Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
2. If the future policy revenues on existing policies are not sufficient to cover
the DAC, then the costs are written off to earnings
3. Investment income is NOT considered in determining whether such a
deficiency does exist.
DAC will be an intangible asset on the balance sheet. The amortisation period
will be disclosed in the financials.
Issue 4: Investments
Under IFRS and US GAAP there are three classifications; available for sale, held
to maturity and trading. In the balance sheet only held to maturity are not marked
to market. The difference between trading and available for sale is that for
trading, movements in value are recognised in the income statement whereas for
available for sale such movements in value go to equity.
4.1.4 Life insurance contracts
Life insurance contracts tend to be more complex than general insurance
contracts. This is also reflected in the accounting. The two main areas that require
further commentary are establishing the technical reserve for life insurance and
premium recognition for life insurers.
Technical reserves for life insurance:
These reserves are derived from two distinct sources;
1. Reserves for claims outstanding: these are precisely the same as we have
seen before.
2. Mathematical reserves: these are reserves that are calculated using
sophisticated data. They are not a provision against a specific certain event.
Instead over the term of the policy, as the holder ages and the likelihood of
claim increases, the reserve increases. The calculation of mathematical
reserves is a complex task and involves consideration such factors as:
• Mortality rates
• Acquisition and administrative expenses
• Minimum guaranteed returns promised to customers
Mathematical reserves are not really used in the same way for general insurance
as the period of cover is defined and the probability of claims is much more
straightforward to calculate albeit more unpredictable.
Under US GAAP there is a detailed suite of rules regarding the calculation of
mathematical reserves. Generally the calculation is determined by the
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