Chapter 7 Flashcards
Role of the IFRS Foundation
The IFRS Foundation develops global accounting standards through the International Accounting Standards Board (IASB)
Purpose of International Financial Reporting Standards (IFRS)
IFRS ensures financial statements are comparable, transparent, and globally consistent
Key Features of the IFRS Framework
Includes accrual accounting, going concern assumption, and the requirement for financial statements to be understandable, relevant, reliable, and comparable
Statement of Financial Position Components
Assets, liabilities, and equity must be clearly presented under IFRS
Statement of Profit or Loss
Reflects a company’s income and expenditure over a financial period
True and Fair’ Requirement (Companies Act 2006)
Directors must ensure financial statements give a true and fair view of the company’s financial position
IFRS 17 – Insurance Contracts
Introduced in 2023 to improve the transparency of insurance liabilities and profitability
Claims Development Tables (CDTs)
Required under IFRS 17 to show how accurately past claims estimates were calculated
UK Generally Accepted Accounting Principles (UK GAAP)
UK GAAP provides an alternative to IFRS and includes FRS 102, FRS 103 (for insurance), and FRS 105 (for micro-entities)
FRS 103 – Insurance Contracts
Allows insurers to continue using existing accounting policies but may be updated following IFRS 17
Challenges in Converting from UK GAAP to IFRS
Includes additional costs, staff training, and changes in financial reporting systems
Impairment Testing in IFRS 17
Requires insurers to test reinsurance assets for impairment to ensure accuracy
Insurance Liabilities and Offsetting
IFRS prohibits offsetting insurance liabilities against reinsurance assets
The Contractual Service Margin (CSM) in IFRS 17
Represents unearned profit in insurance contracts and is released over time
Solvency and Regulatory Reporting under IFRS 17
Requires insurers to disclose risk management strategies and financial health indicators
A UK insurer operates internationally and must prepare consolidated financial statements. Which standard must it follow?
a) US GAAP
b) UK GAAP
c) IFRS
d) Local accounting standards in each country
c) IFRS
IFRS 17 and Profit Recognition
An insurer collects premiums upfront for multi-year policies. Under IFRS 17, when can profits be recognised?
a) Immediately upon receiving the premium
b) At the end of the policy term
c) Over the duration of the policy
d) Only when a claim occurs
c) Over the duration of the policy
An insurer previously estimated reserves based on past trends. Under IFRS 17, what must now be included?
a) Only reported claims
b) A best estimate of future cash flows and risk adjustments
c) Policyholder satisfaction surveys
d) Historical profit margins
b) A best estimate of future cash flows and risk adjustments
A company’s board is unsure whether their financial statements meet the ‘true and fair’ requirement. What must they ensure?
a) They comply with IFRS or UK GAAP
b) They use the same accounting practices as competitors
c) They maximise reported profits
d) They avoid showing financial losses
a) They comply with IFRS or UK GAAP
A regulator requests an insurer’s Claims Development Table (CDT). What is its purpose?
a) To predict future claim payouts
b) To assess the accuracy of past claims reserves
c) To estimate marketing expenses
d) To track employee performance
b) To assess the accuracy of past claims reserves
A small insurer is considering moving from UK GAAP to IFRS. What is a key challenge?
a) No differences between the two standards
b) Increased regulatory scrutiny
c) Fewer financial disclosures required
d) Immediate tax benefits
b) Increased regulatory scrutiny
A reinsurer experiences financial difficulties, and an insurer holds significant reinsurance assets. Under IFRS 17, what must the insurer do?
a) Ignore the reinsurer’s financial health
b) Conduct an impairment test
c) Write off all reinsurance recoveries
d) Reduce premium income
b) Conduct an impairment test
An insurer’s new policy portfolio includes a mix of profitable and unprofitable contracts. How should CSM be adjusted?
a) Profitable contracts increase CSM, while losses reduce it
b) CSM remains unchanged
c) All contracts are treated the same
d) Future profits are ignored
a) Profitable contracts increase CSM, while losses reduce it
An insurer invests in volatile assets but does not disclose this in financial reports. What is the consequence under IFRS 17?
a) No consequence
b) Regulatory penalties for non-disclosure
c) Increased investment income
d) No impact unless investors complain
b) Regulatory penalties for non-disclosure
A small general insurer wants to use the Premium Allocation Approach (PAA) under IFRS 17. When is this permitted?
