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CB1-13: Group accounts and insurance company accounts Page 1

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Group accounts and
insurance company accounts
Syllabus objectives

4.1 Describe the basic construction of accounts of different types and the role and
principal features of the accounts of a company.

8. Describe the structure and content of insurance company accounts.

9. Explain what is meant by the terms subsidiary company and associated
company.
10. Explain the purpose of consolidated accounts.
11. Explain how goodwill might arise on the consolidation of group accounts.

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0 Introduction

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We now consider two particular types of accounts.

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Firstly, we look at how accounts are produced by groups of inter-related companies. Here the
accounts need to show not only the financial position of each company within the group, but also
the picture for the group as a combined economic entity.

We will also look at the accounts of insurance companies, where the complex nature of the
business necessitates special features in the accounts.

The examination is likely to test your knowledge of terms involved in group accounts such as
subsidiary company and goodwill, and your understanding of the purpose of group accounts and
insurance company accounts.

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1 Consolidated financial statements

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Large organisations are often organised as groups of inter-related companies. There are a

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number of reasons why this may be so. Historically, the companies within the group could

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have been acquired as going concerns. The management of the controlling company could
have felt that there were political or marketing considerations which would have made it
unwise to transfer the assets of the controlled company to the acquirer and to liquidate the
purchased company itself.

1.1 Subsidiary companies

The company which holds the controlling interest in the others is known as the ‘parent
company’. The companies which are controlled by the parent company are known as
‘subsidiaries’. Collectively, a parent company and its subsidiaries are known as a ‘group’.

A parent company may also be referred to as a ‘holding’ company.

A controlling interest can arise in a number of ways. The most obvious would be where the
parent company owns a majority of the voting rights.

It is, however, possible to control the subsidiary in other ways. A parent could hold less
than half of the voting shares but still have the right to appoint or remove directors holding
a majority of the voting rights at board meetings or it could have some other right to
exercise a dominant influence over the subsidiary.

This could be done by holding a ‘golden share’ in the subsidiary or by entering into a contract
giving it the right to exercise control.

If Company H (holding) owns 100% of the shares of Company S (subsidiary), Company S is said to
be a wholly owned subsidiary. Where the holding is less than 100%, Company S is said to be a
partially owned subsidiary.

1.2 Consolidated statements of financial position

Legally, the companies in the group retain their independence.

In many cases, however, the business activities of the group members are closely related to
one another, with group members supplying others with products or components or
different group members manufacturing complementary product ranges. It is also common
for group members to provide fellow members with finance.

Even in the case of industrial conglomerates, where there is no direct link between the
businesses of the members, all of the companies are under the control of the same senior
management.

It would be illogical for most purposes to view the group as being anything other than a
single economic entity.

The shareholders of the parent will certainly be more interested in the performance of the
group as a whole than they will be in that of the parent taken on its own.

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Decisions on how to structure a company can be complex. There may be a desire to split a group

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into manageable semi-autonomous units and promote some form of competition between the

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various subsidiaries as well as to have a spirit of co-operation between them.

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The parent is required to publish a set of consolidated financial statements which reflect the
economic reality of the group’s existence.

These statements comprise a consolidated statement of profit or loss and statement of

financial position. These statements must comply with the format and disclosure
requirements which apply to individual companies.

Basically, consolidation is a process of totalling the various items in the statements of profit
or loss and statements of financial position of the individual group members.

However, it is important to remember that the purpose of the exercise is to present the
statements as if the group was a single economic unit. Certain balances in the statements
of the individual group members arise from relationships within the group and must be
cancelled out before the figures can be meaningfully combined.

For example, H Ltd acquired 10,000 shares in S Ltd on 31 December 20X0.

The statements of financial position of the two companies at that date were as follows:

H Ltd S Ltd
£000 £000
Non-current assets 8 6
Investment in S Ltd 10 –
Current assets 12 10
Total assets 30 16

Share capital (£1 shares) 20 10

Current liabilities 10 6
Total equity and liabilities 30 16

Imagine Company H paid £10,000 to buy the shares in Company S.

