Special Class note for

CMA Professional Level –II

201-Advanced Financial Accounting-I

CMA
Professional Level –II
201-Advanced Financial Accounting-I
Accounting for Insurance Companies (IAS–1, IFRS-4)
Insurance companies:
Special 201.06 Accounting for - Insurance Act, 1938 & 1973;
Class-5 Insurance Companies - financial statements of general insurance companies and life assurance
(3 hours) (IAS–1, IFRS-4) companies;
- statutory requirements and limitations;
- preparation of financial statements of insurance companies;
- disclosure requirements.
IFRS-4 : Insurance Contracts
The objective of this IFRS-4 is to specify the financial reporting for insurance contracts by any entity that issues such
contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance
contracts. In particular, this IFRS requires:
(a) Limited improvements to accounting by insurers for insurance contracts.
(b) Disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance
contracts and helps users of those financial statements understand the amount, timing and uncertainty of future
cash flows from insurance contracts.
Scope of IFRS-4: An entity shall apply this IFRS to:
a) Insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
b) Financial instruments that it issues with a discretionary participation feature. IFRS-7 Financial Instruments:
Disclosures requires disclosure about financial instruments, including financial instruments that contain
such features.
Effective date: Periods beginning on or after 1 January 2005
Scope of IFRS-4
This Standard The following are examples of contracts that are The following are examples of items
applies to: insurance contracts, if the transfer of insurance risk is that are not
•Insurance significant: insurance contracts:
contracts • Insurance against theft or damage to property •Investment contracts that have the
that an • Insurance against product liability, professional liability, civil legal form of an insurance contract
entity issues liability or legal expenses but do not expose
and • Life insurance and prepaid funeral expenses the insurer to significant risk
reinsurance • Life-contingent annuities and pensions • Contracts that pass all significant
contracts that • Disability and medical cover insurance risk back to the
it holds • Surety bonds, fidelity bonds, performance bonds and bid bonds policyholder
•Financial • Credit insurance that provides for specified payments to be • Self-insurance i.e. retaining a risk
instruments made to reimburse the holder for a loss it incurs because a that could have been covered by
that an entity specified debtor fails to make payment when due insurance
issues with a • Product warranties (other than those issued directly by a • Gambling contracts
discretionary manufacturer, dealer or retailer) • Derivatives that expose one party to
participation • Title insurance financial risk but not
feature. • Travel assistance insurance risk
If insurance • Catastrophe bonds that provide for reduced payments of • A credit-related guarantee
contracts principal, interest or both if a specified event adversely affects • Product warranties issued directly
include a the issuer of the bond by a manufacturer, dealer or retailer
deposit • Insurance swaps and other contracts that require a payment • Financial guarantee contracts
component, based on changes in climatic, geological or other physical accounted for under IAS-39
unbundling variables that are specific to a party to the contract Financial
may be • Reinsurance contracts Instruments: Recognition and
required. Measurement.

80
Md.Monowar Hossain FCMA,FCPA,ACS,ACA Wednesday, June 18, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.
 Special Class note for
CMA Professional Level –II
201-Advanced Financial Accounting-I

Liability Adequacy Test

An insurer is required to assess at the end of each reporting period whether its recognized insurance liabilities are
adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the
carrying amount of its insurance liabilities is not sufficient, the liability is increased and a corresponding expense is
recognized in profit or loss.

Aria of additional guidance Disclosure

Additional guidance is provided in
IFRS-4 in relation to:
• Changes in accounting policies
• Prudence
• Insurance contracts acquired in a
business combination or portfolio
transfer
• Discretionary participation
features.
It is highly recommended that
insurers gain a full understanding of
IFRS-4 as requirements and
disclosures are onerous
What is Insurance:
An insurer is required to disclose
information that identifies and explains
the amounts arising from insurance
contracts:
• Its accounting policies for insurance
contracts and related assets, liabilities,
income and expense
• Recognized assets,
liabilities, income and expense
• The process used to determine the
assumptions that have the greatest
effect on measurement
• The effect of any changes in assumptions
• Reconciliations of changes in liabilities
and assets.
An insurer is required to disclose
information that enables user of
its financial statement to
evaluate the nature and extent
of risks arising from insurance
contracts:
• Its objectives, policies and
processes for managing risks
• Information about insurance
risk
• Information about credit risk,
liquidity risk and market risk
• Information about exposures
to market risk arising from
embedded derivatives.