a) For short-term policies under one year
b) For long-term life policies
c) For any insurance contract
d) Only for reinsurance contracts
For short-term policies under one year
What does PAA stand for
Premium allocation approach
An insurer’s Solvency II ratio falls below the required threshold due to higher-than-expected claims and investment losses. What is the most immediate action required?
a) Continue business as usual and hope market conditions improve
b) Notify the regulator and submit a recovery plan to restore solvency
c) Stop issuing new policies and lay off staff to cut costs
d) Shift all investments to high-risk assets to recover losses quickly
b) Notify the regulator and submit a recovery plan to restore solvency
An insurer estimates its future claims liabilities but does not include a risk adjustment. What is the consequence of this under IFRS 17?
a) No impact on financial statements
b) Understatement of liabilities, leading to misleading profitability figures
c) Reduction in the insurer’s required capital
d) Immediate regulatory exemption from IFRS reporting
b) Understatement of liabilities, leading to misleading profitability figures
An insurer has significant reinsurance recoverables from a financially unstable reinsurer. Under IFRS 17, what must the insurer do?
a) Assume full recovery and continue business as usual
b) Perform an impairment test and adjust financial statements accordingly
c) Move all reinsurance assets off the balance sheet
d) Request additional funding from policyholders to cover potential losses
b) Perform an impairment test and adjust financial statements accordingly
An insurer invests heavily in long-term corporate bonds. Due to rising interest rates, the bond values decline significantly. How does this affect the insurer’s financial statements?
a) Asset values decrease, potentially leading to solvency concerns
b) The insurer benefits from higher returns and stronger liquidity
c) No impact as investments are unrelated to solvency requirements
d) The insurer can ignore the losses since bonds will eventually mature
a) Asset values decrease, potentially leading to solvency concerns
A life insurance company inflates the estimated future cash inflows from policies to improve financial results. What are the potential consequences under IFRS 17?
a) Regulatory fines, restatement of financials, and reputational damage
b) Increased investor confidence and higher share prices
c) The insurer will receive an award for financial creativity
d) No impact unless a competitor files a complaint
a) Regulatory fines, restatement of financials, and reputational damage
An insurer wants to net off reinsurance recoverables against its claims liabilities in the financial statements to improve its balance sheet. Under IFRS 17, is this allowed?
a) Yes, if both amounts are related to the same policy
b) No, IFRS 17 prohibits offsetting liabilities against reinsurance assets
c) Yes, if the insurer receives permission from the regulator
d) No, unless the policyholder consents to the adjustment
b) No, IFRS 17 prohibits offsetting liabilities against reinsurance assets
An insurer writes a long-term health policy portfolio with a significant expected profit. Under IFRS 17, how should this be accounted for?
a) Recognise all profits immediately
b) Recognise profits gradually over the policy period as services are provided
c) Defer profits until all claims are settled
d) Ignore CSM and report only claims data
b) Recognise profits gradually over the policy period as services are provided
An insurer underreports its liabilities in regulatory filings to maintain a high solvency ratio. What is the likely consequence?
a) Regulatory fines, potential license revocation, and criminal charges
b) Increased investor confidence and lower capital requirements
c) No impact as long as the company remains profitable
d) Higher bonuses for executives due to improved financial ratios
a) Regulatory fines, potential license revocation, and criminal charges
A small insurer with short-term policies is struggling to implement IFRS 17 due to high compliance costs. What approach might they take?
a) Apply the Premium Allocation Approach (PAA) to simplify reporting
b) Ignore IFRS 17 and continue using previous accounting standards
c) Merge with a larger insurer to avoid compliance obligations
d) Lobby regulators for a complete exemption from IFRS
a) Apply the Premium Allocation Approach (PAA) to simplify reporting
An insurer’s asset portfolio consists mainly of equities, which are experiencing extreme volatility. How does this impact Solvency II capital requirements?
a) The insurer must hold higher capital reserves to cover market risk
b) The insurer’s required capital remains unchanged
c) The regulator will reduce capital requirements to encourage investment
d) The insurer can shift the risk to policyholders without additional capital
a) The insurer must hold higher capital reserves to cover market risk
