7. Accounting standards and insurance company accounts

Question 1

What financial reporting standards must UK quoted companies follow for their consolidated accounts?

Answer 1

International Financial Reporting Standards (IFRS)

Question 2

What reporting standard can subsidiaries of quoted companies and parent companies use for their own accounts?

Answer 2

FRS 101 (IFRS with reduced disclosures)

Question 3

What reporting standard can UK companies, other than quoted companies, adopt?

Answer 3

FRS 102 (UK GAAP)

Question 4

What additional standards must insurance companies following FRS 102 adopt?

Answer 4

FRS 103 (sets out financial reporting requirements and guidance for insurance contracts)

Question 5

What is the IFRS Foundation?

Answer 5

A not-for-profit international organisation responsible for developing IFRS Standards.

Question 6

What is the mission of the IFRS Foundation?

Answer 6

To develop standards that bring transparency, accountability, and efficiency to financial markets worldwide.

Question 7

What are the three tiers of the IFRS Foundation’s governance model?

Answer 7

1. IASB
2. Trustees
3. Monitoring Board

Question 8

What is the role of the IASB (International Accounting Standards Board)?

Answer 8

They develop and issue IFRS Standards.

Question 9

What is the role of the Trustees in the IFRS Foundation?

Answer 9

They oversee strategy, funding, and due process of the IASB and are accountable to the Monitoring Board.

Question 10

What is the Monitoring Board’s responsibility?

Answer 10

Setting the form and content of corporate reporting in their respective jurisdictions.

Question 11

What is the purpose of the ISSB (International Sustainability Standards Board)?

Answer 11

To develop sustainability-related disclosure standards for informed investor decisions.

Question 12

What is the role of the IFRS Advisory Council?

Answer 12

To provide strategic support and advice to the IFRS Foundation.

Question 13

What committee supports the IASB (International Accounting Standards Board)?

Answer 13

The IFRS Interpretations Committee.

Question 14

What is the role of the IFRS Interpretations Committee?

Answer 14

To offer guidance where divergence in practice occurs.

Question 15

Which body is responsible for accounting standards in the UK?

Answer 15

he Financial Reporting Council (FRC), soon to be replaced by the Audit, Reporting and Governance Authority (ARGA)

Question 16

What body is responsible for endorsing IFRS in the UK?

Answer 16

The UK Endorsement Board (UKEB)

Question 17

What are the 3 criteria for UK endorsement of IFRS?

Answer 17

1. Align with the principle of a true and fair view.
2. Benefit the UK’s long-term public good.
3. Be understandable, relevant, reliable, and comparable.

Question 18

What are the two underlying assumptions in IFRS?

Answer 18

1. Accrual basis – Record transactions when they happen, not when cash is received or paid.
2. Going concern – Assume the entity will keep operating in the foreseeable future.

Question 19

What four qualities enhance the usefulness of financial information under IFRS?

Answer 19

1. Comparable
2. Verifiable
3. Timely
4. Understandable

Question 20

Under IFRS, what are the three components of the statement of financial position (balance sheet)?

Answer 20

1. Assets
2. Liabilities
3. Equity

Question 21

Under IFRS, what are the two components of the statement of comprehensive income (income statement)?

Answer 21

1. Income
2. Expenses

Question 22

What is the ‘true and fair’ view requirement in UK company law?

Answer 22

Financial statements that give a ‘true and fair’ view, and directors must not approve them unless satisfied they meet this requirement.

Question 23

How is ‘true and fair’ generally interpreted in UK law?

Answer 23

As giving a faithful representation of the company’s financial performance, financial position, and cash flows for the period.

Question 24

Why was the Financial Policy Committee (FPC) established?

Answer 24

To improve financial stability after the 2007–2008 financial crisis.

Question 25

What is the main role of the Financial Policy Committee (FPC)?

Answer 25

To ensure that emerging risks and vulnerabilities across the financial system are identified, monitored, and effectively addressed.

Question 26

To whom is the Financial Policy Committee (FPC) accountable?

Answer 26

To the government.

Question 27

What is the objective of IFRS 17 Insurance Contracts?

Answer 27

To help investors and others better understand insurers' risk exposure, profitability, and financial position.

Question 28

What are 6 key requirements of IFRS 17?

Answer 28

1. Disclose insurance risks and contract terms. 2. Keep insurance liabilities on the balance sheet. 3. Do not offset with reinsurance assets. 4. Test insurance liabilities’ adequacy. 5. Test reinsurance assets for impairment. 6. No provisions for claims on non-existent contracts.

Question 29

How is gross written premium (GWP) presented under IFRS 17?

Answer 29

In the notes to the accounts for analysis over multiple periods.

Question 30

How is net written premium calculated under IFRS 17?

Answer 30

By deducting premiums ceded to reinsurers and brokerage/commission payments.

Question 31

How is earned premium referred to in IFRS 17?

Answer 31

Insurance revenue

Question 32

How are prior-year claims adjustments treated under IFRS 17?

Answer 32

They must be disclosed separately in the insurance contract liability roll-forward, not included in the claims cost.

Question 33

What is the liability for remaining coverage in IFRS 17?

Answer 33

It represents the unearned premium reserve, the part of premiums for the unexpired policy period, shown separately on the balance sheet.

Question 34

How are acquisition costs treated under IFRS 17?

Answer 34

Acquisition costs are included in insurance contract cash flows and liability, not presented as an asset, with the expense shown separately in the income statement.

Question 35

What is the combined ratio in the context of insurance under IFRS 17?

Answer 35

A profitability ratio that divides claims and expenses by premiums earned, measuring underwriting profitability. It includes the claims ratio and expense ratio, and under IFRS 17, it applies to all insurance activities.

Question 36

What do claims development tables (CDTs) provide for general insurers?

Answer 36

CDTs provide information about the accuracy of prior estimates of outstanding claims and the extent to which insurance liabilities vary.

Question 37

What are the 5 main components of IFRS financial statements?

Answer 37

1. Balance sheet 2. Income statement 3. Cash flow statement 4. Notes, including significant accounting policies 5. Either a statement of changes in equity (SOCE) or a statement of recognised income and expense (SORIE)

Question 38

What is required in addition to financial statements under IFRS?

Answer 38

Comparative information for the previous accounting year must be shown.

Question 39

What is the purpose of the FRC's Conduct Committee?

Answer 39

To ensures that public and large private companies comply with reporting requirements and reviews directors' reports and accounts.

Question 40

What are the criteria for a small entity under FRS 102?

Answer 40

A small entity must meet two of the following criteria: 1. Turnover less than £10.2m 2. Total assets less than £5.1m 3. 50 employees or less

Question 41

What is the FRS 105 for micro entities?

Answer 41

A micro entity must meet two of the following criteria: 1. Turnover less than £632,000 2. Total assets less than £316,000 3. 10 employees or fewer

Question 42

What is the difference between UK GAAP and IFRS for individual company accounts?

Answer 42

UK quoted companies must use IFRS for consolidated accounts, but can use UK GAAP for their individual company accounts, avoiding the onerous disclosure requirements of IFRS.