Chapter 34 - Reporting of Results

Question 1

Accounting Concepts & Principles

Answer 1

Accounting concepts and principles may vary from country to country, although efforts are being made to achieve greater harmonisation of international accounting practice. The principles used may also depend on the purposes for which the accounts are designed

Question 2

Financial Accounts

Answer 2

Before attempting to interpret the accounts of a provider, it is necessary to be familiar with both the rules governing the preparation of the accounts and also the accounting rules and conventions that apply in the country concerned.

In developed economies, the published financial statements of financial product providers are usually prepared on a going concern basis and are intended to give a true and fair view of the provider’s performance and financial position.

The prior year’s figures will normally be shown alongside the current year. Changes in accounting practice will be identified and, if material, the prior year’s figures will be restated on the current basis to enable fair comparisons to be drawn.

Question 3

Reports accompanying accounts

Answer 3

The reports accompanying the accounts may reveal much more about the company than an analysis of the published numbers. Because these reports are written to be in the public domain, what is not said or disclosed in the reports can give greater insight to the company’s position than what is publicly disclosed.
These additional reports might disclose information such as commentary on:
- performance of the company against key objectives
- company’s investment strategy and investment performance
- progress of the company against its long-term and short-term strategic objectives
- company’s attitude to risk, the key risks it faces, and how it manages and mitigates those risks
- company’s governance arrangements and how the Board assures itself of independence

Question 4

Insurance Company Accounts

Answer 4

Insurance business is subject to cyclical effects that may affect many providers at more or less the same time. This makes it necessary to compare the profitability of a provider’s business with the results disclosed by the accounts of other providers, especially those transacting similar types of business.

In some countries, insurance companies may be required to put their methods for calculating a risk-based capital requirement into the public domain in a separate report that is filed alongside the accounts. It may be more appropriate to use this additional report for any comparative financial analysis, particularly when comparing companies that use a prescribed standard model for the risk assessment.

It may be possible to get a quick, but limited, indication of the financial position of an insurance company by examining individual accounting items and various ratios of one to another, and comparing them with the accounts of earlier years

It may be useful to consider the figures and ratios both before and after reinsurance, if available and relevant.

Among the ratios to be considered could be:
- incurred expenses to premium income
- commission to premium income
- operating ratio, i.e. the total of incurred claims and expenses to premium income

Question 5

Banks

Answer 5

Banks are also subject to economic cyclical effects that may affect many providers at more or less the same time. Similar to the ratios used to get an indication of the financial position of insurance companies, ratios can be used to assess banks. The most important ratios for assessing banks are:
- probability of default
- loss given default.

Question 6

Why benefit scheme reporting is different ?

Answer 6

Reporting on the progress of benefit schemes is different from the reporting of results by corporate entities. Benefit schemes do not generate profits or losses. Indeed if actuarial valuations of the scheme are not made annually, there are no entries that can be made on the liability side of the balance sheet of a benefit scheme, other than ‘accumulated fund’.

Question 7

Disclosure for benefit schemes

Answer 7

Disclosure could include details of the:
- benefit entitlements
- contribution obligations
- expense charges
- investment strategy
- risks involved
- treatment of entitlements in the event of insolvency

Where disclosure is required by legislation, this may relate to information given to beneficiaries:
- on entry
- at regular intervals
- once payments commence
- on request
- a combination of these

Although it is largely the form of the benefits that will dictate how well it is to be understood by members and potential members, it is usually possible to present the same set of benefits in different ways, some of which may be clearer to members than others.
Poor disclosure can lead to future problems for providers, as it may give rise to the beneficiaries gaining false expectations of their future benefits.

Where benefits are sponsored by employers, it is important that the owners of the capital of the company (and potential owners) are aware of the financial significance of the benefit obligations that exist. Therefore, it is common practice in many countries for these financial obligations to be shown as part of the company’s accounts.

Possible disclosure requirements that may be needed include the:
- assumptions used
- actuarial method used
- value of liabilities accruing over the year
- increase in the past service liabilities over the year
- investment return achieved on the assets over the year
- surplus / deficit
- change in the surplus / deficit over the year
- benefit cost over the year in respect of any directors
- membership movements.