7. Accounting standards and insurance company accounts Flashcards
What financial reporting standards must UK quoted companies follow for their consolidated accounts?
International Financial Reporting Standards (IFRS)
What reporting standard can subsidiaries of quoted companies and parent companies use for their own accounts?
FRS 101 (IFRS with reduced disclosures)
What reporting standard can UK companies, other than quoted companies, adopt?
FRS 102 (UK GAAP)
What additional standards must insurance companies following FRS 102 adopt?
FRS 103 (sets out financial reporting requirements and guidance for insurance contracts)
What is the IFRS Foundation?
A not-for-profit international organisation responsible for developing IFRS Standards.
What is the mission of the IFRS Foundation?
To develop standards that bring transparency, accountability, and efficiency to financial markets worldwide.
What are the three tiers of the IFRS Foundation’s governance model?
- IASB
- Trustees
- Monitoring Board
What is the role of the IASB (International Accounting Standards Board)?
They develop and issue IFRS Standards.
What is the role of the Trustees in the IFRS Foundation?
They oversee strategy, funding, and due process of the IASB and are accountable to the Monitoring Board.
What is the Monitoring Board’s responsibility?
Setting the form and content of corporate reporting in their respective jurisdictions.
What is the purpose of the ISSB (International Sustainability Standards Board)?
To develop sustainability-related disclosure standards for informed investor decisions.
What is the role of the IFRS Advisory Council?
To provide strategic support and advice to the IFRS Foundation.
What committee supports the IASB (International Accounting Standards Board)?
The IFRS Interpretations Committee.
What is the role of the IFRS Interpretations Committee?
To offer guidance where divergence in practice occurs.
Which body is responsible for accounting standards in the UK?
he Financial Reporting Council (FRC), soon to be replaced by the Audit, Reporting and Governance Authority (ARGA)
What body is responsible for endorsing IFRS in the UK?
The UK Endorsement Board (UKEB)
What are the 3 criteria for UK endorsement of IFRS?
- Align with the principle of a true and fair view.
- Benefit the UK’s long-term public good.
- Be understandable, relevant, reliable, and comparable.
What are the two underlying assumptions in IFRS?
- Accrual basis – Record transactions when they happen, not when cash is received or paid.
- Going concern – Assume the entity will keep operating in the foreseeable future.
What four qualities enhance the usefulness of financial information under IFRS?
- Comparable
- Verifiable
- Timely
- Understandable
Under IFRS, what are the three components of the statement of financial position (balance sheet)?
- Assets
- Liabilities
- Equity
Under IFRS, what are the two components of the statement of comprehensive income (income statement)?
- Income
- Expenses
What is the ‘true and fair’ view requirement in UK company law?
Financial statements that give a ‘true and fair’ view, and directors must not approve them unless satisfied they meet this requirement.
How is ‘true and fair’ generally interpreted in UK law?
As giving a faithful representation of the company’s financial performance, financial position, and cash flows for the period.
Why was the Financial Policy Committee (FPC) established?
To improve financial stability after the 2007–2008 financial crisis.
What is the main role of the Financial Policy Committee (FPC)?
To ensure that emerging risks and vulnerabilities across the financial system are identified, monitored, and effectively addressed.
To whom is the Financial Policy Committee (FPC) accountable?
To the government.
What is the objective of IFRS 17 Insurance Contracts?
To help investors and others better understand insurers’ risk exposure, profitability, and financial position.
What are 6 key requirements of IFRS 17?
- Disclose insurance risks and contract terms.
- Keep insurance liabilities on the balance sheet.
- Do not offset with reinsurance assets.
- Test insurance liabilities’ adequacy.
- Test reinsurance assets for impairment.
- No provisions for claims on non-existent contracts.
How is gross written premium (GWP) presented under IFRS 17?
In the notes to the accounts for analysis over multiple periods.
How is net written premium calculated under IFRS 17?
By deducting premiums ceded to reinsurers and brokerage/commission payments.
How is earned premium referred to in IFRS 17?
Insurance revenue
How are prior-year claims adjustments treated under IFRS 17?
They must be disclosed separately in the insurance contract liability roll-forward, not included in the claims cost.
What is the liability for remaining coverage in IFRS 17?
It represents the unearned premium reserve, the part of premiums for the unexpired policy period, shown separately on the balance sheet.
How are acquisition costs treated under IFRS 17?
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.
What is the combined ratio in the context of insurance under IFRS 17?
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.
What do claims development tables (CDTs) provide for general insurers?
CDTs provide information about the accuracy of prior estimates of outstanding claims and the extent to which insurance liabilities vary.
What are the 5 main components of IFRS financial statements?
- Balance sheet
- Income statement
- Cash flow statement
- Notes, including significant accounting policies
- Either a statement of changes in equity (SOCE) or a statement of recognised income and expense (SORIE)
What is required in addition to financial statements under IFRS?
Comparative information for the previous accounting year must be shown.
What is the purpose of the FRC’s Conduct Committee?
To ensures that public and large private companies comply with reporting requirements and reviews directors’ reports and accounts.
What are the criteria for a small entity under FRS 102?
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
What is the FRS 105 for micro entities?
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
What is the difference between UK GAAP and IFRS for individual company accounts?
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.
