Fa Assignment

Introduction
General insurance or non-life insurance policies, including automobile and homeowners

policies, provide payments depending on the loss from a particular financial event. General
insurance is typically defined as any insurance that is not determined to be life insurance. It is
called property and casualty insurance in the U.S. and Canada and Non-Life Insurance in
Continental Europe.
In the UK, insurance is broadly divided into three areas: personal lines, commercial
lines and London market.
The London market insures large commercial risks such as supermarkets, football players and
other very specific risks. It consists of a number of insurers, reinsurers, P&I Clubs, brokers
and other companies that are typically physically located in the City of London. The Lloyd's
of London is a big participant in this market. The London Market also participates in personal
lines and commercial lines, domestic and foreign, through reinsurance.
Commercial lines products are usually designed for relatively small legal entities. These
would include workers' comp (employers liability), public liability, product liability,
commercial fleet and other general insurance products sold in a relatively standard fashion to
many organisations. There are many companies that supply comprehensive commercial
insurance packages for a wide range of different industries, including shops, restaurants and
hotels.
Most general insurance policies are annual and the premium payment is in advance. No risk
commences unless you have paid the premium. In some long term policies companies have
the facility of collecting premiums periodically
The premium is calculated on the extent and nature of the cover you want. A higher sum
insured means a higher rate of premium. Similarly a higher risk will be charged a higher
premium. An example of this is that an older person will have to pay a higher premium for
health insurance for the same sum insured. Sometimes the risk is higher depending on the
location of risks for example in motor insurance in areas where accidents are higher. So the
premium will vary according to the nature and severity of the risk.
MCOM (Accountancy) SEM1
Page 1
If I buy a policy and dont make a claim, it is a loss. So, why should I buy insurance?
General insurance is not meant to be for savings or investment returns. It is meant for
protection. What you pay for is the protection against a risk. To approach it as something
from which returns should be obtained is not the correct approach as there is a price to pay
for protecting a property worth lakhs for a few hundred rupees.
In case of problem with the claims, First you should write to the company and give them
sufficient time to respond suitably. If they dont respond, or it is not a response satisfactory to
you, then you can approach the appropriate judicial channel. For complaints relating to
personal insurance covers upto a value of Rs.20 lakh, you may approach the Insurance
Ombudsman in your area.
The Ombudsman has a technical team that will go into the merits of your case and give an
award). If you are unhappy with the outcome with the Ombudsman you still have recourse to
consumer courts.
The IRDA also has a Grievance Cell. You may contact
In indemnity policies, the upper limit of a claim is the sum assured and this usually applies
for the period of the policy. Certain policies, however, allow for reinstatement of the Sum
Insured by payment of proportionate premium for the remaining period of the policy. The
actual claim will be the actual extent of financial loss as validated by documents like bills. If
the property is underinsured, the insured shall bear a ratable proportion of the loss. There can
be more than one claim in the policy period but the sum assured is usually the limit for the
policy period unless reinstated.
Nowadays health insurance policies which cover hospitalization costs have also a
cashless settlement of claims. That is, you dont have to pay for the treatment at the hospital
and then make a claim for reimbursement of the expenses. The insurance company has a
service provider called the third party administrator (TPA) health services, who liaises with
the hospitals and directly makes the payment for your treatment as per the terms of your
policy and coverage.
Page 2
Insurance industry in India
Insurance industry has always been a growth-oriented industry globally. On the Indian scene
too, the insurance industry has always recorded noticeable growth vis--vis other Indian
industries.
Triton Insurance Co. Ltd. was the first general insurance company to be established in India
in 1850, whose shares were mainly held by the British. The first general insurance company
to be set up by an Indian was Indian Mercantile Insurance Co. Ltd., which was established
in 1907. There emerged many a player on the Indian scene thereafter.
The general insurance business was nationalised after the promulgation of General
Insurance Business (Nationalisation) Act, 1972. The post-nationalisation general insurance
business was undertaken by the General Insurance Corporation of India (GIC) and its 4
subsidiaries:
1. Oriental Insurance Company Limited;

2. New India Assurance Company Limited;
3. National Insurance Company Limited; and
4. United India Insurance Company Limited.
Towards the end of 2000, the relation ceased to exist and the four companies are, at present,
operating as independent companies.
The Life Insurance Corporation (LIC) was established on 01.09.1956 and had been the sole
corporation to write the life insurance business in India.
The Indian insurance industry saw a new sun when the Insurance Regulatory &
Page 3
Development Authority (IRDA) invited the applications for registration as insurers in

August, 2000. With the liberalisation and opening up of the sector to private players, the
industry has presented promising prospects for the coming future. The transition has also
resulted into introduction of ample opportunities for the professionals including Chartered
Accountants.
The Indian Insurance industry is featured by the attributes:
Low market penetration;
Ever-growing middle class component in population.
Growth of consumer movement with an increasing demand for better insurance

products;
Inadequate application of information technology for business.
Adequate fillip from the Government in the form of tax incentives to the insured, etc.
The industry formations need to keep vigil on these characteristics of the Indian market and
formulate their strategies to entail maximum contribution to the output of the sector.
The Indian life and non-life insurance business accounted for merely 0.42 percent of the
world's life and non-life business in 1997. The figures of the basic parameters of the
industry's performance viz. Insurance Density and Insurance Penetration also are evident of
the hitherto existing low-yield Indian market conditions.
The term "Insurance Penetration" broadly measures the contribution of the insurance
industry in relation to a nation's entire economic productivity. The figure of premium vis-vis the GDP of 1999 stood at 0.54 percent for non-life insurance business and 1.39 percent
for the life insurance business. The term "Insurance Density" reflects the Insurance
purchasing power. The premium per capita in India amounted to US $ 2.40 for non-life
insurance and US $ 6.10 for life insurance in 1999 but with the deregulation of the sector, a
Page 4
sea-change in the scene is most likely.
Role for Chartered Accountants