We can imagine that the statement of financial position of Company H before the purchase of
Company S looked very much as it does at present, except that instead of having a £10,000
investment, it would have had an extra £10,000 of cash in current assets.

If this group is looked at from the outside, the directors of H Ltd control non-current assets
with a book value of £14,000 (ie £8,000 + £6,000) and current assets of £22,000 (ie £12,000 +
£10,000). The group has current liabilities of £16,000.

The calculation of the book value of the group’s assets and liabilities is, therefore, a simple
matter of adding across the statements.

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Before doing so, however, it is necessary to cancel out any internal relationships which

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arise within the group. For example:

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 The parent shows an asset of £10,000 in respect of its investment in the subsidiary.

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 This is matched by a capital balance of £10,000 which appears in the subsidiary’s
statement of financial position.

In other words, if we were to simply add all the entries in both statements of financial position
together, we would encounter some double-counting problems.
 On the assets side, we would be including both the value of Company H’s investment in
Company S and the assets that Company S possesses.
This double counting would be removed in a set of consolidated accounts.
 Similarly, on the equity side, we would be including Company S’s share capital as well as
the equity capital of Company H itself. This would not make sense as Company S no
longer has shareholders in its own right.
Again, this double counting would be removed.

Once these have been offset against one another, the consolidated statement of financial
position would appear as follows:

H Group

Consolidated statement of financial position

£000
Non-current assets 14
Current assets 22
Total assets 36

Share capital (£1 shares) 20

Current Liabilities 16
Total equity and liabilities 36

The process of identifying and cancelling internal relationships can become more
complicated in practice. Such problems are, however, beyond the scope of this syllabus.

The parent would also prepare a consolidated statement of profit or loss. The principles are
the same as for the statement of financial position, in that any transactions between group
members would have to be cancelled before totalling across the statements.

1.3 Goodwill on consolidation

Defining goodwill
The figures in the previous example deliberately had the amount that Company H paid to buy
Company S’s shares as £10,000, the same as the share capital and reserves of Company S.

However, in many takeovers, the amount that Company H has to pay to Company S’s
shareholders exceeds the balance sheet value of the share capital and reserves of Company S.

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In this case, a balancing item known as ‘goodwill’ is needed. This is a consequence of the way in

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which the consolidated statement of financial position for a parent company with a subsidiary is

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drawn up.

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Goodwill is calculated as:

cost of acquisition – book value of shares acquired

The cost of the acquisition is the value of any cash paid out, plus the market value of any shares or
debt paid out, to Company S’s shareholders.

The book value of shares acquired means the value of the proportion of the share capital and
reserves that Company H owns as a result of the acquisition.

It may seem strange that a company would pay more for another company than the balance sheet
says it is worth. But, remember that the balance sheet:
 only values certain assets – some, notably the value of the skilled workforce and the
customer base, are excluded from the balance sheet
 may not allow for revaluation of assets such as land and buildings that were valued at cost,
but may have increased significantly in value.

Any amount paid in excess of the nominal value of the shares and reserves acquired by a
parent is known as ‘goodwill’.

In theory, this is the amount which the parent is paying for such intangibles as:
 the reputation of the subsidiary
 its customer base
 its loyal workforce.

Accounting for goodwill

Goodwill as a non-current asset

Goodwill is normally shown as a non-current asset in the consolidated statement of financial

position.

In the previous example, assume instead that Company H has paid £11,000 for Company S rather
than £10,000. Goodwill would therefore be £1,000.

The amount shown as an investment in H’s balance sheet would be £11,000 rather than £10,000
and presumably H would have less cash as a result, so the current assets would be £11,000 (rather
than £12,000).

