aktuariat-witzel Aktuarielles Controlling I Presentation of Other Comprehensive Income Universität Basel Herbstsemester 2014 Dr. Ruprecht Witzel ruprecht.witzel@ aktuariat- witzel.ch www.aktuariat- witzel.ch
P resentation of Other Comprehensive Income • This presentation is an amendment to the presentations – Basics of US GAAP for Life Insurers and – Basics of IFRS 4 for Life Insurers • We will illustrate the new presentation of Other Comprehensive Income using the Consolidated Financial Statements of the Annual Report 2013 of Swiss Life • Zurich Insurance Group and Baloise are using the same concept; the wording is sometimes a little bit different • We will use the same wording as Swiss Life Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 2
P resentation of Other Comprehensive Income • Since reporting year 2013, there are new rules in force in US GAAP and IFRS concerning the presentation of Other Comprehensive Income (OCI) • The relevant statements are the same or nearly the same in US GAAP and IFRS • The concept of OCI is – part of US GAAP and IFRS and of several local accounting systems – but is not known (or not yet known) in the local accounting systems for example of Switzerland, Germany and Austria Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 3
P resentation of Other Comprehensive Income • The Balance Sheet (BS) and the Profit and Loss Account (P&L) of a company are connected via the fact that a profit increases equity and a loss reduces equity – These changes of equity are denoted as income statement- related (“ erfolgswirksam” ) • The P&L is often also called “ Statement of Income” • The difference between total income and total expenses after taxes, i.e. the result of the P&L after taxes, is often called “ net profit” or “ net income” Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 4
P resentation of Other Comprehensive Income • The items of the OCI – induce changes of equity which are denoted as not effecting net income , i.e. they do not impact profit or loss after taxes of the P&L (“ erfolgsneutral” ) and in addition – are not due to transactions with shareholders as capital reductions or capital injections which are also not effecting net income Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 5
P resentation of Other Comprehensive Income • This implies that in US GAAP/ IFRS there are three ways to change equity : – via net income of P&L which is denoted as income statement- related – via OCI which is denoted as not effecting net income – via transactions with shareholders which are also denoted as not effecting net income • In the local accounting systems of Switzerland, Germany and Austria only the first way and third way to change equity are (up to now) known Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 6
P resentation of Other Comprehensive Income • Examples of items required to be presented as OCI are: – changes in the market values of assets classified as available for sale (afs- assets) – foreign currency translation adjustments on foreign subsidiaries – changes in the fair value of cash flow hedge instruments – revaluations of property equipment and intangible assets – adjustments regarding pension liabilities Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 7
P resentation of Other Comprehensive Income • These items are presented under the title “ Other Comprehensive Income ” as part of the so called “Statement of Comprehensive Income” • The corresponding result after taxes is called “Net Other Comprehensive Income” • The sum of – Net Profit and – Net Other Comprehensive Income is called “ Total Net Comprehensive Income ” • In the following, we will consider in more detail only afs- assets Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 8
P resentation of Other Comprehensive Income • Characteristic for afs- assets is the fact that in the BS they are valued at market values and in the P&L different model- values are used to determine the corresponding investment income • The impact of changes in the market values of afs- assets on equity is presented in the presentation Basics of US GAAP for Life Insurers in the chapter 9. Shadow Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 9 Adjustments
P resentation of Other Comprehensive Income • For example a share classified as available for sale is valued – in the BS at market value – in the P&L at cost value , as long there is no impairment and the share is not sold • This implies – that investment income is equal only to the dividend payments and – the changes in the market value have not yet been recognized in the P&L Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 10
P resentation of Other Comprehensive Income • At valuation date, the difference between market value and cost value – is denoted as unrealized gain or loss and – is part of the Accumulated Other Comprehensive Income (AOCI) which is part of equity • Keep in mind that the items of – OCI are flows and of – AOCI are stocks • In chapter 9. of the US GAAP presentation this is illustrated with the following example Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 11
P resentation of Other Comprehensive Income • Example: Share, available for sale, not sold during the year Cost value End of previous year 100 End of year 100 Market value End of previous year 110 End of year 120 • In the BS on the asset side, the share has the values 110 resp. 120 • In the BS on the liability side, the AOCI shows 10 resp. 20 unrealized capital gains as part of shareholders’ equity • In the P&L, only the dividends paid are recognized as current investment income • The increase in the market value is not recognized in the P&L as part of investment income Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 12
P resentation of Other Comprehensive Income • If no adjustments would be made, shareholders’ equity would be overstated • If for example, the unrealized capital gains would be realized, not the total amount would belong to shareholders – At least, for example, taxes have to be paid • By means of the Shadow Adjustments , one try to determine that part of the unrealized Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 13 capital gains or losses which “really”
P resentation of Other Comprehensive Income • The Shadow Adjustments are determined by capturing all consequences of an assumed realization of the unrealized capital gains or losses • It is a virtual calculation using the assumption: “what would happen, if all unrealized capital gains or losses would be realized?” • The effects are only shown as Shadow Adjustments in the Balance Sheet • The Profit & Loss Account is not affected Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 14
P resentation of Other Comprehensive Income Examples of different shadow adjustments are: • The taxes on unrealized capital gains or losses are normally not classified as shadow adjustments, although it is the same issue • The unrealized gains or losses are disclosed net of taxes which implies a corresponding tax position • If unrealized capital gains would be realized, a special amortization of DAC or PVFP would be the consequence for FAS 97 and FAS 120 products, but not for FAS 60 products – This is captured by the shadow DAC or shadow PVFP • In analogy the URL and DPL has to be treated, so there is also a shadow URL and shadow DPL Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 15
P resentation of Other Comprehensive Income • On all shadow adjustments, the corresponding taxes are to be recognized • According to the new presentation rules these items are now published in the so called “ Consolidated Statement of Comprehensive Income” Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 16
P resentation of Other Comprehensive Income • In contrast to this, if the share would be classified as trading then these issues would not arise because then the share would be valued in the BS and the P&L (to determine investment income) at market values • In this case, changes in the market value of the share would effect equity income statement- related • The increase of the market value of the share by 10 in the reporting year could imply for example: – an additional amortization of the DAC of FAS 120 products because of a true up effect and – corresponding tax effects Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 17
P resentation of Other Comprehensive Income • The following slides present the – Consolidated Statement of Income – Consolidated Statement of Comprehensive Income – Consolidated Balance Sheet of the Annual Report 2013 of Swiss Life for the years 2012 (restated) and 2013 Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 18
P resentation of Other Comprehensive Income Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 19
P resentation of Other Comprehensive Income Aktuar. Contr. I Presentation of OCI Dr. Ruprecht Witzel; HS 14 20
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