Chapter 37: Accounting and disclosure

Question 1

Interpreting accounts (5)

Answer 1

In analysing accounts, attention should be paid to:

• any accounting rules, guidance and practice in the country concerned
• whether the accounts should be prepared on a going concern basis and should give a true and fair view
• any changes in accounting practice
• the basis used for valuation of assets
• any exceptional events during the accounting period

Question 2

4 ratios to analyse insurance accounts

Answer 2

• expense ratio
• commission ratio
• operating ratio
• ratio of outward reinsurance premiums to gross premium income

Question 3

Disclosure of benefit schemes could include… (6)

Answer 3

• benefit entitlements
• contribution obligations
• expense charges
• investment strategy
• risks involved
• treatment of entitlements in the event of insolvency

Question 4

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

Answer 4

• on entry
• at regular intervals
• once payments commence
• on request
• a combination of these

Question 5

Common aims different accounting standards attempt to achieve (4)

Answer 5

• recognising the realistic cost of accruing benefits
• avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
• consistency in the accounting treatment from year to year
• disclosure of appropriate information

Question 6

Differences that exist (in accounting standards) relate to (5)

Answer 6

• relative emphasis on the balance sheet and the income sheet
• choice of actuarial method
• flexibility in the setting of assumpTions
• smoothing of year on year fluctuations
• amount of information to be disclosed

Question 7

Possible disclosure requirements that may be needed (8)

Answer 7

• ASSUMPTIONS
• ACTUARIAL METHODS
• VALUE OF LIABILITIES accruing over the year
• increase in the past service liabilities at the start of the year
• INVESTMENT RETURN achieved on the assets
• SURPLUS OR DEFICIT and the change in this figure over the year
• BENEFIT COST over the year in respect of any directors
• MEMBERSHIP movements

Question 8

operating ratio

Answer 8

The ratio of the sum of incurred claims and expenses to premium income.
It is used more in looking at short-term classes of business, typically in general insurance, rather than long-term classes.

Question 9

Outward reinsurance premium income

Answer 9

An outgo of the reinsurance company, ie the premiums it pays to reinsurers.

Question 10

2 Main purposes of the actuarial valuation of a benefit scheme:

Answer 10

• demonstrate the solvency of the scheme

- determine the future contribution rate required

Question 11

Accounting concept:

Money measurement

Answer 11

Accounting statements restrict themselves to matters which can be measured objectively in money terms.

Question 12

Accounting concept:

Business entity

Answer 12

The affairs of the business are kept separate from those of the owners.

Question 13

Accounting concept:

Realisation

Answer 13

Income is recognised as and when it is “earned”.

Question 14

Accounting concept:

Accruals

Answer 14

Revenue and costs should be recognised as they are earned or incurred, not as money is received or paid.

Question 15

Accounting concept:

Matching

Answer 15

Income and expenses which relate to each other should be matched together and dealt with in the same income statement.

Question 16

Accounting concept:

Dual aspect

Answer 16

Every transaction or adjustment will affect two figures.

Question 17

Accounting concept:

Materiality

Answer 17

There is little point in
providing information which is so detailed as to be unintelligible,
or in making minute adjustments which have no real effect on the picture portrayed by the financial statements.

Question 18

Accounting concept:

Prudence

Answer 18

Financial statements should avoid presenting an unduly optimistic position.
Thus the lowest reasonable figure should be stated for profit / assets, and the highest reasonable figure should be stated for any liabilities.
(only applicable to situations of uncertainty)

Question 19

Accounting concept:

Consistency

Answer 19

Figures published should be comparable from one year to the next.
Accounting policies should not be changed from one year to the next without good reason.

Question 20

How might disclosure improve the security of benefit schemes? (3)

Answer 20

• makes the operation of the scheme more transparent and subject to scrutiny
• alerting members and trustees to potential problems, enabling them to put pressure on the scheme sponsor to address them
• providing members with the opportunity to leave the scheme if they are not happy with the level of security offered (which might convince the sponsor to respond by addressing the security issue).