurance liability under IFRS 17? A) Investment income only B) Discounted cash flows, risk adjustment, and CSM C) Reinsurance balances only D) Historical cost of claims

Answer 53

Answer: B) Discounted cash flows, risk adjustment, and CSM Explanation: These are the three building blocks of insurance contract valuation under IFRS 17

Question 54

Which item is excluded from insurance service result under IFRS 17? A) Claims incurred B) Insurance revenue C) Net reinsurance result D) Investment return

Answer 54

Answer: D) Investment return Explanation: Investment return is reported separately under IFRS 17 to distinguish operating results​

Question 55

Why are insurance firms required to disclose changes in assumptions under IFRS 17? A) To improve auditor recruitment B) To ensure consistency with past IFRS 4 reports C) To improve transparency and comparability D) To reduce policyholder claims

Answer 55

Answer: C) To improve transparency and comparability Explanation: Changes in assumptions affect profit and must be explained to stakeholders

Question 56

Under UK GAAP, which accounting rule allows simplification for small firms? A) FRS 105 B) IFRS 17 C) Solvency II D) PRA Handbook

Answer 56

Answer: A) FRS 105 Explanation: FRS 105 is the micro-entities regime under UK GAAP for the smallest businesses