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SP9- ERM > Mod 07: Financial statements > Flashcards

Mod 07: Financial statements Flashcards

1
Q

Outline the information that is often included in a company’s financial statements
(ActEd 223)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Information provided in financial statements

Information provided in an organisation’s financial statements will often include:

  1. balance sheet – financial position at a point in time showing assets and liabilities
  2. profit and loss statement – revenue and costs over a specified period
  3. detailed disclosures and commentary, eg basis and methodology
  4. additional supporting information, eg auditor’s report.

(ActEd 224)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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2
Q

Give examples of ratios relating to the following:
1. profitability
2. liquidity (liquidity risk)
3. debt (market / credit risk)
4. shares (market risk)
5. efficiency (market)

(ActEd 225)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Examples of ratios

  1. profitability – return on capital employed, asset utilisation ratio, profit margin, gross profit margin, return on equity
  2. liquidity (liquidity risk) – current ratio, quick ratio
  3. debt (market / credit risk) – interest cover, asset cover, asset gearing, shareholders’ equity ratio, income gearing, interest priority percentages, asset priority percentages
  4. shares (market risk) – earnings per share, price earnings ratio, dividend yield, payout ratio
  5. efficiency (market) – inventory turnover period, trade receivables turnover period, payables turnover period

In addition, performance ratios linked to return on capital (risk-adjusted return on capital, economic income created, shareholder value, shareholder value added) is covered in Module 30
(ActEd 226)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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3
Q

Outline reasons why good quality financial reporting is important
(ActEd 227)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Reasons for good quality financial reporting
Good quality financial reporting will support an organisation in a number of areas:
1. raising capital – since external stakeholders will use financial reports to assess the organisation’s creditworthiness / strength

  1. stakeholder reassurance – who will be able to understand the organisation’s current and future financial position
  2. compliance with local laws – for regulators and tax authorities
  3. internal decision marking – based on projected financial statements as a result of certain decisions.

(ActEd 228)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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4
Q

Define accounting standards and list the factors that may affect the nature of accounting standards

(ActEd 229)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Accounting standards

Accounting standards are the principles and rules to be followed in the production of financial statements.

They are often set and maintained by non-governmental bodies such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).

The nature of the accounting standards will depend on:

  1. the purpose of the reporting
  2. the intentions of those who set the standards
  3. the intended users of the financial reports.

(ActEd 230)

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5
Q

Discuss advantages and disadvantages of principles-based and rules-based accounting standards, including one example of each

(ActEd 231)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Principles-based and rules-based accounting

  1. standards Principles-based accounting standards

Adv: An organisation can use discretion to ensure that financial statements reflect the nature of the organisation, its liabilities and its risk profile.
Disadv: Discretion makes financial statements less transparent, more open to manipulation, and less comparable with other organisations

Example: International Financial Reporting Standards (IFRS) are principles based.

  1. Rules-based accounting standards 

Adv: A standardised system increases the accuracy of financial statements and makes them more comparable with other organisations

Disadv: The rules may be complex, making them difficult and costly to meet.

Example: US Generally Accepted Accounting Principles (US GAAP) are rules based.

(ActEd 232)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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6
Q

State six important issues in the preparation of financial statements that accounting standards need to consider

(ActEd 233)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Issues to consider in the preparation of financial statements

  1. true and fair
  2. going concern or wind-up
  3. best estimate or prudent basis
  4. profit accrual
  5. timeliness vs computational complexity
  6. comparability

(ActEd 234)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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7
Q

Outline the aims of IFRS accounting standards
(ActEd 235)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Aims of IFRS accounting standards

  1. improve transparency – by enhancing the international comparability and quality of financial information
  2. strengthen accountability – by reducing the information gap between the providers of capital and the people to whom they have entrusted their money
  3. contribute to economic efficiency – by helping investors to identify opportunities and risks across the world, thus improving capital allocation

(ActEd 236)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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8
Q

Describe the General Measurement Model (or GMM) method for valuing insurance liabilities under IFRS 17

(ActEd 237)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

General Measurement Model

IFRS 17 is the IFRS reporting standard for insurance contracts. Under the General Measurement Model, there are two components for determining the insurance company liabilities:
 the fulfilment cashflows – the best estimate of the present value of future expected cashflows, plus an explicit risk adjustment for non-financial risk (the ‘risk adjustment’)
 the Contractual Service Margin (CSM) – a device to try and smooth out the emergence of the insurance company’s profits.

The company must make certain disclosures with respect to the risk adjustment including the methodology used in determining it (eg Value at Risk, Conditional Tail Expectation and Cost of Capital) and a reconciliation from the opening and the closing balances of the risk adjustment.

(ActEd 238)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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9
Q

Outline the purpose of a risk margin under Solvency II, including what the risk margin represents

(ActEd 239)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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A

Solvency II risk margin

The purpose of a risk margin under Solvency II is to ensure that insurers hold sufficient assets to transfer their liabilities to another provider if required.

It represents the theoretical compensation for the risk of future experience being worse than the best estimate assumptions, and for the cost of holding regulatory capital against this.

(ActEd 240)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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10
Q

Discuss how an insurance company may align the IFRS 17 risk adjustment with the Solvency II risk margin

(ActEd 241)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

A

Aligning the IFRS 17 risk adjustment with the Solvency II risk margin

The IFRS 17 risk adjustment has a similar aim to the Solvency II risk margin, however there is more freedom to use different methodologies to determine the IFRS 17 risk adjustment than the Solvency II risk margin.

An insurance company may use a cost of capital approach for the risk adjustment under IFRS 17 to be consistent with the risk margin calculation under Solvency II.

(ActEd 242)

ActEd, BPP. Subject SP9 Flashcards 2025. BPP (THE ACTUARIAL EDUCATION COMPANY), 09/2024. VitalBook file.

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SP9- ERM (9 decks)

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