Week 1
ACTL1122 Week 1
Actuaries and Corporations
Week 1 Outline:
1. Course introduction
2. The role of actuaries in corporate management and financial
reporting
3. The Insurance Australia Group 2012 Annual General Meeting
4. The conceptual framework of financial reporting
5. Accounting fundamentals
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Week 1
Topic Objectives and Learning Approach
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To understand why corporations exist and how they are managed
To recognise the role of actuaries in corporations and their input
in financial reports
To be aware of what companies report to the shareholders and
public in their financial statements, and recognise what are the
important details
Be able to understand the purposes of financial reporting, the
desirable qualities of financial statements and the fundamentals
of accounting
At this stage, understand the context and do not get too lost in
the details as we are covering building blocks now of corporation
management and financial reporting
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Week 1
This Weeks Readings I
2012 Insurance Australia Group Annual Report
Refer to the Corporate Governance report (p.2-11) and get a
general idea of how the company is managed, as well as how the
shareholders interests are managed. Also, look at the 5 year
financial summary on p.1 and the Operating and Financial
Review on p.15-17. The information here allows you to get a
better understanding of how companies report their financial
results. Investors, equity research analysts and the general
public will use this information to assist them in making decisions
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Week 1
This Weeks Readings II
The UK Institute and Faculty of Actuaries 2013 Subject CT2
Syllabus Unit 10, Parts 1-5
This document forms the core reading for the first 4 weeks of the
course. In conjunction with The Conceptual Framework of
Financial Reporting, the fundamentals of financial reporting are
covered. The content in this document assists you in
understanding better how financial statements are prepared in
practice (but we have skipped the book-keeping part)
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Week 1
This Weeks Readings III
The International Financial Reporting Standards (IFRS) The
Conceptual Framework of Financial Reporting Chapter 4
This document provides an overview of how financial reports are
prepared to assist individuals to make timely decisions in relation
to the company. Skim read this document for now, but re-visit it
over the next 4 weeks as we will return to it
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Course Introduction
Course Structure
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Two parts :
1. Corporate management and financial reporting :
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Management structure in corporation How company management is
structured to oversee operations, finance and investment
Corporate governance How company management is monitored
and regulated to ensure they act in the best interest of shareholders
Financial reporting How companies report their financial
performance and position to inform their stakeholders and assist in
decision-making, and interpreting what information is worthwhile and
what is not
2. Actuarial role in insurance, risk and capital management :
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Reserves for insurance products How much money to set aside
from invested premiums to cover for future claim expenses which may
need to be paid in future years
Reinsurance To what extent will the insurance company retain or
transfer the risks it has underwritten
Capital management How much money should the insurance
company hold as capital to meet regulatory requirements whilst
retaining sufficient flexibility to engage in growth
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The Role of Actuaries in Corporate Management and Financial Reporting
The Actuarys Role in Corporations
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Providing recommendations on decisions relating to identifying,
measuring and managing quantitative risks
Reviewing premium rates and reserving levels and signing off
statutory reports
Surprisingly, actuaries are not sitting at the top management
positions compared to 20 years ago :
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Most executives in insurance companies now are qualified
accountants, lawyers and financiers, not actuaries!
Dont believe me? Check the annual reports of AMP, IAG, Suncorp
and QBE!
Part of this trend can be explained by current actuarial graduates
aspiring to become executives, but are not particularly interested
in undertaking workshops to develop their generalist skills (Chu
et al, 2011) :
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A successful manager cannot simply be technically competent!
A mismatch of aspirations of becoming a manager without the
necessary generalist skills will lead to disappointment
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The 2012 IAG AGM
Corporate Governance and Shareholder Relations I
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Refer to the Corporate Governance Document of IAG
(Commences p2 of 2012 Annual Report) to get an understanding
of the role of the Board in relation to its shareholders :
1. Be accountable to shareholders for the companys performance by
having a suitable management and oversight structure comprising
the Board of Directors and Executives
2. Determining the criteria for appointing directors and having
measures to ensure their propriety
3. Establishing measures to promote ethical and responsible
decision-making
4. Ensure financial reports are delivering true and fair view of
companys performance
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The 2012 IAG AGM
Corporate Governance and Shareholder Relations II
5. Regularly informing shareholders with timely disclosure and
reporting
6. Respecting the relationships with shareholders by maintaining
open communication channel
7. Monitoring and managing risks faced by the business to ensure
shareholder value
8. Reviewing remuneration structure to align management and
shareholders interests
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The 2012 IAG AGM
Corporate Governance and Shareholder Relations III
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Companies update shareholders regularly via half-year financial
and full-year financial reports, as well as periodic updates (refer
to Principle 5 on p.8 about what materials the company releases
via the ASX) :
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Financial results summary on profitability and solvency
Company strategy and the success or otherwise of the strategy in
context of the prevailing market conditions
Operating performance in terms of how different business
segments have performed
Cash flow positions and liquidity position
Key company events which have affected the company in a
material manner
Dividend payments and timing, where appropriate
Management commentary on economic and business outlook, and
proposed direction going forward
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The 2012 IAG AGM
Discussion Question 1
From the webcast of the 2012 Annual General Meeting Presentation
by the Chairman and the CEO, answer the following questions :
(a) What are the key financial measures which IAG uses to
summarise its overall performance for the financial year?
