The latest regulations regarding preparation of financial statements issued by IRDA are:
1. Cash Flow Statement (Common for All Insurers):
Insurers will in addition to the earlier statutory and subsidiary books of accounts and statements, will have to prepare a receipts and payments account (cash flow statement). This statement must be prepared in accordance with AS- 3 using the direct method given in the Accounting Standard.
2. Life Insurance Companies:
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Insurers doing life insurance business should comply with the requirements of Schedule A.
The Schedule A, among other things, gives the following forms:
Revenue Account – Form A-RA
Profit and Loss Account – Form A-PL
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Balance Sheet – Form A-BS
The profit and loss account and balance sheet are given in summary form. There are 15 Schedules, the first four relate to profit and loss account and the remaining eleven relate to balance sheet which gives the details of the summary heads. Schedule 5 deals with share capital. It is followed by a connected Schedule 5A, which, gives the pattern of shareholding.
3. General Insurance Companies:
Insurers doing general insurance business should comply with the requirements of Schedule B.
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The schedule B among other things gives the following forms:
Revenue Account – Form B-RA
Profit and Loss Account – Form B-PL
Balance Sheet – Form B-BS
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It is important to note here that both Life Insurers and General Insurers are required to prepare Revenue Account and Balance Sheet in summary form. The details are to be given in the accompanying schedules. Here also the first four relate to profit and loss account and the rest eleven pertaining to balance sheet. Schedule 5A gives the pattern of shareholding. In both the schedules profit and loss appropriation account is dispensed with and the appropriations are accommodated in the profit and loss account.
4. Auditor’s Report:
The report of the auditors on the financial statements of every insurer and re-insurer must conform to the requirements of Schedule C. The Authority reserves the right to issue guidelines on the appointment, continuance or removal of auditors. These guidelines can include matters relating to qualifications, experience, rotation and period of appointment of auditors.
5. Management’s Report:
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The financial statements must be accompanied by a management report given in part (iv) in Schedules A and B as well. The report deals with compliance of certain requirements of the regulations, provision of solvency margins, disclosure with regard to the overall risk exposure and the strategy adopted to mitigate the same.
It also includes ageing of claims indicating the average period taken to settle the claims, computing market value of investments, its impact on balance sheet and a review of asset quality performance of investments in terms of portfolios such as real estate, loans, investments, etc. Finally, the report includes a responsibility statement indicating the compliance with the accounting standards, financial statements reflecting a true and fair view, maintenance of adequate accounting records, preparation of
accounts on a going-concern basis and the existence of an internal audit system consistent with the size and nature of business.
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6. Contingent Liabilities:
The financial statements should disclose the contingent liabilities, the accounting policies and the departures from such policies with reasons therefore.
7. Premium Recognition:
Premium is the main revenue for insurance business. In the case of life business premium is to be recognized as income when due. In the case of general insurance premium is to be recognized as income over the contract period or the period of risk whichever is appropriate.
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Unearned premium and premium received in advance both of which represent income not relating to the accounting period must be disclosed separately in the financial statements. Unearned premium is the premium for the period of unexpired risk. Premium received in advance represents the premium received prior to the commencement of risk.
In other words, the premium relates entirely to subsequent accounting periods. A provision should be made for unearned premium. Both premium received in advance and unearned premium are Shown separately in the balance sheet under the heading ‘Current Liabilities’.
8. Premium Deficiency:
It is the sum of expected claim costs, related expenses and maintenance costs exceeding the related unearned premium.
9. Actuarial Valuation of Claims Liability-in Some Eases:
Previously there was no need for actuarial valuation in general insurance. Now the regulations require estimation of claims made in respect of contracts exceeding four years, must be recognised on actuarial basis, subject to the regulations of the Authority.
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10. Catastrophe Reserve:
Such a reserve should be created by the insurers towards losses which might arise due to entirely unexpected set of events and not for any specific known purpose. Investment of the funds of this reserve must be made in accordance with the prescription of Authority.
11. Investments:
Valuation of investments must be made in the manner prescribed by the Authority.
12. Loans:
Loans must be measured on historical cost subject to impairment provisions.