CH33 - Reporting results

Question 1

Main accounting concepts commonly used in drawing up financial statements (11)

Answer 1

1. cost
2. money measurement
3. going concern
4. business entity
5. realisation
6. accruals
7. matching
8. dual aspect
9. materiality
10. prudence
11. consistency

Question 2

In analysing accounts, attention should be paid to (3)

Answer 2

1. any accounting rules, guidance and practice in the country concerned
2. whether the accounts should be prepared on a going concern basis and should give a true and fair view
3. any changes in accounting practice

Question 3

Reports accompanying accounts

Answer 3

Reports accompanying accounts expand the information available about the company. What is not said or included can also be insightful.

Question 4

Additional reports might include (6)

Answer 4

1. chairperson’s and CEO’s statements - successes, progress against key objectives, senior management changes
2. investment report - investment strategy and performancd
3. strategic report - progress against long and short term strategic objectives
4. risk report - attitude to risk, key risks faced, risk management approaches taken
5. remuneration report - director’s pay, Board attendance, turnover of directors
6. corporate governance report - organisation of Board and committee, independence of directors

Question 5

Insurance companies - ratios for analysis accounts (4)

Answer 5

1. expense ratio
2. commission ratio
3. operating ratio (particularly short term business)
4. ratio of outward reinsurance premiums to gross premium income

Insurance business is subject to cyclical effects, so the results of one insurance company should be compared to those of companies transacting similar types of business.

The strength of provisioning basis will affect the reported results, which makes it difficult to achieve consistency from year to year. In some countries, insurance companies are required to disclose their capital requirements in a separate report.

Question 6

Benefit schemes disclosure (6)

Answer 6

Reporting on the progress of benefit schemes is different as benefit schemes do not generate profits or losses. In many countries, information about the financial position of the scheme must be disclosed to beneficiaries in an attempt to improve security.

It is important that beneficiaries are given sufficient clear information about their entitlements. Disclosure could include details of the:

1. benefit entitlements
2. contribution obligations
3. expense charges
4. investment strategy
5. risks involved
6. treatment of entitlements in the event of insolvency

Question 7

Benefit schemes - disclosure timing (5)

Answer 7

Where disclosure is required by legislation, this may relate to information given to beneficiaries:

1. on entry
2. at regular intervals
3. once payments commence
4. on request
5. a combination of these

Question 8

Common aims that most of the accounting standards attempt to achieve (4)

Answer 8

1. recognising the realistic costs of accruing benefits
2. avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
3. consistency in the accounting treatment from year to year
4. disclosure of appropriate information

Question 9

Possible disclosure requirements that may be needed (8)

Answer 9

These include:

1. assumptions
2. actuarial method
3. value of liabilities accruing over the year
4. increase in the past service liabilities over the year
5. investment return achieved on the assets over the year
6. surplus or deficit and the change in this figure over the year
7. benefit cost over the year in respect of any directors
8. membership movements