• It is protection against the financial effect of loss.

• Insurance is a risk transfer mechanism.
• Transfer risk from the insured to the insurer.
CLASSIFICATION OF INSURANCE:
• Marine - insurance of Hull, Cargo & Freight,
• Fire - insurance of material loss or damage by fire & special
perils, Loss of profit.
• Life- Human life related insurance.
• Misc & Accident - that are not within above departments.
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of
risk management primarily used to hedge against the risk of a contingent, uncertain loss.

What is Risk ?
Risk is something which may or may not happen, endangers an enterprise from achieving its goal and target.

There are the following categories of risk:

1. Financial risks which means that the risk must have financial measurement.
2. Pure risks which means that the risk must be real and not related to gambling
3. Particular risks which means that these risks are not widespread in their effect, for example such as earthquake
risk for the region prone to it.
Insurance
It is commonly accepted that only financial, pure and particular risks are insurable. Development and
Regulatory
Authority (IDRA)

81
Md.Monowar Hossain FCMA,FCPA,ACS,ACA Wednesday, June 18, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.
 Special Class note for
CMA Professional Level –II
201-Advanced Financial Accounting-I

Risk may be classified as either pure or speculative. Speculative involves the possibilities of loss or gain. Pure risk involves
only the possibility of loss or no loss. Only pure risk may be covered under insurance. There are two factors that work
together to cause or contribute to losses. They are perils and hazards.

Perils & Hazards

A peril is a cause of loss. The peril of fire, windstorm, flood or theft. Each of these can be the cause of a loss.
A hazard, on the other hand, is a condition that may create or increase the chance of loss arising from a given peril.

Hazards are normally classified into three categories :-

1. Physical Hazards : Consist of those physical properties that increase the chance of loss from the various perils,
2. Moral Hazard : Refers to the increase in the probability of loss which results from evil tendencies in the
character of the insured person.
3. Morale Hazard not to be confused with moral hazard, results from a careless attitude on the part of insured
persons toward the occurrence of losses.

What is insurable? How does insurance help society?

Certain conditions must exist before insurance is Insurance helps society by reimbursing people and businesses for
possible insured losses, encouraging accident prevention, providing funds
1. Large number of homogeneous exposures or investment, enabling people to borrow money, and reducing
2. The loss can be measured in monetary anxiety.
term's. (a) Payment of losses
3. The premium must be reasonable. (To put the insured in the same financial position immediate
4. The loss must be entirely fortuitous. before the loss.)
5. No prospect of gain or profit. (b) Accident prevention.
6. Not against public policy (c) Investment in the Economy.
7. The person insuring must suffer loss, (d) Support for credit
8. The loss must not be catastrophic. (e) Reduction of Anxiety

What is an insurance company do with the premiums they collect?

Basically insurance companies do three things with the premiums they collect.
a. The money is used to pay claim.
b. It is used to pay expenses involved in selling and providing insurance protection.
c. It is invested if not needed immediately.

Payment of Claim

Re-insurance payment.

Management Cost.

Investment of Funds.
HOW DOES INSURANCE WORK?
• The whole basis of Insurance is to spread the RISK as far as possible.
• LOSSES OF THE FEW are paid for by the CONTRIBUTIONS OF MANY.
• Transferring the Risk does not in itself prevent losses from occurring but it provides a form of financial security
and peace of mind for the insured.