The Chartered Accountants have engaged themselves in the audit of Insurance Companies
since long. With the transition in the insurance sector, the horizons for their contribution
have broadened. There has, emerged a king-size pool of opportunities that the Chartered
Accountants can explore and apply their professional wisdom and experience to.
The structure of an insurance company, generally, comprises the Operating Department,

Administrative Department and the Finance Department. The Operating Department
generally performs the basic functions pertaining to the designing of products, marketing
thereof, servicing the insured, management of portfolio, etc.
The Administrative Department looks after the day to day affairs of the company.
The Finance Department backs the operations and administration of the company by
accounting for the transactions, streamlining the flow of funds, materializing the
management decisions, etc.
Page 5
The Administration Department as well as the Finance Department, usually, functions

through in-house setup. The Finance Department functions in the areas of accounting,
financial and management reporting, budgeting and controlling, etc. and thus renders
enormous scope for finance professionals. The new entrants in the insurance sector are
likely to call for the services of the Chartered Accountants for their financial setup
requirements.
The Operating Department performs the following basic functions:

1. Risk Perception and Evaluation:
The fundamental function of an insurer is to provide a cover against the detriment caused to
the insured due to the happening of certain specified and agreed events. Thus, prior to
providing such umbrella through a product, the insurer has to assess the risk involved in the
transaction.
The insurer has to identify the element of risk prevalent in the concerned industry or a
particular unit. The perception of risk requires the study of variables through various
methods including the application of scientific and statistical techniques and correlation
thereof with the industry or unit under study in light of their basic environmental and infrastructural characteristics. After the identification and categorisation of the risks perceived,
the probability of happening of the loss-causing events and the severity of the loss has to be
assessed.
The risk-evaluation, segment-wise or client-wise needs the industry-specific knowledge.

The Chartered Accountants possess the knowledge about the operations of the industries or
the units with which they deal in their normal course of profession. If the insurers intend to
avail of the out-sourced services for such risk perception and evaluation, the Chartered
Accountants may render their services. The Chartered Accountants can avail of the services
of the Technical Faculty for the purpose, if required.
2. Designing of the Insurance Product:
On the basis of the risks perceived, the insurer develops a product to cover the stipulated
Page 6
risks. While designing an insurance product, an insurer decides its cost to be charged from
the insured in the form of premium, reduction thereof in certain cases like not lodging any
claim during the previous covered period(s), suggesting the implementation of riskmitigating measures, etc. The features of a product should be flexible enough to provide for
the determination of premiums, rebates, additional premiums, etc. depending upon the risk
benchmarks as determined.
The Chartered Accountants can play a valuable role in developing the features of an
insurance product. They possess adequate knowledge of the financial and technical aspects
pertaining to the industry and can apply their skills to yield well-tailored products
incorporating the desired features. They can exploit their financial intuition to quantify the
risk element and correlate it with the earnings of the company to develop a well-defined
premium structure. The Chartered Accountant firms can formulate a model insurance
product grounded on the study of an industry and apprise the insurance companies about the
development of the same to make them aware of the quality of services, which can be
rendered by them to the insurers.
3. Marketing of the Products:
The core function of the marketing force of an insurance company is to generate awareness
about the insurance products among the target market. But in the Indian scenario, where the
insurance penetration is too low as compared to the other nations, the marketing force needs
to perform the pro-active role in developing an insurance culture. It is through the efficiency
of the sales force of an insurance company that the desirability and the success of a product
are determined.
In Indian insurance market, the function is, basically performed by the agents. The persons
desiring to function as insurance agents have to obtain licence to act as such from the IRDA
or an officer authorised by the Authority in this behalf. The agents approach the prospective
buyers and apprise them of the basic features of the products. In order to dispense with the
functions, the agents need to possess adequate knowledge of the insurance industry,
products and the modalities attached therewith. Further, the marketing personnels should be
adequately backed by the back-office setup.
Page 7
4. Selling of the Products:

The term selling in the context of insurance industry connotes the issuance of policies to the
applicant proposer. The non-life insurance policy basically embodies the covenant between
the insurer and the insured wherein the former agrees to indemnify the latter for the loss
caused to him on the happening of the certain agreed events up to a specified limit. The life
insurance policy generally contains the agreement whereby the insurer agrees to pay to the
insured or the beneficiary of the policy an agreed amount on the expiry of the term of the
policy or in the event of the death of the insured respectively. The additional benefits in the
shape of Riders viz. Accidental Death Benefit, Double Sum Assured, Critical Illness
benefits; Waiver of Premiums, etc. can also be appended with the policy on the payment of
an additional premium.
In Indian industry, the function is, generally performed by the insurer. In addition, the
insurance companies depute their Direct Selling Representatives to look after the function.
They receive the proposal documents, vet them and issue policies to the proposers.
The Chartered Accountants can engage themselves in the process by entering into agreement
with the insurance companies to function as the Direct Sellers of their products and charge
commission in lieu of the services so rendered from them. The area promises attractive
scope for the constituents of the profession.
5. Servicing:
The functions of an insurer include the provision of the Post-sales services to the insured.
Among the services rendered by the insurer is the service of processing and release of
claims. The insurers need to verify the accuracy of the facts presented in relation to the
insurance claim and the documents produced in support thereof.
The Chartered Accountants have a significant role to play in this area. The services, which
can be provided by the Chartered Accountants include the services as Surveyors and Loss
Assessors, Claim Assurers, Claim Negotiators, etc.
The Chartered Accountants have already been engaged in the surveys and loss assessments.
Page 8
The Chartered Accountants engaged in the field visit the place of loss and assess the
quantum of loss incurred by the insured.
The section 64 UM(2) of the Insurance Act provides that no claim in respect of a loss which
has occurred in India and requiring to be paid or settled in India for an amount of Rs.
20000/- or more in value on any policy of general insurance, unless otherwise directed by
the Authority, be admitted for payment or settled by an insurer unless he has obtained a
report, on the loss that has occurred from an approved Surveyor and Loss Assessor.
Some general insurance companies allow the authorised third parties to process the claims
and release the payments up to a specified amount on the basis of their assessment. The third
party in turn may forward the case with the insurer and get the amount paid to the insured
reimbursed. The practice allows the insurers to salvage the time involved in the processing
of small claim cases.
The Chartered Accountants may pursue the practice of receiving the claim documents,
verification thereof in light of the facts recorded, releasing the payment as assessed and
receive the amount in-turn from the insurance company. For the service, the insurance
company will allow the service charges as stipulated.
Apart from the above-mentioned services, the Chartered Accountants can engage
themselves as negotiators between the insurer and the insured.
6. Management of Portfolio:
The management of the portfolio includes the assessment of requirement of funds,
identification of various sources of finance, the evaluation of the sources in the light of their
cost, availability, timing, etc., reconciling the features of various sources with the needs of
the company and the selection of appropriate conjunction of sources. The Chartered
Accountants are well equipped with the techniques required to weigh the various sources
and thus can provide efficient services to the insurance companies as an outside advisory
agency. There is invariably a large scope for the disposal of the services of Chartered
Page 9
Accountants in this field.
The insurer possesses huge amount of funds, which need proper management. The
management of the portfolio of an insurance company requires the identification of
investment avenues, evaluation thereof and the selection of the most appropriate mix of
alternatives where the funds of the company can be invested. The selection requires the
knowledge of finance-related functions and techniques apart from the in-depth knowledge
of the patterns of requirement of funds in the company as well as in the industry as a whole
and the regulations of the IRDA in this behalf. The Chartered Accountants are well versed
with the methods and techniques pertaining to the finance related decision-making including
the application of scientific and statistical techniques for the same.
The decision with regard to the reinsurance of risks also falls in the domain of the activity of
management of portfolio. The insurer has to assess the risk involved in a single or multiple
insured units and reach at the retention or transfer of the excess risks. In case the insurer
reckons the degree of risk involved to be too high, it passes the risk on through reinsurance
or shares the same in consortium with the other insurers. The decision requires the deep
knowledge of the intricacies of the risk assessment and proper and timely application
thereof. The Chartered Accountants can deliver the goods in their capacity as specialist
agencies to the insurers as they have the sound intellectual knowledge of assessment
techniques that are required to perform the job effectively.
Types of General Insurance:

General insurance is sub-divided into:
(a) Fire
(b) Accident, and
(c) Marine.
Page 10
General Insurance was controlled and conducted by General Insurance Corporation of

India before the incorporation of Insurance Regulatory and Development Authority (IRDA)
in 2002. General Insurance companies are to prepare accounts (Revenue) for each individual
unit. General Insurance policies are issued for a short period, say, for a year, but it may be
renewed. The Policies are issued at any date of the year.
In a general insurance, the liability of the insurer arises only when the insured suffers any loss
caused by specific reasons and, consequently, he will be indemnified. If no loss is occurred
question of compensation does not arise and the premium which was paid will not be carried
forward for the next period; rather the same will be lapsed and will not be adjusted.`
Marine Insurance:
A marine insurance contract is an agreement by which the insurer undertakes to indemnify
the assured in the manner and to the extent thereby agreed, against marine losses. In other
words, it is a contract which protects the insured against losses on inland water or any land
risk which may be incidental to any sea voyageSec 4(i). In short, this policy may cover a
ship during buildings or the launch of a ship or any adventure analogous to a marine
adventure.
Fire Insurance:
Similarly, fire insurance means insurance against any loss caused by fire. Fire Insurance
business means the business of effecting, otherwise than incidentally to some other class of
business, contract of insurance against loss by or incidental to fire or other occurrence
customarily included among the risks insured against in fire insurance policies Sec. 2(6A).
Accidental Insurance:
It is other than Life Insurance, Marine and Fire Insurance.
Like Life Insurance Companies, in general insurance also from April 2000 a good
number of private players have come into the field:
(a) Tate AIG General Insurance;
(b) Reliance General Insurance Company
(c) HDFC-Chubb General Insurance;
Page 11
(d) Bajaj Alliance General Insurance Co. Ltd.;

