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Purpose of accounting
Provide information to the user so that he/she may perform analysis to form its own decision
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Accounting information should be
- Understandable: transparent
- Relevant: make a diff in user's decisions, should be timely, have predictive value, and provide useful feedback on past decisions
- Reliable: dependable, include concepts of representational faithfulness, verifiability, completeness, neutrality
- Comparable and consistent: must allow for comparison across time and competing interests
- Unbiased: must avoid being misleading, either report unbiased or explain bias
- Cost-benefit effective: cost of producing info should be reasonable
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Types of accounting
- GAAP: focus as value as going concern; used by investors and creditors
- SAP: statutory accounting; focus on liquidation mkt value (realizable value of assets); used by regulators
- Tax: focus on social and political concerns; used by tax authorities
- Management: focus on needs of management
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Principal financial reports
- Balance sheet: list assets, liabilities, surplus
- Income statement: reports income, expenses, earnings
- Cash flow statement: reports sources and uses of cash
- Notes and disclosures: allow for add'l info
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GAAP hierarchy
- Organisation in charge of securities regulation
- Standards set by specified account standars (IFRS)
- Industry-specific guidance
- Interpretations
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Fair value vs Historical cost
- Fair value: amt for which an asset could be exchanged or a liability settled btwn knowledgeable, willing parties in an arm's lenght transaction
- very relevant but less reliable
- very reliable, but less relevant
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Deferral/matching vs asset/liability
- Deferral/matching: coordinate timing of income and expense recognition to occur at same time; focus on timing of profit emergence
- Asset/liability: focus on the value of assets or liabilities that exist as of balance sheet date
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Impairment
Asset considered impaired if no longer expected to produce economic benefits expected when first acquired
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Common insurance accounts
- Balance sheet assets
- Premium receivable
- Reinsurance recoverables
- Deferred acquisition cost
Balance sheet liabilities - Policy liabilities
- Unearned premium liability
- Claim and claim expense liabilities
- Insurance expense liabilities
Income statement accounts - Premiums, Losses, Loss expenses, UW expenses, UW income, PH dividends
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