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Now if we try adding both balance sheets together we find that the book value of the assets of S are

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not equal to the amount of the investment shown in H’s accounts. The difference is goodwill and

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remains on H’s balance sheet after the consolidation. The statements of financial position would

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look as follows:

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H Ltd S Ltd Consolidated H
£000 £000 £000
Non-current assets (incl goodwill) 8 6 15
Investment in S Ltd 11
Current assets 11 10 21
Total assets 30 16 36

Share capital (£1 shares) 20 10 20

Current liabilities 10 6 16
Total equity and liabilities 30 16 36

Non-current assets have a value of £15,000 that includes £1,000 of goodwill on consolidation.

Splitting up goodwill

International accounting standards state that ‘goodwill’ ought to be broken down into its
constituent parts where possible, eg brand names, patents.

IFRS 3 deals with the accounting treatment of goodwill. Under IFRS 3, if a business is
acquired it is necessary to record all separately identifiable intangibles. Many assets which
would previously have been treated as part of goodwill must now be identified and valued
separately. Valuing these assets can be a complex matter in many cases and will often
require specialist advice.

Negative goodwill

If in the previous example Company S had been purchased for £9,000, this would indicate that
Company H had purchased Company S’s assets cheaply, relative to the book value of Company S,
and so would enhance the residual value of H.

The calculation of goodwill therefore results in a negative amount which would be added to the
‘other reserves’ in the consolidated accounts (so that ‘other reserves’ increase).

Goodwill on the purchase of an associate company

The value of an associate (see Section 1.5) is taken to be whatever it cost.

Hence, no goodwill item appears in the consolidated balance sheet, as the value of the associate
will be balanced exactly by the amount paid out. However, companies do show the goodwill
element of an associate acquisition in a note to the accounts.

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Question

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Statements of financial position (in £s) for Company A and Company B are shown below. Shares

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in Company A have a par value of 50p, and those in Company B a par value of 25p.

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A B
Non-current assets 300 100
Current assets 600 440
Share capital 400 160
Reserves 400 80
Current liabilities 100 300

Calculate the goodwill assuming that Company A’s shares are priced at par, and that Company B’s
shareholders are offered 1 share in Company A for every 1 share in Company B when Company A
acquires:

(i) 100% of Company B

(ii) 75% of Company B.

Solution

(i) Company A acquires a 100% share of Company B

B’s share capital is 160 and the shares have par value 25p, so the number of shares in B is:

160
 640
0.25

A therefore needs to offer 640 of its own shares, with a value of 640  0.50 = 320.

The total value of B to A is the value of 100% of its share capital and reserves, ie 160 + 80 = 240.

Goodwill = the value of A’s shares given to B’s shareholders – the value of A’s holding in B.

So goodwill = 320 – 240 = 80.

(ii) Company A acquires a 75% share of Company B

A is acquiring 75% of the 640 shares in B, ie 480 shares. A needs to offer 480 of its own shares to B’s
shareholders. The value of these shares is 480  0.50 = 240.

The value of 75% of B to A is (160 + 80)  0.75 = 180.

Therefore the goodwill is 240 – 180 = 60.

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1.4 Non-controlling interests

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Defining non-controlling interest

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It is unnecessary for the parent to own all of the subsidiary’s share capital in order for it to
exercise control. In most circumstances, the parent will have control if it owns 50% or more
of the shares or if it can otherwise control the subsidiary company.

Given that the directors of the parent control all of the subsidiary’s assets, it would not be
appropriate to consolidate only that percentage which the parent can claim to own.

This leaves the problem of accounting for the portion of the subsidiary’s finance which is
provided by the other shareholders.

The value of the share capital and reserves provided by the subsidiary’s minority
shareholders is called the ‘non-controlling interest’.

Accounting for non-controlling interest

The non-controlling interest must be shown separately in the statement of financial
position, in the equity section, after the capital and reserves attributable to equity holders.
An example is:

EQUITY £
Capital and reserves attributable to equity holders of the company
Share capital 40,000
Other reserves 15,000
Retained earnings 80,000
135,000
Non-controlling interest 10,000
Total equity 145,000

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Example

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Mr X decides to expand by acquiring 80% of the business of a friend Mr Y. The statements of

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financial position of the two businesses are as follows:

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all figures in $ Mr X Mr Y
Assets
Cash 50 200
Trade receivables 200 50
Total assets 250 250

Equity and liabilities

Capital ($1 nominal) 50 200
Reserves 100 50
Equity 150 250
Loan 100 0
Total equity and liabilities 250 250

Mr X pays $240 for an 80% stake in the business of Mr Y and raises this cash by increasing the loan
from $100 to $340.