(e) Royal Sundaram Alliance Insurance Co. Ltd.
(f) IFFCO Tokyo General Insurance Co. Ltd.
(g) ICICI Lombard General Insurance Co. Ltd.
(h) Export Credit Guarantee Corporation Ltd. etc.
In 1971, General Insurance Corporation of India was established which was the holding
company of:
(i) National Insurance Co. Ltd.;
(ii) United India Insurance Co. Ltd. and
(iii) The New India Assurance Co. Ltd.
However, from Dec. 2000, GIC became The National insurer for General Insurance.
Thus, they are treated as independent Insurance companies.
Regulatory Framework:
While preparing and presenting accounts for Insurance companies various rules and
regulations should be taken into consideration.
The following Acts and Regulations are to be considered:
(a) The Insurance Act, 1938;
(b) The Companies Act, 1956;
(c) The General Insurance Business (Nationalization) Act, 1972;
(d) The Insurance Regulatory and Development Authority, 1999;
(e) The Insurance Regulatory and Development Authority Regulations, 2002.
Applicability of Accounting Standards:

Page 12
While preparing Receipts and Payments Account, Profit and Loss Account and the Balance
Sheet of the Insurance companies, the recommendations of Indian Accounting Standards (A3)
framed by the ICAI should strictly be followed as far as practicable, to the General Insurance
Company with the exception of
(i) AS 3 (Cash Flow Statement) to be prepared under Direct Method only.
(ii) AS 13 (Accounting for Investment)not to be taken into consideration.
(iii) AS 17 (Segment Reporting)to be applied in general without considering the class of
Security.
Financial Statements of General Insurance Companies:

The financial statements of general insurance companies must be in conformity with the
regulations of IRDA, Schedule B.
It has three parts: viz:
(a) Revenue Account;
(b) Profit and Loss Account, and
(c) Balance Sheet.
A. Revenue Account (Form B-RA):
The Revenue Account of general insurance companies must be prepared in conformity with
the regulations of IRDA, Regulations 2002, as per the requirements of Schedule B. It has
already been stated above that separate Revenue Account is to be prepared for each individual
unit i.e. for Marine, Fire, and Accident.
These individual revenue accounts will highlight the result of operation of each individual
unit for a particular accounting period. It also reveals the incomes and expenditures of each
individual unit. Like Revenue Account of a life insurance company, Revenue Account is
prepared under Mercantile System of Accounting.
Items appearing in Revenue Account:
Premiums:
Page 13
It has already been stated above that general insurance policies are issued for a short period,
say, for a year. As a result, many of them may be unexpired at the end of the year. Therefore,
the entire premium so received cannot be treated as an income for the current year only. A
portion of that amount should be carried forward to the next year in order to cover the
unexpired risks. This is what is known as Reserve for Unexpired Risks.
As per Schedule IIB of the IRDA the Reserve for Unexpired Risks should be provided
for out of net premium so received as:
(a) 50% for Fire Insurance business;
(b) 50% for Miscellaneous Insurance business;
(c) 50% for Marine Insurance business other than Marine Hull business, and
(d) 100% for Marine Hull business.
In addition to the above, if any company wants to maintain more than this level, it can do so.
The same is known as Additional Reserve.
Illustration 1:
Indian Insurance Co. Ltd. furnishes you with the following information:
(i) On 31.12.1996 it had reserve for unexpired risk to the tune of Rs. 40 crores. It comprised
of Rs. 15 crores in respect of marine insurance business: Rs. 20 crores in respect of the fire
insurance business, and Rs. 5 crores in respect of miscellaneous insurance business.
(ii) It is the practice of Indian Insurance Co. Ltd. to create reserves at 100% of net premium
income in respect of marine insurance policies and at 50% of net premium income in respect
of fire and miscellaneous income policies.
(iii) During 1997, the following business was conducted:
Page 14
Indian Insurance Co. Ltd. asks you to:

(a) Pass journal entries relating to Unexpired Risks Reserve.
(b) Show in columnar form Unexpired Risk Reserve A/c for 1997.
Page 15
Page 16
Claims Incurred (Net):

It is the first item that appears in the expenditure side of the Revenue Account of an insurance
company. Claims mean the amount which is payable by the insurer, to the insured for the loss
suffered by the latter against which the insurance was made.
Claims can be divided into:
(a) Claims intimated but not yet accepted and paid;
(b) Claims intimated, accepted but not paid;
(c) Claims intimated, accepted and paid; and
(d) Claims rejected. But if there is only Claims intimated the same is to be treated like (b).
That is why, in order to find out the outstanding claims, claims that have been intimated
(whether paid or unpaid) should be considered.
At the end of the year the entry for the purpose will be:
Claims A/c Dr.
To Claims Intimated Accepted but Not Paid A/c
Claims Intimated but Not Accepted and Not Paid A/c
A reverse entry should be passed at the beginning of the next year for which there will be no
effect in Claims Account. But, if any claim is rejected subsequently, the amount is to be
transferred to Profit and Loss Account and Claims Account must be credited for the purpose.
Page 17
Amount of claim to be charged to Revenue Account may be computed as:
Illustration 2:
From the following figures appearing in the books of Fire Insurance division of a
General Insurance Company, show the amount of claim as it would appear in the
Revenue Account for the year ended 31st March 1999:
Page 18
Commissions:
Insurance Regulatory and Development Authority Act, 1999, regulates the amount of
commission which is payable on policies to the agents.
Commission expenses is to be charged to Revenue Account of the General Insurance
Company which is computed as:
Page 19
Illustration 3:
Compute the amount of Commission to be charged to Revenue Account from the
following particulars presented by a General Insurance Company as on 31st March
2009:
Operating Expenses:
Operating expenses will come under Schedule 4 of the Act. All revenue expensesother than
the commission and claimswill appear under this head.
Page 20
Some of the operating expenses are:

