Financial Reporting Overview

Question 1

financial reporting bases (4)

Answer 1

• Generally Accepted Accounting Principles (GAAP) - focused on measuring financial performance by matching revenues and expenses
• Statutory Accounting Principles (SAP) - prescribed by the NAIC for use by state regulators to monitor solvency
• tax - used to compute taxable income
• International Financial Reporting Standards (IFRS) - used in many countries outside the U.S.

Question 2

primary financial statements (4)

Answer 2

• balance sheet - presents assets and liabilities as of a specific point in time
• income statement - presents financial results (revenues and expenses) during a specific time period
• statement of capital and surplus - reflects changes in surplus that are not recorded in the income statement
• cash flow statement - recognizes actual cash flows

Question 3

liquidation vs going concern

Answer 3

• liquidation - viewing a company as a runoff, useful for regulators interested in satisfying policyholder obligations
• going concern - viewing a company as ongoing business, useful for investors

Question 4

fair value vs historical cost

Answer 4

• fair value - recording at a value it would be bought or sold for in the open market
• historical cost - recording at original purchase price minus depreciation
• trade-off between accuracy and verifiability

Question 5

principle-based vs rule-based

Answer 5

• principle-based - general guidance that must be interpreted and applied
• rule-based - specific guidance
• trade-off between adaptability and ease of use