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.

For a financial product provider, this can lead to volatile results if the assets and liabilities do not move consistently.

Question 2

List eleven accounting concepts (Make sure I understand them all - see practice question at end of chapter)
And see q bottom page 3

Answer 2

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

Question 3

Outline 7 important things that should be considered when analyzing 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. In developed countries accounts are 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

Chairperson’s / CEO’s statement

Answer 5

• These might give details of the successes of the year, little will be said about the failures
• Performance against key objectives should be reported
• These reports normally refer to changes at board and senior management level and give an idea of whether the company is flourishing or notw

Question 6

Investment Report

Answer 6

A summary of investment strategy and performance - often included within another report

Question 7

Remuneration Report

Answer 7

As well as recording the pay of executive and non-executive directors for comparison with other similar companies, this would also show attendance at board meetings and the turnovers of directors, both giving an idea of the state of the company

Question 8

Corporate Governance Report

Answer 8

Describes how the company is organised in terms of board and board committees

Statements on how the board assures itself of independence would normally be included

Question 9

Risk Report

Answer 9

If not included elsewhere, this might explain the company’s attitude to risk, the key risks it faces, and how it manages and mitigates those risks

Question 10

Strategic Report

Answer 10

This should refer to the company’s long-term and short-term strategic objectives, report how they have been met and the progress being made to achieve the long-term objectives

Performance against Key Performance Indicators must be given

Question 11

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

Answer 11

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

Care is needed when drawing conclusions from such high-level analysis. For example, a sharp risk in premium income maybe a sign of competively low, and perhaps unprofitable, premium rates, or it may represent the market success of a new popular product unique to the company concerned

Question 12

Explain why the operating ratio is used more in looking at short-term classes of business (such as general insurance)

Answer 12

For short-term classes of business, most of the cashflows occur in a single year and the major items of interest are premiums, claims and expenses.

Therefore, the operating ratio can give a meaningful measure of the profitability of a company.

For long-term insurance, the cashflows are spread over a greater time period and include the maintenance of appropriate provisions over this time period.

Therefore an analysis of amounts over a single accounting period is not particularly enlightening

Question 13

Explain why benefit scheme reporting is different

Answer 13

Benefit schemes do not generate profits or losses

If actuarial valuations of the scheme are not made annually, there are no entries that can be made on the liability side of the balance sheet of a benefit scheme, other than ‘accumulated fund’

The results of the actuarial evaluation of the scheme generate a figure for accumulated surplus or deficit.

This amount may be used to adjust the contribution rate for the succeeding period

Question 14

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

Answer 14

SIMMERS

• Sponsor must be made aware of the financial significance of the benefits obligations
• Informed decisions can be made by the beneficiaries
• Mis-selling ( product or service is deliberately misrepresented or a customer is misled about its suitability.) is avoided
• Manages the expectations of members
• Encourages take up
• Regulatory requirement of non-state benefit provision
• Security of scheme improved as sponsor / trustees are made more accountable

Question 15

WHEN might disclosure of information to beneficiaries be required?

Answer 15

PRICE

• Payments commencement
• Request
• (Regular) Intervals
• Combination
• Entry

Question 16

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

Answer 16

SCRIBE (preSCRIBEd information)

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

Question 17

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

Answer 17

CARD

• Consistency in the accounting treatment from year to year (although not necessarily from company to company)
• Avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
• Recognizing the realistic costs of accruing benefits
• Disclosure of appropriate information

Question 18

List 9 items that owners of benefit providers may be required to disclose in accounts (Maak seker wat owners of benefit providers is)

Answer 18

MID CLAIMS

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

Question 19

Explain briefly why past services liabilities will increase over the year (employer’s obligation to fund a pension plan for the time period when employees were qualified to participate but the plan was not yet established)

Answer 19

To reflect the fact that benefits are 1 year closer to being paid

Question 20

Give examples of how disclosure could help to improve the security of non-state provision

Answer 20

• By making the operation of the scheme more transparent and subject to scrutiny
• Alerting members and trustees to potential problems, possibly enabling them to put pressure on the scheme sponsor to address these potential problems
• Providing members with the opportunity to leave the scheme if they are not happy with the level of security offered. If members did this in sufficient numbers, the sponsor may respond by addressing the security issue