We can say the following:

 Mr X has acquired 80% of the shares in Mr Y’s business = 160 shares of $1 each.
 The value of the 80% holding is 80%  ($200 + $50) = $200.
 Goodwill is cost of acquisition – book value of shares acquired = $240 – $200 = $40.
 Mr Y’s non-controlling interest has a value of $250 – $200 = $50 (= 20% × $250).

To complete a consolidated set of accounts we can consider that Mr X owns and controls all of the
assets in both companies, but that Mr Y has provided some of the capital for the combined
company in the shape of the non-controlling interest.

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We can now consolidate both statements of financial position and eliminate internal

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relationships.

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all figures in $ Mr X Mr Y Mr X

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Unconsolidated Consolidated

Assets
Shares in Mr Y 240 0
Goodwill 40
Cash 50 200 250
Trade receivables 200 50 250
Total assets 490 250 540

Equity and liabilities

Capital ($1 nominal) 50 200 50
Reserves 100 50 100
Capital and reserves attributable to 150 250 150
equity holders of the company

Non-controlling interest 50
Total equity 150 250 200
Loan 340 0 340
Total equity and liabilities 490 250 540

To reach the final column we have done the following:

 added the cash of both companies together
 added the goodwill to the consolidated balance sheet (this would be held under
‘intangibles’ in the non-current asset category)
 added all other categories together such as trade receivables together
 added the book value of Mr Y’s non-controlling interest as part of the equity of the
consolidated company.

The share capital and reserves of Mr Y’s company disappear – to include them would be double
counting these liabilities as discussed earlier.

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1.5 Associated companies

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Along with holding companies and subsidiaries, there is a third type of group member.

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An associated undertaking is one which is not a subsidiary, but which is subject to
significant influence (but not control) by the parent.

There is normally a presumption that significant influence would arise if the parent owned
more than 20% of the associate’s voting rights.

For most purposes, it is adequate to assume that a holding of between 20% and 50% of S’s shares
will make S an associate company of H.

The fact that the parent can merely exert influence means that it would not be appropriate to
include the value of its assets in the consolidated financial statements. It would also be
inappropriate to treat the associate as a simple investment.

Instead, compromise is reached by including the parent’s share of the associate’s results in
the consolidated statement of profit or loss – regardless of whether it receives these by way
of dividend. The consolidated statement of financial position includes the parent’s share of
the associate’s assets and liabilities. The entries in both the statement of profit or loss and
statement of financial position are single line entries, which state the total amounts
attributable to associate companies.

Question

A plc owns shares in three companies, B Ltd (40% shareholding), C Ltd (100% shareholding) and D
Ltd (25% shareholding).

A plc has a contractual right to appoint two thirds of the board of B Ltd. A plc has used its voting
rights to appoint all of the directors of C Ltd.

State, with reasons, whether companies B, C and D are subsidiaries of A or are associates.

Solution

C Ltd is a subsidiary because A Ltd controls a majority of voting rights.

B Ltd is also a subsidiary because A Ltd controls a majority of the board.

D Ltd is an associated company because A owns more than 20% of voting rights but does not have
control.

1.6 Interpretation of consolidated financial statements

One should always be aware of the artificial nature of the group structure. Strictly, the
group has no legal identity. It is impossible to enter into a contract with a group. Any
relationships will be with one or more of the group’s members.

In theory, it would be possible for a group member to collapse without receiving any
support from the other group members.

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In practice, a large group would find it almost impossible to permit a subsidiary to fail

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without compensating the company’s creditors because of the negative publicity it would

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cause. It is also possible to insist on a formal guarantee from the parent as a condition of

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granting a loan to a group member.

