Aktuarielles Controlling I Presentation of Other Comprehensive - - PowerPoint PPT Presentation

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Aktuarielles Controlling I Presentation of Other Comprehensive - - PowerPoint PPT Presentation

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aktuariat-witzel Aktuarielles Controlling I Presentation of Other Comprehensive Income Universitt Basel Herbstsemester 2014 Dr. Ruprecht Witzel ruprecht.witzel@ aktuariat- witzel.ch www.aktuariat- witzel.ch P resentation of Other

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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

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  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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
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SLIDE 3
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 4
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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”

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SLIDE 5
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 6
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 7
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 8
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 9
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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
  • f afs- assets on equity is presented in the

presentation Basics of US GAAP for Life Insurers in the chapter 9. Shadow

Adjustments

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  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 11
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 12
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 13
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

capital gains or losses which “really”

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SLIDE 14
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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
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SLIDE 15
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 16
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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”

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SLIDE 17
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation 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

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SLIDE 18
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • The following slides present the

– Consolidated Statement of Income – Consolidated Statement of Comprehensive Income – Consolidated Balance Sheet

  • f the Annual Report 2013 of Swiss Life for the years 2012

(restated) and 2013

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SLIDE 19
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 20
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 21
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 22
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 23
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 24
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 25
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 26
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

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SLIDE 27
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • Concerning the Consolidated Statement of Income no

special comments seem to be necessary

  • The result is the Net Profit which amounts in 2012 to

mCHF 99 and in 2013 to mCHF 784

  • These Net Profits are the basis to calculate Earnings Per

Share which amounts in 2012 to CHF 3.06 and in 2013 to

CHF 24.45

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SLIDE 28
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • The Consolidated Statement of Comprehensive Income

starts with Net Profits of mCHF 99 respectively mCHF 784

  • The block Other Comprehensive Income consists of the

following two parts: –

Items that may be reclassified to the Income Statement

–

Items that will not be reclassified to the Income Statement

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SLIDE 29
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

Items that may be reclassified to the Income Statement:

  • In the years 2012 and 2013, the two most important items

are related to –

financial assets available for sale (mCHF 3’ 816

respectively mCHF - 5’ 161) and cash flow hedges (mCHF 408 respectively mCHF - 656) and – the corresponding adjustments (nearly mCHF - 3’ 209 respectively mCHF 3’ 865)

  • The results of this part of the OCI are mCHF 1’ 167

respectively mCHF - 1’ 855

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SLIDE 30
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

Items that will not be reclassified to the Income Statement:

  • The impact of these items is in both years negligible
  • Net Other Comprehensive Income amounts in 2012 to

mCHF 1’ 215 and in 2013 to mCHF - 1’ 856

  • This implies a Total Comprehensive Income in 2012 of

mCHF 1’ 313 and in 2013 of mCHF - 1’ 072

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SLIDE 31
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • Concerning the Assets and Liabilities (without Equity) of

the Consolidated Balance Sheet no special comments are

necessary, except the following hint: – In the BS end of 2012 and 2013 the afs- assets amount to mCHF 81’ 176 respectively to mCHF 81’ 071 which is nearly half of the total assets

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SLIDE 32
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • In Equity the tremendous changes in Net Other

Comprehensive Income are reflected in the corresponding changes of the item Accumulated Other Comprehensive Income as part of Equity (all figures in mCHF):

– AOCI begin of 2012: 530 – NOCI of 2012: +1’ 215 – AOCI end of 2012: 1’ 745 – NOCI of 2013: - 1’ 856 – AOCI end of 2013: - 112

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SLIDE 33
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • Typical examples of afs- assets are bonds and shares
  • In the following, we consider the year 2013 and assume

that in 2013 all afs- assets are bonds or shares

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SLIDE 34
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • If all these afs- assets would be classified as trading, then

the changes in their market values of mCHF - 5’ 161 would be recognized as investment income in the P&L and would

directly impact Net Profit and Equity

– In this case bonds and shares are valued in the P&L and the BS at market values

  • The question arises which part of the adjustments of

mCHF 3’ 326 (= 3’ 222 + 104) would still remain?

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SLIDE 35
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

35

Presentation of Other Comprehensive Income

All afs- assets classified as trading (cont.):

  • If all of these adjustments would remain, it follows:

– That there would be hit in the P&L due to the

investment losses about mCHF - 1’ 800 (- 1’ 835 = -

5’ 161 +3’ 326)

  • The adjustment of mCHF 3’ 222 is under the title

“Policyholder participation” which is a hint that it is due to a reduction of the shadow DBR of this amount

  • For trading assets, the question arises whether the DBR

could be lowered by mCHF 3’ 222 without becoming negative, because normally a negative DBR is not allowed

– A negative DBR would be an asset

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SLIDE 36
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

36

Presentation of Other Comprehensive Income

All afs- assets classified as trading (cont.):

  • If nothing of these adjustments would remain, it follows

that the tax relief would be higher – If we assume a tax rate of 22.5% , the unrealized losses

  • f mCHF - 5’ 161 would imply a tax credit of mCHF

1’ 161

– In this case, the hit in the P&L due to the investment

losses would be about mCHF - 4’ 000

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SLIDE 37
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

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Presentation of Other Comprehensive Income

  • If all the afs- bonds would be classified as held to maturity,

then the changes in their market values would –

neither be recognized in the P&L as investment income

–

nor in the OCI

–

nor in the BS

  • In this case bonds would be valued in the P&L and the BS

at amortized cost values

– Changes in the market values have no impact in the BS and in the P&L

  • The corresponding unrealized losses would not been shown

in the BS, but would still exist

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SLIDE 38
  • Aktuar. Contr. I Presentation of OCI
  • Dr. Ruprecht Witzel; HS 14

38

Presentation of Other Comprehensive Income

  • It is not usual to classify bonds as held to maturity,

because in this case the insurance companies are normally not allowed to sell these bonds

  • Bonds classified as held to maturity are blocked