Chapter 37 - Accounting And Disclosure Flashcards
List the accounting ratios used to study a company’s financial statements.
Assets/Liabilities
Claims (net and gross of reinsurance)
Expenses/net premium and commission/net premium
Operating ratio
Investment returns/assets
Investment mix (Real and LT, ST and nominal)
Reinsurance (claims and premiums)
Gross profit/net premium (Gearing?)
ROC (Profit after tax/A-L-profit after tax)
Claim settlement pattern = claims paid/claims outstanding
1/answer = length of tail
Why do we need to do financial reporting?
- Published accounts
- Tax
- Statutory solvency
- Wind-up
- Discontinuance/Surrender
- Lability transfer or M&A
- Internal accounts
- Supervisory reasons
- Determine premiums/contributions
- Discretionary benefits
- Investment strategies
- Disclosure
- Maximum funding tets
- Value benefit improvements
- Setting global provisions
Define cost.
It is the value of non-current assets in the SFP.
Historical cost - depreciation to date - impairment write down
Define money measurement.
Accounting statements restrict themselves to matters which can be measured objectively in a financial way.
Define business entity.
The company books should be kept separate from the owner’s personal finances
Define realisation.
Income must be recognised when it is earned.
Define accruals.
Income and expenses must be recognised when they are earned or incurred, not when they are received or paid.
Define matching (in accounting context).
Income and expenses that relate to each other should be matched together and be put in the same Statement of Comprehensive Income.
Define dual aspect.
For every transaction/adjustment there will be 2 figures.
Define materiality.
One should not include so much detail that it becomes intelligible, and one must not make such minor adjustments that will not have a real affect on the overall picture portrayed by the financial statements.
Define going concern.
The assumptions that the organisation will continue in operational existence for the foreseeable future.
Vs wind-up
- Intangible assets like goodwill
- Asset-depreciation
- Work in progress
Define prudence.
- Financial statements should avoid presenting unduly optimistic positions
- Lowest reasonable value for A and highest reasonable value for L
- Cannot deliberately include a margin to overstate A or understate L
What stakeholders might be interested in the financial statements of a company.
Investors and potential investors Customers and potential customers Tax authorities Analysts Shareholders Management Competitors Auditors Regulator Loan creditors Employees
Define consistency in an accounting context.
Figures published by a company should be comparable from one year to the next.
The accounting practices should not change.
What factors would you consider when interpreting accounts?
- Valuation basis
- Accounting practices
- Realised and unrealised gains and losses - treatment
- Going concern
- RuleS and guidance
- Market conditions - changes
- Exceptional events or expenses
What is the purpose of valuing a benefit scheme?
- Prove solvency
- Determine contributions
What would be disclosed to beneficiaries?
- Benefit entitlements (including options available)
- Risk involved
- Investment strategy (past performance & net of expenses)
- Expense charges
- Contribution (obligations and acknowledgment of acceptance)
- Funding level
- Wind-up
- Insolvency
- Transfer of liabilities
- How it is operated
- Assumptions
- More info
What are the benefits of disclosing information to beneficiaries.
- Transparency
- Security
- Reduces fraud
- Gives members option to leave
- Can find problems and rectify sooner
When (at what times) might regulation require disclosure to members?
- On entry
- Regular intervals
- On request
- When benefit payments start
- Combination of the above
What are the aims of accounting standards for a benefit scheme?
- Disclosure of appropriate informatin
- Avoidance of distortions resulting from fluctuations in the flow of contributions
- Recognise the real cost of accruing benefits
- Consistency from one accounting year to the enxt
Why do accounting/reporting differ between companies?
- Methodology (actuarial)
- Emphasis on relative importance of SFP and IS
- Assumptions used
- Smoothing on year-to-year fluctuations
- Amount of disclosure
What are the possible disclosure requirements?
- Assumptions used
- Methodology
- Investment returns earned on assets
- Surplus/deficit and change in surplus/deficit
- Past service liability increase
- Liabilities accrued over the year
- Director’s benefit costs
- Membership movements