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Any support between group members could be restricted by the overseas location of some
subsidiaries, and therefore subject to exchange restrictions or other local regulations which
prohibit the payment of funds back to head office.

Alternatively, minority shareholders might be able to block transactions which would be

damaging to their company, even though they were potentially beneficial for the group as a
whole.

It is also notable that the accounting techniques associated with consolidated financial
statements has recently been one of the most controversial areas for regulators.

Question

Define the following terms:

(i) parent company
(ii) subsidiary company
(iii) associated undertaking
(iv) non-controlling interest.

Solution

(i) Parent company

A company which holds shares in other companies.

(ii) Subsidiary company

A subsidiary is a company controlled by a parent company. This control may be through holding a
majority of voting rights or by being able to appoint or remove directors holding a majority of
voting rights at board meetings.

(iii) Associated undertaking

An associated undertaking is one which is not a subsidiary, but which is subject to significant
influence by the parent. A significant influence would normally arise if the parent owned
between 20% and 50% of the associate’s voting rights.

(iv) Non-controlling interest

The non-controlling interest is the value of the share capital and reserves provided by the
subsidiary’s minority shareholders.

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2 Insurance companies

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2.1 Introduction

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Insurance companies are effectively subject to the same reporting regime as any other type of
limited company. As for other companies, a statement of financial position and a statement of
profit or loss must be produced.

For most companies, the concept of profit is relatively intuitive. If a company sells an item of
stock for more than it costs to make, it makes a profit. For an insurance company, the concept of
profit is not so clear-cut.

When a policy is sold, the policyholder pays the company a premium and the company incurs
sales and administration expenses. However, at this point the company does not know how much
profit it will make as the policy may last for many years, during which time the company will have
to pay claims and incur expenses and further premiums may be paid.

To allow for these future cashflows, the company will set up an estimated liability (a reserve) in its
statement of financial position. A conservative approach may be adopted in estimating this to
avoid too much profit being made at the start of the policy.

The preparation of insurance company accounts is complicated by two special features:

 The underlying contracts (liabilities) fall due outside the accounting period and are
uncertain in size.

 Premature transfer of ‘profit’ to shareholders may endanger the financial stability of

the company and the ability to meet future liabilities.

In order to address these features, insurance accounts contain special features.

This section looks at the special features of insurance company accounts. We consider both
general insurance (short-term insurance, eg car or buildings insurance) and long-term insurance
(eg life insurance).

2.2 Estimation of liabilities and timing of profit

Estimated values for future liabilities must be assessed, either on a statistical basis or by
expert judgement. For long-term (life and pensions) business this is often entrusted to
actuaries.

Premiums already received in respect of such liabilities need to be identified and held until
the liabilities have expired.

Additional sums may have to be set aside to meet any anticipated worsening in claims
experience or any failure by third parties to honour their commitments towards meeting
eventual liabilities.

Therefore, the provisions made for future liabilities are likely to be conservative in nature,
with the result that current profit is under-stated. This conflicts with the basic accounting
principle that the accounts should show a ‘true and fair’ view of the position of the
company.

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This feature is exacerbated by the profit profile of long-term contracts, whereby business

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written initially causes a financial strain due to the costs of setting up the contracts and

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establishing adequate initial reserves.

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There may be a loss on the policy in the early years, due to the initial expenses and the need to
set up initial reserves. This is known as new business strain.

However, the product design will provide for these initial costs to be subsequently
recovered, and will also aim to provide an overall return to the company. The question
arises as to when (and how) this profit should be reported.

A further problem is introduced by the taxation environment whereby particular classes of

business may operate under different tax rules. This may require that the overall activities
of the company are allocated to separate sub-funds for tax purposes.

For example, general insurance may be taxed differently from long-term insurance.

2.3 Statement of profit or loss

The statement of profit or loss for an insurance company is divided into technical and non-
technical accounts.