INSURANCE OF INSURANCE.
 A further step in the basic principle of insurance viz., spreading of risks.
 A process whereby larger risks and exposures are atomized and spread among insurers so that any loss thereon
descend lightly on all.

82
Md.Monowar Hossain FCMA,FCPA,ACS,ACA Wednesday, June 18, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.
 Special Class note for
CMA Professional Level –II
201-Advanced Financial Accounting-I

REINSURANCE CONTRACT
Insured

Insurer

Re-insurer
MAIN FEATURES
• The Insured only has a contractual relationship with the insurer.
• The insured is not a party to the reinsurance contract. The Insurer must pay valid claims, even if he fails to
recover from re-insurers.
MAIN FUNCTIONS
Helps insurers to offload a part of their accumulation with other insurers and ensures safety in the event of a big claim.
 Insurers are given additional underwriting capacity.
 Enables insurers to have a wider spread (Internationally) of catastrophic losses which can place grave strain on
national economy.
 Enables the direct insurer to expand the volume of business without an increase in capital.
 Helps insurers through exchange of technical information and assistance.
 Protects insurer’s Balance Sheet.
 Shareholders are assured of financial stability of the company.
 Insured is rest assured to get the claim in full in view of the reinsurance backup.
 The insured is protected against abnormal increase in rate of premium arising out of a single loss.
 The reinsurance capacity adds to the insurers capacity which in turn helps to accept large risks. Big industries
and insured are relieved of the worry of searching for insurance capacity on their own.

Problem No.21 [Accounting for Insurance Company]

th
Prepare Revenue Account in proper form for the year ended 30 June, 2014, from the following particulars related to
FYR General Insurance Co. for the year ended 2013 –2014:

Related to Direct Related to

Descriptions
Business (Tk.) Reinsurance (Tk.)
Premiums:
Amount received 30,00,000 2,40,000
Receivable at the beginning 1,80,000 24,000
Receivable at the end 2,40,000 36,000
Amount paid -- 3,60,000
Payable at the beginning -- 30,000
Payable at the end -- 42,000

Claims:
Amount paid 18,00,000 1,80,000
Payable at the beginning 60,000 12,000
Payable at the end 1,20,000 18,000
Amount recovered -- 1,20,000
Receivable at the beginning -- 18,000
Receivable at the end -- 12,000

Commission:
Amount paid 72,000 10,800
Amount received -- 14,400

83
Md.Monowar Hossain FCMA,FCPA,ACS,ACA Wednesday, June 18, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.
 Special Class note for
CMA Professional Level –II
201-Advanced Financial Accounting-I

Additional information:
(i) Interest, dividend and rent received ……………………………………………………………………………….…………Tk. 30,000
Income-tax in respect of above ………………………………………………………………………………………………..… 6,000
(ii) Management expenses including Tk. 12,000 related to legal expenses regarding claims Tk. 132,000
(iii) Provision for income tax existing at the beginning of the year was Tk. 1,95,000, the income-tax actually paid
during the year Tk. 1,68,000 and the provision necessary at the yearend Tk. 2,07,000.
(iv) The net premium income of the company during the year 2012-2013 was Tk. 24,00,000 on which reserve for
unexpired risk @ 50% and additional reserve @ 7 ½% was created. This year, the balance to be carried forward is
50% of net premium on reserve for unexpired risk and 5% on additional reserve.

Solution of problem no.21 [Accounting for Insurance Company]

FYR General Insurance Company Ltd.

Revenue Account
For the year ended 30.06.2014

84
Md.Monowar Hossain FCMA,FCPA,ACS,ACA Wednesday, June 18, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.
 Special Class note for
CMA Professional Level –II
201-Advanced Financial Accounting-I

Homework:
14. Question No.5 of CMA Exam:December-2013 [ Accounts for General Insurance]
15. Question No.3 of CMA Exam:August-2013 [Accounts for Life Insurance]

85
Md.Monowar Hossain FCMA,FCPA,ACS,ACA Wednesday, June 18, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.