Discuss about the Advanced Financial Accounting for Tower Insurance.
Tower Insurance is a New Zealand based insurance company established in 1869 and headquartered in Auckland. This bank is listed in the New Zealand Stock Exchange and has performed well financially since its inception. This company trades as TWR ticker symbol in the stock exchange. This company provides insurance in case of fire accidents and general insurance (Annual Report, 2016). This company is slowly diversifying from the core functioning areas to other forms of insurance products. Richard Harding is the chief executive officer of this group. This report focuses on the NZ IFRS 7, 9 AND 32 and the areas where the company has used the following accounting principles. These are the important accounting standards that the company needs to consider in preparing the financial statements (Tower.co.nz. 2016).
Financial Reporting Standards
The NZ IFRS 7 states the different disclosure policies regarding the financial positions and the financial performance of the companies. This disclosure deals with exclusively financial instruments and the scope and objectives of those instruments. Other disclosures in the above mentioned Schedule includes the transfers of the financial assets, accounting policies and the items of the expenses, loss, profits and gains. Another most important part of this reporting is the Quantitative as well as the quantitative disclosures. The disclosures deals with the market risk, liquidity risk, credit risk, collaterals and impaired financial assets. Moreover, this reporting standard focuses on the fair value of the disclosures and the users can have a fair share of understanding about the functioning of the business (Treasury.govt.nz, 2016).
NZ IFRS 9 deals with the amendments made to the Financial Instruments and this is a newly added section in year 2013. The basic requirements of this section merge with the hedge accounting standards and the handling of the risk management techniques. This will help the users of the report to get true and fair information that can be relied. The prime objectives of the accounting standards are also to reflect the true and fair value and with the advent of this section, the objectives have become all the more achievable. The specific accounting for macro hedging and open portfolios is not considered by this accounting reporting section. The business entity with the initial recognition designates the financial liability determined at a fair value (Treasury.govt.nz, 2016).
A business entity has the liberty to initially recognize and then calculate the value of the financial assets either at amortized cost or at fair value. If required the company can apply the hedge accounting requirements in case of the hedge accounting requirements for the hedged financial assets. The liabilities of the company will be measured in accordance with the paragraphs 4.2.1. The recognizition of the gains or the losses will be made at the fair value unless there is a hedging relationship with the assets or a financial liability represents the credit risk of the company. The loss or the gains of the financial assets if measured at amortized costs are not the part of the hedging instruments. Moreover, different hedging instruments are elaborated in these financial standards, which include derivatives as well as non-derivative instruments. The gains or loss that is made by the instruments unless and until there is a credit risk connection with the given financial instruments (Treasury.govt.nz, 2016).
NZ IFRS 32 establishes relationships with the principle of presenting the financial instruments as liabilities or as equity and the reasons for offsetting those financial liabilities or the assets. The classification of the financial instruments is made from the perspective of the prospective issuers as equity instruments, financial liabilities and the financial assets. Moreover, they are further classified as dividends, gains, losses, and the circumstances, which lead to the offsetting of the related financial liabilities and the assets. Measurement of the financial liabilities and the financial assets are basic principle of these accounting standards. The joint ventures or the associates and subsidiaries companies mostly prefer this technique. Insurance contracts are mentioned in these standards and they focus on the derivative part of the instruments. On the other hand, there are definitions of financial terms are explained in this accounting section, like the financial assets, financial liability, equity and liabilities, puttable instruments are given in this sections (Treasury.govt.nz, 2016).
Moreover, apart from the given above, there are different settlement options, treasury shares, interest dividends, gains and losses are given. The classification of the dividends, interests or the gains and losses are simply classified as either expense or profit. Classification depends upon the way the financial instruments are divided and accordingly the expenses and losses are segregated. For instance, the interest on bonds, payments of dividends is classified as expenses and on the other hand, the changes in the value of the equity are not presented in the financial statements. On the other hand, the financial liabilities and the financial assets are to be offset only when the company has legal obligations to do the same and intends to settle the financial instruments on a net basis. Settlement of the liabilities and the assets are very much subjective and it is at the discretion of the management of the company. The company should always try to represent the true and fair value and look for the greater interests of the stakeholders.