In general, all items relating to the main insurance business are shown in the technical account.
This is divided further into separate accounts for general and long-term business.

The non-technical account then brings together the profits from the two types of business and
adds in any profit made on other non-insurance business. To this is added other items such as the
investment return on investments other than those supporting the insurance business and tax on
profit to give the overall profit to shareholders.

Thus, the statement of profit or loss will typically appear in three forms – separate revenue
(‘technical’) accounts for general insurance and long-term insurance businesses and a
‘non-technical’ statement of profit or loss.

Technical accounts
Each revenue account will take the form:
Earned premiums (net of reinsurance)
+ Investment income
+ Realised capital gains
 Claims incurred (net of reinsurance) or benefits payable
 Net operating expenses incurred (including investment expenses)
Balance on revenue account

where the investment income and realised capital gains are those earned on the
investments held to cover the insurance liabilities. There may need to be transfers from the
reserves to cover the actual liabilities which are payable.

There may be additional items in the revenue account depending, for example, on company
practice, accounting standards, regulatory requirements, or the purpose of the accounts.

For general insurance, these could include any change in the claims equalisation provision.

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The ‘claims equalisation provision’ is a type of reserve used to smooth out fluctuations in claims

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from year to year.

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For long-term business, they could include transfer to (or from) the ‘fund for future

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appropriations’ (ie all funds the allocation of which – either to policyholders or shareholders
– has not been determined by the end of the financial year).

The ‘fund for future appropriations’ is a type of reserve applicable to life-insurance business.

For general insurance or long-term business, unrealised gains or losses on investments

might be included.

Non-technical account
The balances on the revenue accounts are then transferred to the ‘non-technical’ statement
of profit or loss.

The non-technical account takes the form:

Balance on general insurance revenue account

+ Balance on long-term insurance revenue account
+ Investment income
+ Realised and unrealised gains (losses) on investments
+ Profit (or loss) from other ordinary activities before tax
 Tax on profit (or loss) from all activities
Profit or loss for the financial year

where investment income and capital gains are those earned on investments relating to
shareholders’ funds / free reserves.

‘Other ordinary activities’ would be other business activities of the company that are not
general or long-term insurance business.

2.4 Statement of financial position

Remember the balance sheet equation:

Assets = Liabilities + Equity

We can see that some of the assets of the business cover the liabilities and some of the assets
cover the equity capital (or shareholders’ fund or free reserves).

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The statement of financial position contains the usual items plus, typically, these additional

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entries:

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Assets

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 Assets held to cover insurance liabilities
Insurance companies consider the term of their liabilities and invest in appropriate assets.
For example, long-term insurers tend to invest in medium- and long-term assets whereas
general insurers tend to invest in short-term assets.
 Assets representing free reserves
The shareholders’ fund or free reserves is the value of the share capital and reserves of
the business. The greater the free reserves, the more freedom the company has in its
investment policy, eg it could invest in long-term assets that yield a greater return.
 Reinsurers' share of technical provisions
If the insurer is using reinsurance, then the reinsurer will pay the insurer for their share of
the claims. This can be shown as an asset in the balance sheet.
 Trade receivables arising out of direct insurance operations (policyholders,
shareholders)
These are amounts owed to the company by policyholders or sales intermediaries.
 Trade receivables arising out of reinsurance operations
These are amounts owed to the company by reinsurers.
 Prepayments and accrued income
Prepayments are amounts paid in advance. Accrued income is income that has accrued
on an investment since the last payment.

Liabilities
 Fund for future appropriations
This is a type of reserve applicable to life-insurance business.

 Technical provisions:
 long-term insurance business provisions, including the actuarially estimated
value of the company’s liabilities including bonuses already declared and
after deducting the actuarial value of future premiums.

 general insurance business provisions, including unexpired risk reserves

and outstanding claims reserves.

The unexpired risk reserve is to cover the claims and expenses that are expected
to emerge from an unexpired period of cover.

The outstanding claims reserve is to cover the claims and expenses for all
outstanding claims that have not yet been settled.

