18 Profit Reporting Flashcards
State which set of accounting requirements apply to which types of UK Life Company. (5)
- All UK listed insurance companies are required to use EU adopted IFRS when preparing their financial statements.
- In other situations, such as:
- the subsidiaries of listed companies
- unlisted groups and their companies
- the parent company’s own accounts
companies are permitted by the Companies Act 2006 to use either IFRS or UK GAAP. - Companies that have a listing in the US are also required to prepare accounts under US GAAP.
List the four asset categories under IAS39 and summarise briefly how financial assets are valued. (6)
The categories of financial assets for IAS39 are:
- Fair value through profit or loss (e.g. assets held for trading with a short time horizon)
- Available for sale (e.g. quoted equities)
- Held to maturity (e.g. govt bonds intended to be held to maturity)
- Loans and receivables (e.g. unquoted bonds)
All are measured at fair value at initial recognition.
Subsequently, the fair value of an asset will be depend on its classification.
How does IFRS4 define an insurance contract? (3)
“A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder”.
How does IFRS4 require insurance contracts to be valued? (3)
- An insurance contract can be valued broadly in line with local accounting standards.
- For a UK company this means means “old UK GAAP”.
- Changes to these accounting policies can be made so long as there is no reduction in relevance or reliability.
Which two IAS apply to valuing investment contracts? (2)
An investment contract must be valued in accordance with IAS18 and IAS39.
State the three sources of requirements that together form the UK GAAP accounting framework. (3)
- Companies Act 2006
- Schedule 3 of the Large and Medium Sized Companies and Groups Regulations 2008
- Financial Reporting Standards
Give a brief overview of the “Old UK GAAP” accounting framework (4)
- It applied to accounting periods beginning before 1/1/15.
- It typically takes the Solvency I balance sheet as the starting point.
- It is sometimes referred to as the Modified Statutory Basis (MSB).
- It still has relevance for UK life insurance companies since the accounting policies for insurance contracts in financial statements under IFRS or “New UK GAAP” are often derived from “Old UK GAAP”.
Give a brief overview of the “New UK GAAP” accounting framework (4)
- Applies to accounting periods starting on or after 1/1/15.
- Comprises FRS100 through to FRS104.
- Includes many elements that are brought forward from “Old UK GAAP”.
- Is intended to be an interim solution for some elements.
Describe the main features of the “Old UK GAAP” balance sheet assets and liabilities. (5)
- Assets were generally valued at market value and were not subject to any inadmissibility requirements.
- The definition of an insurance contract was the same as in IFRS4.
- The liabilities were made up of Technical Provisions and for with-profits, the Fund for Future Appropriations..
- The liabilities of with profits contracts issued by “realistic basis life companies” were based on the realistic balance sheet in Pillar 1 Peak 2.
- The liabilities of other insurance contracts were based on the statutory solvency basis adjusted for DAC and investment, resilience and similar contingency reserves.
Describe Deferred Acquisition Costs (DAC) as used under “Old UK GAAP”. (7)
- Many insurance contracts have future margins over and above renewal costs that are meant to recover the initial new business costs.
- The initial new business strain reduces profit. This is then followed by profits arising in future when margins are released.
- Acquisition Costs can be deferred to prevent or reduce the new business strain.
- This essentially capitalises the future release of margins.
- DAC is amortised over the period in which it is expected to be recovered.
- DAC is not a “real” asset and as such does not impact the cashflow to or from the company.
- It is simply an accounting concept used for spreading profit.
State the four main principles underlying US GAAP. (4)
- Historic Cost: Assets and Liabilities should be valued at acquisition cost rather than fair market value.
- Revenue Recognition: Revenue should be recorded when it is earned rather than when it is received.
- Matching: Expenses should be matched to revenues wherever it is reasonable to do so. Expenses are not recognised when they are incurred but when the work undertaken makes its contribution to revenue. Only if there is no connection with revenue can expenses be charged to the current period.
- Full Disclosure: Information disclosed should be sufficient to make a judgement, whilst keeping the cost of preparation and use of that information reasonable.
Summarise how assets are treated in insurance accounts prepared under US GAAP. (5)
The categories of asset are:
- Trading - valued at market value.
- Available for sale - valued at “book value” (amortised cost for bonds, cost value for equities) for the profit and loss account and at market value for the balance sheet.
- Held to maturity - valued at amortised cost value.
A DAC asset is also held in line with the matching principle.
After the purchase of a business or portfolio, the present value of future profits expected to arise from that business is set up as an intangible asset in the balance sheet.
Summarise the main FAS’s relevant to accounting for life assurance products under US GAAP. (7)
FAS60: Traditional Non-Linked Products:
- Valued using prospective methods and “locked in” best estimate assumptions, including provisions for adverse deviations.
- If the premium paying period is shorter than the insurance period, it may be necessary to hold a deferred profit liability.
- For short duration business, the reserve is a gross unearned premium reserve.
FAS97: Most UL and UWP contracts, investment and limited pay contracts:
- Products are generally valued at “account value” i.e the undercounted unit value.
FAS120: With profits contracts that meet certain principles
What statement must a company make if they prepare their accounts in accordance with IFRS?
They must make an explicit and unreserved statement of compliance.
An entity shall not describe financial statements as complying with IFRS unless they comply with ALL the requirements of IFRS.
What accounting standards apply to insurance and investment contracts respectively?
Insurance: IFRS4
Investment: Split between
- IAS 18 for the investment management component
- IAS39 for the financial instrument component