Training Expenses; Rent, Rates and Taxes; Repairs; Printing and Stationery; Legal and
Professional Expenses; Advertisement and Publicity, Interest on Bank Charges, etc.
B. Profit and Loss Account (Form B-Pl):
In order to find out the overall performance or results of the operating of general insurance
business Profit and Loss Account of the General Insurance Companies is prepared. It also
takes into account the income from investment by way of interest, dividend, Rent Profit/Loss
on sale of investments. Provision for Taxations and Provision for Doubtful Debts, if any,
should also be provided for.
Similarly, other expenses related to insurance business and bad debts written-off also will be
adjusted to this account. However, appropriation section of Profit and Loss Account will
contain payment of interim dividend; proposed dividend; transfer to any reserve i.e.
appropriation items.
C. Balance Sheet (Form B-Bs):
The Balance Sheet of a general insurance company as per IRDA format is divided into two
parts, viz. Source of Funds and Application of Funds. It is prepared in vertical form.
Sources of Funds:
It consists of:
(i) Share Capital (Schedule 5):
Various classes of Share Capital viz. Authorized Capital, Issued, Subscribed, Called-up and
Paid up capital are separately shown.
(ii) Reserves & Surplus- (Schedule 6):
All kinds of reserves will appear under this head, viz. Securities Premium, Balance of Profit
and Loss Account, General Reserve, Capital Redemption Reserve, Capital Reserve, etc.
(iii) Borrowings (Schedule 7):
Long term borrowings viz. Bonds, Debentures, Bank Loans, taken from various financial
institutes will appear under this head.
Applications of Funds:
It consists of:
Page 21
(i) Investments (Schedule 8):

All kinds of investments, whether long-term or short-term, will appear under this schedule.
(ii) Loans (Schedule 9):
Different kinds of loans clearly specified, viz. (a) Security-wise, Borrower-wise,
performance-wise, and maturity-wise classification.
(iii) Fixed Assets (Schedule 10):
All fixed assets viz. Goodwill, Intangibles, Land and Building, Freehold/Leasehold Property,
Furniture & Fixture, etc. will appear in this schedule.
(iv) Current Assets:
This section has two parts:
(a) Cash and Bank Balances (Schedule 11):
All cash and bank balances lying at Deposit Account and Current Account, Money-at-call and
short notice etc. will appear in the Schedule.
(b) Advances and Other Assets (Schedule 12):
All advances (short-term) and other assets, if any, will appear in this Schedule.
(v) Current Liabilities (Schedule 14):
All current liabilities viz., Agents balances, Premium Received in Advance, Sundry
Creditors, Claims Outstanding etc.
(vi) Provisions (Schedule 15):
All kinds of provisions viz., Reserve for Unexpired Risk; Provision for Taxation, Proposed
Dividend, Others.
New Format for Financial Statement:

According to Insurance Regulatory and Development Authority (Preparation of Financial
Statements and Auditors Report of Insurance Companies) Regulations, 2002, every general
insurance company must prepare as per Schedule B of the Regulations the following three
statements for preparation and presentation of financial statements:
Page 22
For General Insurance:

Revenue Account Form B-RA
Profit and Loss Account Form B-PL
Balance Sheet Form B-BS
Thus, in short, every general insurance company is required to prepare a Revenue Account
(Form B-RA); Profit and Loss Account (Form B-PL) and Balance Sheet (Form B-BS).
General Insurance Business:

