Transcript Soziale Sicherungssysteme der Schweiz - aktuariat

aktuariat-witzel
Aktuarielles Controlling I
Presentation of Other Comprehensive Income
Universität Basel
Herbstsemester 2014
(Version February 2015)
Dr. Ruprecht Witzel
[email protected]
www.aktuariat-witzel.ch
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
• Aktuar. Contr.
WeI Presentation
will use
the sameDr.wording
as Swiss Life
of OCI
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
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”
Aktuar. Contr. I Presentation of OCI
Dr. Ruprecht Witzel; HS 14
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Presentation of Other Comprehensive Income
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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
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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
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
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 afsassets
Aktuar. Contr. I Presentation of OCI
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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 of afsassets on equity is presented in the presentation Basics
of US GAAP for Life Insurers in the chapter 9. Shadow
Adjustments
– The same statements are valid in IFRS 4
Aktuar. Contr. I Presentation of OCI
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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
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
Aktuar. Contr. I Presentation of OCI
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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
I Presentation
of OCI
Dr. Ruprecht Witzel;
HS 14
• Aktuar. Contr.
The
increase
in the market
value
is not recognized in
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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” belongs to the shareholders
•
Technical reserves can only be backed by P&L book
values, i.e. by the values of the assets which are
recognized in the P&L
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
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
Aktuar. Contr. I Presentation of OCI
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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”
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
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
of the Annual Report 2013 of Swiss Life for the years
2012 (restated) and 2013
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
Aktuar. Contr. I Presentation of OCI
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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
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
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
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
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
Aktuar. Contr. I Presentation of OCI
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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
Equity begin of 2012:
8'981
•
NOCI of 2012: +1’215
Delta equity in 2012:
1'174
•
AOCI end of 2012: 1’745
Equity end of 2012:
10'155
•
NOCI of 2013: -1’856
Delta equity in 2013: 1'137
Aktuar. Contr. I Presentation of OCI
Dr. Ruprecht Witzel; HS 14
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Presentation of Other Comprehensive Income
•
In 2012 the increase of Equity by +1'174 mCHF is
nearly equal to the increase of Net Other
Comprehensive Income by +1'215 mCHF, because
– Net Profit of this year amounts only to 99 mCHF and
– the other items of equity are nearly constant
Aktuar. Contr. I Presentation of OCI
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Presentation of Other Comprehensive Income
•
In 2013 the decrease of Equity by -1'137 mCHF is
substantially lower than the decrease of Net Other
Comprehensive Income by -1'856 mCHF, because
– Net Profit of this year amounts to 784 mCHF and
– is (nearly) totally used to increase Retained Earnings
by + 781 mCHF
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
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?
Aktuar. Contr. I Presentation of OCI
Dr. Ruprecht Witzel; HS 14
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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
Aktuar. Contr. I Presentation of OCI
Dr. Ruprecht Witzel; HS 14
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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 of 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
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
•
Aktuar. Contr. I Presentation of OCI
Dr. Ruprecht Witzel; HS 14
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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
Aktuar. Contr. I Presentation of OCI
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