(b) How is the companys performance compared? Why do you think
this approach is used?
(c) What are the key business segments of IAG? What types of
information are presented?
(d) What does the IAG management view in relation to the business
environment IAG operated in over the past year and what is
expected of the environment and business outlook in the coming
year?
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The Conceptual Framework of Financial Reporting
The Purpose of the Conceptual Framework
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Defines how and why accounting information is organised a
particular way :
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Sets guidelines on how judgement is used in reporting :
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Layout of reports to help users follow the flow
Not all items are straightforward (valuing certain assets)
Qualities of financial reports :
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Defines why reports have these characteristics
Helps auditors and other users pick up poor quality reports
Reduces the risk of users being misled by financial reports
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Accounting Fundamentals
Defining Accounting and Users of Accounting
Information
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Accounting is known also as the language of business
Records transactions and organises financial information
Assists in financial decision-making by :
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Assess financial position and performance
Identify stronger and weaker performing business
Compare performance over time or against other companies
Who are the interested parties who uses accounting information?
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Board. Strategical decisions and performance measurement
Management. Operational decisions
Shareholders/owners/general public. Assessing company
performance
Government/regulatory body. Ensure information is reliable
Tax office. Calculate how much tax needs to be paid
Competitors. Compare performance against own
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Accounting Fundamentals
Key Accounting Conventions
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Monetary assumption Transactions are reported by change in
economic benefits in monetary terms
Accrual accounting Transactions are recognised when they
occur, not necessarily when cash or goods are exchanged
Going concern Financial reporting assumes company operates
in the foreseeable future, without intention to liquidate or cease
operations, unless shown otherwise by significant events
Financial period For comparability, reports are regularly
prepared and released to assist in decision-making
Reporting entity The transactions recorded are associated with
the entitys activities, rather than of the individuals who may be
part of the entity
Fair value assumption Transactions are recorded based on fair
value, or value as determined by two parties in an arms-length
transaction where neither parties are compelled to partake in the
transaction
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Accounting Fundamentals
Fundamentals The Five Accounting Classes
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Assets give the business future economic benefits : Cash,
accounts receivable, inventory, property, land, goodwill, etc.
Liabilities are financial obligations to be met in future : Payables,
borrowings, provisions, etc.
Owners equity is the net ownership of company assets :
Shareholders equity, retained profits, reserves
Revenues are inflow of economic benefits for providing goods or
services, or savings of past expenses
Expenses are outflow of economic benefits in conducting the
business operations
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Accounting Fundamentals
Discussion Question 2 I
For the following cases, explain how the accounting conventions
should be or have been used to ensure its correct recording in the
financial statements in accordance with the Conceptual Framework of
Financial Reporting :
(a) An insurance company sells life insurance policies and needs to
record its sales to determine profit/loss. How may they measure
this profit/loss?
(b) A property developer purchased a vacant lot of land 15 years ago
for $10m, but since then this land has been developed, and is
now worth $90m. The developer has hence recognised an
upward adjustment to Land for $80m.
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Accounting Fundamentals
Discussion Question 2 II
(c) A bank has earned $1 000 of interest from a customer who has
taken out a mortgage to purchase a home. It is currently the 25th
day of the month, and the interest has not been debited from the
customers bank account. When does the bank recognise the
interest revenue, and why?
(d) A business owner has bought a mobile phone for personal use
from his own personal account. He does not record this in the
financial statements for his business.
(e) An insurance company has hired 5 graduates on a starting salary
of $55 000 each. The graduates have worked overtime, but they
were not paid for these hours. How would the company account
for the overtime hours?
(f) A car dealer has sold $2m worth of vehicles just before the end of
the financial year on credit and will receive the money in the next
financial year. How would the company account for the revenue
and cash flow in accordance to the Conceptual Framework?
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Accounting Fundamentals
Accounting Identities
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Important relationships in financial statements
When constructing financial statements, check these all hold,
otherwise something is wrong
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Balance sheet identity :
Assets = Liabilities + Owners Equity
Full accounting identity :
Assets + Expenses = Liabilities + Owners Equity + Revenues
N.B. The LHS classes are debit items and the RHS classes
are credit items in double-entry accounting
Accounting profit/loss :
Profit/Loss = Revenues Expenses
Change in owners equity over the year :
EOY Equity = BOY Equity Profit/Loss + Injections Dividends
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Summary
Summary
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Take time to reflect on the following :
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How do corporations structure themselves to balance the interests
of the managers and shareholders?
What types of roles could actuaries have in a corporation, given
their skills and expertise?
How do corporations present their financial and operating results?
Why do they present certain information as they do and how does it
help the stakeholders make decisions?
In what ways do you think the conceptual framework of financial
reporting meet its objectives, and where do you think it may not
achieve its objectives?
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