Chapter 37: Accounting and disclosure Flashcards
Interpreting accounts (5)
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
4 ratios to analyse insurance accounts
- expense ratio
- commission ratio
- operating ratio
- ratio of outward reinsurance premiums to gross premium income
Disclosure of benefit schemes could include… (6)
- benefit entitlements
- contribution obligations
- expense charges
- investment strategy
- risks involved
- treatment of entitlements in the event of insolvency
Where disclosure is required by regulation, this may relate to information given to beneficiaries:
- on entry
- at regular intervals
- once payments commence
- on request
- a combination of these
Common aims different accounting standards attempt to achieve (4)
- 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
Differences that exist (in accounting standards) relate to (5)
- 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
Possible disclosure requirements that may be needed (8)
- 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
operating ratio
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.
Outward reinsurance premium income
An outgo of the reinsurance company, ie the premiums it pays to reinsurers.
2 Main purposes of the actuarial valuation of a benefit scheme:
- demonstrate the solvency of the scheme
- determine the future contribution rate required
Accounting concept:
Money measurement
Accounting statements restrict themselves to matters which can be measured objectively in money terms.
Accounting concept:
Business entity
The affairs of the business are kept separate from those of the owners.
Accounting concept:
Realisation
Income is recognised as and when it is “earned”.
Accounting concept:
Accruals
Revenue and costs should be recognised as they are earned or incurred, not as money is received or paid.
Accounting concept:
Matching
Income and expenses which relate to each other should be matched together and dealt with in the same income statement.
Accounting concept:
Dual aspect
Every transaction or adjustment will affect two figures.
Accounting concept:
Materiality
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.
Accounting concept:
Prudence
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)
Accounting concept:
Consistency
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.
How might disclosure improve the security of benefit schemes? (3)
- 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).