The prescribed formats which have been suggested by IRDA for preparing Revenue
Account (Form B-RA), Profit and Loss Account (Form B-PL) and Balance Sheet (Form
B-BS) are presented:
Page 23
Notes:
To Forms B-RA and B-PL:
(a) Premium income received from business concluded in and outside India shall be
separately disclosed.
(b) Re-insurance premiumswhether on business ceded or acceptedare to be brought into
account gross (i.e. before deducting commissions) under the head reinsurance premiums.
Page 24
(c) Claims incurred shall comprise claims paid, specific claims settlement costs where
applicable and change in the outstanding provision for claims at the year-end.
(d) Items of expenses and incomes in excess of one per cent of the total premiums (less Reinsurance) or Rs. 5, 00,000, whichever is higher, shall be shown as separate line items.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub-head Others shall be included items like foreign exchange gains or losses
and other items.
(g) Interest dividends and rentals receivable in connection with an investment should be
stated as gross amount, the amount of income tax deducted at source being included under
advance taxes paid and taxes deducted at sources.
(h) Interest from rent shall include only the realized rent. It shall not include any notional
rent.
Page 25
Notes:
Page 26
(a) Incurred but Not Reported (IBNR), Incurred but Not Enough Reported (IBNER) claims
should be included in the amount for outstanding claims.
(b) Claims include specific claims settlement cost but not expenses of management.
(c) The surveyor fees, legal and other expenses shall also form part of claims cost.
(d) Claims cost should be adjusted for estimated salvage value if there is a sufficient certainty
of its realization.
Page 27
Page 28
Notes:
(a) The extent to which the borrowings are secured shall be separately disclosed stating the
nature of the security under each sub-head.
(b) Amounts due within 12 months from the date of Balance Sheet should be shown
separately.
Page 29
Notes:
(a) Investments in subsidiary/holding companies, joint ventures and associates shall be
separately disclosed; at cost.
(i) Holding company and subsidiary shall be construed as defined in the Companies Act,
1956.
(ii) Joint Venture is a contractual arrangement whereby two or more parties undertake an
economic activity.
(iii) Joint control is the contractually agreed sharing of power to govern the financial and
operating policies of an economic activity to obtain has benefits from it.
(iv) Associate is an enterprise in which the company has significant influence and which is
neither a subsidiary nor a joint venture of the company.
Page 30
(v) Significant influence (for the purpose of this Schedule) means participation in the
financial and operating policy, decisions of a company, but not control of those policies.
Significant influence may be exercised in several ways; for example, by representation on the
board of directors, participation in the policymaking process, material inter-company
transactions, interchange of managerial personnel or dependence on technical information.
Significant influence may be gained by share ownership, statute or agreement.
As regards share ownership, if an investor holds, directly or indirectly through subsidiaries,
20 per cent or more of the voting power of the investee, it is presumed that the investor does
have significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly through subsidiaries, 20 per cent or
more of the voting power of the investee, it is presumed that the investor does have
significant influence, unless it can be clearly demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20 per
cent of the voting power of the investee, it is presumed that the investor does not have
significant influence, unless such influence is clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.
(b) Aggregate amount of Companys Investments other than listed equity securities and
derivative Instruments and also the market value thereof shall be disclosed.
(c) Investments made out of Catastrophe Reserve should be shown separately.
(d) Debt securities will be considered as held to maturity securities and will be measured at
historical cost subject to amortisation.
(e) Investment property means a property (land or building or part of a building or both) held
to earn rental income or for capital appreciation or for both, rather than for use in services or
for administrative purpose.
(f) Investments maturing within twelve months from balance sheet date and investments
made with the specific intention to dispose of within twelve months from balance sheet date
shall be classified as short-term investments.
Page 31
Notes:
(a) Short-term loans shall include those which are repayable within 12 months from the date
of balance sheet. Long-term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long-term secured loans snail be specified in each
case. Secured loans, for the purposes of this Schedule, means loans secured wholly or partly
against an asset of the company.
(d) Loans considered doubtful and the amount of provision created against such loans shall be
disclosed.
Page 32
Page 33
Notes:
(a) The items under the above heads shall not be shown net of provisions for doubtful
amounts. The amount of provision against each head should be shown separately.
(b) The term officer should conform to the definition of that term as given under the
Companies Act, 1956.
Page 34
(c) Sundry Debtors will be shown under item 9 (others).
Notes:
(a) No item shall be included under the head Miscellaneous Expenditure and carried
forward unless:
1. Some benefit from the expenditure can reasonably be expected to be received in future,
and
2. The amount of such benefit is reasonably determinable.
(b) The amount to be carried forward in respect of any item included under the head
Miscellaneous Expenditure shall not exceed the expected future revenue/other benefits
related to the expenditure
Page 35
Illustration 4:
The following balances as at 31st Dec. 2009 have been extracted from the books of
accounts of the General Insurance Co. Ltd.:
It is proposed that out of the profit Rs. 1, 00,000 be transferred to General Reserve and that a
dividend @ Rs. 12% be provided for after making a provision of Rs. 2, 00,000 for Income
Tax.
Page 36
Claims intimated but not paid on 31.12.2009 were as under:

Fire Rs. 55,400; Marine Rs. 12,700; Miscellaneous Rs. 19,400.
Create 40% provision for unexpired risks in case of fire and miscellaneous insurance and
100% provision in case of marine business.
Prepare Revenue Account, Profit and Loss Account, and the Balance Sheet of the company.
Page 37
Page 38
Page 39
Page 40
Accounting Standard (AS) 16

Borrowing Costs
Objective
The objective of this Standard is to prescribe the accounting treatment for borrowing costs.
Scope
1. This Standard should be applied in accounting for borrowing costs.
2. This Standard does not deal with the actual or imputed cost of owners equity, including
preference share capital not classified as a liability.
Definitions
The following terms are used in this Standard with the meanings specified:
Borrowing costs are interest and other costs incurred by an enterprise in connection with the
borrowing of funds.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale.
Explanation:
What constitutes a substantial period of time primarily depends on the facts and
circumstances of each case. However, ordinarily, a period of twelve months is considered as
substantial period of time unless a shorter or longer period can be justified on the basis of
facts and circumstances of the case. In estimating the period, time which an asset takes,
technologically and commercially, to get it ready for its intended use or sale is considered.
Borrowing costs may include:

(a) interest and commitment charges on bank borrowings and other short-term and long-term
borrowings;
Page 41
(b) amortisation of discounts or premiums relating to borrowings;

