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 eleven accounting concepts.

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 important things that should be considered when analyzing accounts.

Answer 3

1. The strength of the provisioning 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 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 the accounting ratios that might be considered in analyzing a general insurance company’s accounts.

Answer 5

• Incurred expenses to premium income
• Commission to premium income
• Operational ratio (total of incurred claims
  and expenses to premium income)
• 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 more 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
• Recognizing the realistic costs of accruing
  benefits
• Disclosure of appropriate information

Question 10

List the 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