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Shareholders’ fund

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In insurance company accounts, the assets less the liabilities equals the shareholders’

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funds.

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Insurance company accounts will be considered in more detail in the relevant Specialist
subjects.

Similar issues arise with respect to pension scheme accounts. Again, the relevant
Specialist subjects will address these.

Question

State where the following items appear in the accounts of an insurance company.

Use the following abbreviations:

 R for revenue account
 I for the non-technical account
 A for assets
 L for liabilities
 S for shareholders’ fund.

(i) revaluation reserve

(ii) investment income earned on investments relating to insurance liabilities

(iii) balance on general insurance revenue account

(iv) unexpired risk reserve

(v) reinsurers’ share of technical liabilities.

Solution

(i) S (The shareholders’ fund comprises share capital and reserves. Reserves include
the revaluation reserve.)

(ii) R

(iii) R (the bottom line) and carried forward to I

(iv) L

(v) A

© IFE: 2019 Examinations The Actuarial Education Company

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CB1-13: Group accounts and insurance company accounts Page 19

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Chapter 13 Summary

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Group accounts

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Consolidated accounts are needed when one company owns a substantial proportion of
another company. These accounts reflect the operations of the whole group owned by the
parent or holding company, including its subsidiaries and associated companies.

Subsidiary company
Company S is said to be a subsidiary company of holding Company H when Company H has a
controlling interest in Company S, ie holds the majority of the shares of Company S or controls
the board of directors of Company S in some other way.

If Company H owns 100% of the shares in Company S, S is a wholly owned subsidiary.

If H owns less than 100% of the shares in S, S is a partially owned subsidiary. The portion held
by other shareholders is termed the non-controlling interest.

Consolidated accounts must be produced. This basically involves adding up the items in the
statement of profit and loss and the statement of financial position, presenting the statements
as if the group is a single unit. Any interrelationships between members of the group are
cancelled.

Associated company
Company A is an associate of Company H if Company H has an investment in the shares of
Company A that gives Company H a significant influence but not control over Company A.

Normally, a holding by H of between 20% and 50% of A’s shares will make A an associate of H.

The consolidated statement of profit or loss and statement of financial position of the group
include single line entries showing the parent company’s share of the associate’s income,
assets and liabilities.

Goodwill
Goodwill represents the excess of the value paid for a subsidiary company over the value to
the predator company of the share of assets purchased. It is shown in the consolidated
statement of financial position of the group.

Non-controlling interest
In the consolidated statement of financial position, the value of the subsidiary’s share capital
and reserves that is owned by minority (non-controlling) shareholders is shown separately in
the equity section, after the capital and reserves attributable to equity holders.

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Insurance companies

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Insurance companies complete their accounts in a manner comparable to other limited

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companies, but the preparation of insurance company accounts is complicated by two
special features:
 The underlying contracts (liabilities) fall due outside the accounting period and are
uncertain in size.
 Premature transfer of ‘profit’ to shareholders may endanger the financial stability of
the company and the ability to meet future liabilities.

In order to address these features, insurance accounts contain special features.

The statement of profit or loss is divided into technical and non-technical accounts.

The technical or revenue accounts show the profit made on the main insurance business and
is split into a general business account and a long-term business account. The non-technical
account adds in other sources of profit to show the profit attributable to shareholders.

Each technical revenue account takes the form:

Earned premiums (net of reinsurance)
+ Investment income
+ Realised capital gains
– Claims incurred (net of reinsurance) or benefits payable
– Net operating expenses incurred (including investment expenses)
Profit or loss for the financial year

The statement of financial position has the usual items plus typically, for assets:
 Assets held to cover insurance liabilities
 Assets representing free reserves
 Reinsurers' share of technical provisions
 Trade receivables arising out of direct insurance operations
 Trade receivables arising out of reinsurance operations
 Prepayments and accrued income
and for liabilities:
 Fund for future appropriations
 Technical provisions for long-term and general insurance business.

© IFE: 2019 Examinations The Actuarial Education Company