(c) amortisation of ancillary costs incurred in connection with the arrangement of
borrowings;
(d) finance charges in respect of assets acquired under finance leases or under other similar
arrangements; and
(e) exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
Explanation:
Exchange differences arising from foreign currency borrowings and considered as borrowing
costs are those exchange differences which arise on the amount of principal of the foreign
currency borrowings to the extent of the difference between interest on local currency
borrowings and interest on foreign currency borrowings. Thus, the amount of exchange
difference not exceeding the difference between interest on local currency borrowings and
interest on foreign currency borrowings is considered as borrowings costs to be accounted for
under this Standard and the remaining exchange difference, if any, is accounted for under AS
11, The Effects of Changes in Foreign Exchange Rates. For this purpose, the interest rate for
the local currency borrowings is considered as that rate at which the enterprise would have
raised the borrowings locally had the enterprise not decided to raise the foreign currency
borrowings.
The application of this explanation is illustrated in the Illustration attached to the Standard.
Examples of qualifying assets are manufacturing plants, power generation facilities,
inventories that require a substantial period of time to bring them to a saleable condition, and
investment properties. Other investments, and those inventories that are routinely
manufactured or otherwise produced in large quantities on a repetitive basis over a short
period of time, are not qualifying assets. Assets that are ready for their intended use or sale
when acquired also are not qualifying assets.
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of
a qualifying asset should be capitalised as part of the cost of that asset. The amount of
Page 42
borrowing costs eligible for capitalisation should be determined in accordance with this
Standard. Other borrowing costs should be recognised as an expense in the period in which
they are incurred.
Borrowing costs are capitalised as part of the cost of a qualifying asset when it is probable
that they will result in future economic benefits to the enterprise and the costs can be
measured reliably. Other borrowing costs are recognised as an expense in the period in
which they are incurred.
Borrowing Costs Eligible for Capitalisation
The borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made. When an
enterprise borrows funds specifically for the purpose of obtaining a particular
qualifying asset, the borrowing costs that directly relate to that qualifying asset
can be readily identified.

It may be difficult to identify a direct relationship between particular borrowings
and a qualifying asset and to determine the borrowings that could otherwise have
been avoided. Such a difficulty occurs, for example, when the financing activity
of an enterprise is co-ordinated centrally or when a range of debt instruments are
used to borrow funds at varying rates of interest and such borrowings are not
readily identifiable with a specific qualifying asset. As a result, the determination
of the amount of borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset is often difficult and the exercise
of judgement is required. 10. To the extent that funds are borrowed specifically for
the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible
for capitalisation on that asset should be determined as the actual borrowing costs
incurred on that borrowing during the period less any income on the temporary
investment of those borrowings.
The financing arrangements for a qualifying asset may result in an enterprise
obtaining borrowed funds and incurring associated borrowing costs before some
or all of the funds are used for expenditure on the qualifying asset. In such
circumstances, the funds are often temporarily invested pending their expenditure
on the qualifying asset. In determining the amount of borrowing costs eligible for
Page 43
capitalisation during a period, any income earned on the temporary investment of

those borrowings is deducted from the borrowing costs incurred.
To the extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation should be determined by applying a capitalisation rate to the
expenditure on that asset. The capitalisation rate should be the weighted average
of the borrowing costs applicable to the borrowings of the enterprise that are
outstanding during the period, other than borrowings made specifically for the
purpose of obtaining a qualifying asset. The amount of borrowing costs capitalised
during a period should not exceed the amount of borrowing costs incurred during
that period.
Excess of the Carrying Amount of the Qualifying Asset over Recoverable

Amount.
When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its
recoverable amount or net realisable value, the carrying amount is written down or written off
in accordance with the requirements of other Accounting Standards. In certain circumstances,
the amount of the write-down or write-off is written back in accordance with those other
Accounting Standards.
Commencement of Capitalisation
The capitalisation of borrowing costs as part of the cost of a qualifying asset should
commence when all the following conditions are satisfied.
(a) expenditure for the acquisition, construction or production of a qualifying asset
is being incurred;
(b) borrowing costs are being incurred; and
(c) activities that are necessary to prepare the asset for its intended use or sale are
in progress.
Expenditure on a qualifying asset includes only such expenditure that has resulted in
payments of cash, transfers of other assets or the assumption of interest-bearing
liabilities. Expenditure is reduced by any progress payments received and grants
received in connection with the asset (see Accounting Standard 12, Accounting for
Government Grants). The average carrying amount of the asset during a period,
including borrowing costs previously capitalised, is normally a reasonable
Page 44
approximation of the expenditure to which the capitalisation rate is applied in that

