You have been hired as the new Internal Auditor for Ashton Company, a public com

Question

You have been hired as the new Internal Auditor for Ashton Company, a public company. Here's your concern that you bring to the Board of Directors. You wonder if, within the financial industry, public companies are properly valuing long term liabilities on their financial statements. The Board of Directors asks you to prepare a report for a follow-up meeting indicating whether or not their long term liabilities have been properly valued. What key points would you address and why? Share thoughts and suggestions with classmates.

Explanation / Answer

The amount of the long-term liability determined in respect of a group of contracts shall not be less than such amount as, if the assumptions adopted for the valuation were to remain unaltered and were fulfilled in practice, would enable long-term liabilities similarly determined at all times in the future to be covered from resources arising solely from the contracts and the assets covering the amount of the long-term liability determined at the current valuation.

Prudence

Provision for all long-term liabilities shall be made on prudent assumptions that shall include appropriate margins for adverse deviation of the relevant factors. Each individual assumption shall satisfy the prudence requirement, unless the Actuary is satisfied that in aggregate the assumptions contain sufficient prudence.

The amount of the long-term liabilities shall be determined in compliance with these Regulations and shall take into account, inter alia, the following factors:

(a) all guaranteed benefits, including guaranteed surrender values;

(b) bonuses or other benefits to which policyholders are already either collectively or individually contractually entitled;

(c) all options available to the policyholder under the terms of the contract;

(d) discretionary charges and deductions, in so far as they are consistent with the fair treatment of policyholders; (e) all future bonuses or other discretionary benefits consistent with the fair treatment of policyholders and assumed future experience;

(f) the existing investments and continuing investment policy;

(g) expenses, including commissions; and

(h) any rights under reinsurance arrangements.

The determination of the amount of the long-term liabilities shall take into account the relationship between the nature, term and currency of the long-term liabilities and the nature, term and currency of the assets deemed to be held in respect of those long-term liabilities and shall include provision against the effects of possible future changes in the value of the assets and liabilities due to fluctuations in investment conditions and currency movements on:

(a) the ability of the company to meet its obligations arising under contracts for long-term business as they arise; and

(b) the adequacy of the assets to meet the long-term liabilities as determined in accordance with these Regulations.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.