Chapter 34: Reporting Results Flashcards
Outline the emphasis of changes to accounting standards in recent years, and the consequences of using market value of assets in the financial statements of financial product providers
In recent years, changes to accounting standards have placed a greater emphasis on neutrality rather than prudence. For trading companies, there has also been a move away from historical cost towards ‘fair value’.
Investment companies, including financial product providers, have prepared accounts using the market value of assets (or a proxy for it) for many years.
This means revaluing assets and liabilities at the end of each accounting period. Gains and losses on revaluation should be included in that period’s income statement.
For a financial product provider, this can lead to volatile results if the assets and liabilities do not move consistently.
List eleven accounting concepts (Make sure I understand them all - see practice question at end of chapter)
And see q bottom page 3
- Cost
- Money management
- Going concern
- Business entity
- Realization
- Accruals
- Matching
- Dual aspect
- Materiality
- Prudence
- Consistency
Outline 7 important things that should be considered when analyzing accounts
- The strength of the bases used
- The impact of business growth
- The statutory and accounting rules that apply in the country concerned.
- In developed countries accounts are usually prepared on a going concern basis and give a true and fair view.
- Whether there have been any changes in accounting practice over the last year and what the effects of these changes are
- The reports accompanying the accounts (including occurrence of exceptional events)
- The effects of the underwriting cycle on insurance companies - should compare only against accounts of providers with similar business.
List 6 additional reports that might accompany the accounts
CIRCUS
- Chairperson’s / CEO’s statement
- Investment report
- Remuneration report
- Corporate governance report
- (Uncertainty) Risk report
- Strategic report
Chairperson’s / CEO’s statement
- These might give details of the successes of the year, little will be said about the failures
- Performance against key objectives should be reported
- These reports normally refer to changes at board and senior management level and give an idea of whether the company is flourishing or not
Investment Report
A summary of investment strategy and performance - often included within another report
Remuneration Report
As well as recording the pay of executive and non-executive directors for comparison with other similar companies, this would also show attendance at board meetings and the turnovers of directors, both giving an idea of the state of the company
Corporate Governance Report
Describes how the company is organised in terms of board and board committees
Statements on how the board assures itself of independence would normally be included
Risk Report
If not included elsewhere, this might explain the company’s attitude to risk, the key risks it faces, and how it manages and mitigates those risks
Strategic Report
This should refer to the company’s long-term and short-term strategic objectives, report how they have been met and the progress being made to achieve the long-term objectives
Performance against Key Performance Indicators must be given
List 4 accounting ratios that might be considered in analyzing a insurance company’s accounts
- Incurred expenses to premium income
- Commission to premium income
- Operating ratio (total of incurred claims and expenses to premium income)
- Outward reinsurance premium to gross premium income
Care is needed when drawing conclusions from such high-level analysis. For example, a sharp risk in premium income maybe a sign of competively low, and perhaps unprofitable, premium rates, or it may represent the market success of a new popular product unique to the company concerned
Explain why the operating ratio is used more in looking at short-term classes of business (such as general insurance)
For short-term classes of business, most of the cashflows occur in a single year and the major items of interest are premiums, claims and expenses.
Therefore, the operating ratio can give a meaningful measure of the profitability of a company.
For long-term insurance, the cashflows are spread over a greater time period and include the maintenance of appropriate provisions over this time period.
Therefore an analysis of amounts over a single accounting period is not particularly enlightening
Explain why benefit scheme reporting is different
Benefit schemes do not generate profits or losses
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’
The results of the actuarial evaluation of the scheme generate a figure for accumulated surplus or deficit.
This amount may be used to adjust the contribution rate for the succeeding period
List the reasons why disclosure of information to scheme beneficiaries and also to the provider or sponsor or regulator is important
SIMMERS
- Sponsor must be made aware of the financial significance of the benefits obligations
- Informed decisions can be made by the beneficiaries
- Mis-selling ( product or service is deliberately misrepresented or a customer is misled about its suitability.) is avoided
- Manages the expectations of members
- Encourages take up
- Regulatory requirement of non-state benefit provision
- Security of scheme improved as sponsor / trustees are made more accountable
WHEN might disclosure of information to beneficiaries be required?
PRICE
- Payments commencement
- Request
- (Regular) Intervals
- Combination
- Entry