period.
The activities necessary to prepare the asset for its intended use or sale encompass
more than the physical construction of the asset. They include technical and
administrative work prior to the commencement of physical construction, such as the
activities associated with obtaining permits prior to the commencement of the
physical construction. However, such activities exclude the holding of an asset when
no production or development that changes the assets condition is taking place. For
example, borrowing costs incurred while land is under development are capitalised
during the period in which activities related to the development are being undertaken.
However, borrowing costs incurred while land acquired for building purposes is held
without any associated development activity do not qualify for capitalisation.
Suspension of Capitalisation
Capitalisation of borrowing costs should be suspended during extended periods in which
active development is interrupted.
Borrowing costs may be incurred during an extended period in which the activities necessary
to prepare an asset for its intended use or sale are interrupted. Such costs are costs of holding
partially completed assets and do not qualify for capitalisation. However, capitalisation of
borrowing costs is not normally suspended during a period when substantial technical and
administrative work is being carried out. Capitalisation of borrowing costs is also not
suspended when a temporary delay is a necessary part of the process of getting an asset ready
for its intended use or sale. For example, capitalisation continues during the extended period
needed for inventories to mature or the extended period during which high water levels delay
construction of a bridge, if such high water levels are common during the construction period
in the geographic region involved.
Cessation of Capitalisation
Capitalisation of borrowing costs should cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If minor
Page 45
modifications, such as the decoration of a property to the users specification, are all that are
outstanding, this indicates that substantially all the activities are complete.
When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalisation of
borrowing costs in relation to a part should cease when substantially all the activities
necessary to prepare that part for its intended use or sale are complete.
A business park comprising several buildings, each of which can be used individually, is an
example of a qualifying asset for which each part is capable of being used while construction
continues for the other parts. An example of a qualifying asset that needs to be complete
before any part can be used is an industrial plant involving several processes which are
carried out in sequence at different parts of the plant within the same site, such as a steel mill.
Disclosure
The financial statements should disclose: (a) the accounting policy adopted for borrowing
costs; and (b) the amount of borrowing costs capitalised during the period.
Illustration:
Note: This illustration does not form part of the Accounting Standard. Its purpose is to assist
in clarifying the meaning of paragraph 4(e) of the Standard.
Facts:
XYZ Ltd. has taken a loan of USD 10,000 on April 1, 20X3, for a specific project at an
interest rate of 5% p.a., payable annually. On April 1, 20X3, the exchange rate between the
currencies was Rs. 45 per USD. The exchange rate, as at March 31, 20X4, is Rs. 48 per USD.
The corresponding amount could have been borrowed by XYZ Ltd. in local currency at an
interest rate of 11 per cent per annum as on April 1, 20X3.
The following computation would be made to determine the amount of borrowing costs for
the purposes of paragraph 4(e) of AS 16:
(i)
(ii)
Interest for the period = USD 10,000 5%x Rs. 48/USD = Rs. 24,000/(ii) Increase in the liability towards the principal amount = USD 10,000 (48-45) =
(iii)
Rs. 30,000/(iii) Interest that would have resulted if the loan was taken in Indian currency = USD
10000 x 45 x 11% = Rs. 49,500
Page 46
(iv)
(iv) Difference between interest on local currency borrowing and foreign currency
(v)
borrowing = Rs. 49,500 Rs. 24,000 = Rs. 25,500

Therefore, out of Rs. 30,000 increase in the liability towards principal amount, only
Rs. 25,500 will be considered as the borrowing cost. Thus, total borrowing cost
would be Rs. 49,500 being the aggregate of interest of Rs. 24,000 on foreign currency
borrowings (covered by paragraph 4(a) of AS 16) plus the exchange difference to the
extent of difference between interest on local currency borrowing and interest on
foreign currency borrowing of Rs. 25,500. Thus, Rs. 49,500 would be considered as
the borrowing cost to be accounted for as per AS 16 and the remaining Rs. 4,500
would be considered as the exchange difference to be accounted for as per
Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates.
In the above example, if the interest rate on local currency borrowings is assumed to
be 13% instead of 11%, the entire exchange difference of Rs. 30,000 would be
considered as borrowing costs, since in that case the difference between the interest
on local currency borrowings and foreign currency borrowings (i.e., Rs. 34,500 (Rs.
58,500 Rs. 24,000)) is more than the exchange difference of Rs. 30,000. Therefore,
in such a case, the total borrowing cost would be Rs. 54,000 (Rs. 24,000 + Rs.
30,000) which would be accounted for under AS 16 and there would be no exchange
difference to be accounted for under AS 11, The Effects of Changes in Foreign
Exchange Rates.
Page 47

Fa Assignment

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Fa Assignment

Hochgeladen von

Copyright:

Verfügbare Formate

Introduction

General insurance or non-life insurance policies, including automobile and homeowners

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

Insurance industry in India

1. Oriental Insurance Company Limited;

Development Authority (IRDA) invited the applications for registration as insurers in

The Indian Insurance industry is featured by the attributes:

Low market penetration;

Ever-growing middle class component in population.

Growth of consumer movement with an increasing demand for better insurance

Inadequate application of information technology for business.

sea-change in the scene is most likely.

Role for Chartered Accountants

The structure of an insurance company, generally, comprises the Operating Department,

The Administration Department as well as the Finance Department, usually, functions

The Operating Department performs the following basic functions:

The risk-evaluation, segment-wise or client-wise needs the industry-specific knowledge.

MCOM (Accountancy) SEM1

4. Selling of the Products:

MCOM (Accountancy) SEM1

Accountants in this field.

Types of General Insurance:

MCOM (Accountancy) SEM1

General Insurance was controlled and conducted by General Insurance Corporation of

MCOM (Accountancy) SEM1

(d) Bajaj Alliance General Insurance Co. Ltd.;

Applicability of Accounting Standards:

Financial Statements of General Insurance Companies:

MCOM (Accountancy) SEM1

Indian Insurance Co. Ltd. asks you to:

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

Claims Incurred (Net):

MCOM (Accountancy) SEM1

Amount of claim to be charged to Revenue Account may be computed as:

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

Some of the operating expenses are:

(i) Investments (Schedule 8):

New Format for Financial Statement:

MCOM (Accountancy) SEM1

For General Insurance:

General Insurance Business:

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

(c) Sundry Debtors will be shown under item 9 (others).

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

Claims intimated but not paid on 31.12.2009 were as under:

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

MCOM (Accountancy) SEM1

Accounting Standard (AS) 16