Use of the financial reporting by the Tower Insurance
Tower Insurance Group follows the particular Accounting standards religiously and disclosures are given according to the standards mentioned in the IFRS 7. The income statements of the company reveals the profit figures for the current year, consolidated balance assets sheet reveals the figures of the liabilities and the assets of the company in the current figure. This data is helpful to the different users like the creditors, suppliers, shareholders and other related parties. Cash flows is an important consideration in this particular accounting standard and this company has showed a declining trend in the cash figures of the company. Declining in the cash figures is not a bad trend that the company has, due to the rise in the investment activities. This company has increased spending in the investment activities, which focuses on the long-term vision of the company. It will take time to recover the investments from the market, but still the vision of the company is clear and the objectives well identified ( Annual Report, 2016).
On the other hand, as this company operates in the insurance sector they do not apply the hedge fund accounting in the daily running of the business. Only the registered hedge funds will be able to apply the hedge fund accounting in preparing the financial reports. There are different hedging instruments used by the company like derivatives as well different non-derivative instruments. It qualifies for the use of different hedge instruments and prepares the hedge accounting accordingly. Moreover, this company has summarized the accounting policies like the investments contracts, life insurance contracts, securitization vehicles, investments in different financial assets. The disclosures also provide the details of the impairment of the assets, the intangible assets and the different sort of taxes like the income tax, goods and service tax, provisions and debt figures for the current accounting periods. On the basis of the above discussions it can be concluded that the company follows the NZ IFRS 9 guidelines to the extent it is possible for the company to follow.
This company from 2014 onwards has replaced the IFRS 39, with IFRS 9 and this company classifies the financial instruments in two parts and is initially recognized. The credit risk of the entity is recorded in other comprehensive income section rather than income statement. The company makes the impairment of the financial assets and the company does it since 2014. On the other hand, the new model has a credit loss model for determining the impairment of the financial assets. All the activities are coordinated with the regulatory advices and the company is following all the requirements of the relevant sections (Annual Report, 2016).
NZ IFRS 32 is important for the joint ventures, subsidiaries of the companies. It is not very much applicable for the insurance sectors. On investigating the Annual Report of the company, it is difficult to determine the exact reasons of the offsetting of the liabilities and the assets of the company. The offsetting is made whether for the legal obligations or for any other reasons is not clear. There may be many other reasons for the offsetting of such instruments. On the other hand, consolidations part of the Annual Report highlights on the different financial terms is explained in the financial report of the company.
Use of Alternative Accounting Standards
Alternative accounting standards that the company could have applied is Generally Accepted Accounting Standards (GAAP). The company can follow a global accounting standard, as this standard has many advantages over the NZ IFRS standard. This standard gives priority to the investors and is comparable among the different companies using the same accounting policy. This helps in providing the consistency and the transparency among the users. It brings about a consistency and a transparency among the users of this standard. For the above-mentioned reasons, it will be beneficial for the company to use this particular method instead of the NZ IFRS.
Use of different accounting standards will help the company in suiting the different needs of the company and at the same time the company will able to change the patterns of the recording the financial transactions. By using different standards there will be lot of changes in the recording pattern of the company. The changes will help them to record lower revenue or lower gains or vice versa and meet the requirements of the company. The company may have the intentions of lowering profits or lowering gains as per the requirements. The changes will help them to meet the required goals and satisfy the needs of different stakeholders at the same time.
Ethical Issues by the use of Accounting Standards
The ethical issues that are found in the reporting standards is the increase of the profit that are observed while using the above reporting standards. On the contrary, the use of the different accounting standards like GAAP would have maintained a rational amount of expenses and the profit would have represented a true and fair value. This is an important part of the ethical issues in the business. The information that will be available to the users will be informative to investors and other users and they can take proper decision-making techniques.
Usefulness of the information to the users
The information will be very much useful to the users of the accounting reports as based on these different decisions which are of serious nature are taken by the users. Different users of the financial information include the suppliers, creditors, investors and the employees. It is important to deliver true and fair reporting. The stakeholders and prospective investors will make out the performance of the companies and the image of the company depends upon the information revealed by the company. On the basis of the above points it can be concluded that the information given are of prime importance to the users and the company should always strive to give the proper information to them (Treasury.govt.nz., 2016)
Conclusion
On analyzing the above report, it can be concluded that Tower group operates in the insurance sector and they follows the NZ IFRS 7, 9 and 32. On the other hand, it is noticed they are not able to follow the IFRS 32 in a proper manner. The reason for such lack of diligence is cited as improper Accounting standards. The IFRS 32 is meant for subsidiary companies and joint ventures. The alternative accounting standard that is recommended to the company is the use of GAAP. This accounting standard is applicable on a global scale and it focuses on the investors and is found to be very much useful to the company. The importance of the information to the users are also given in the report and the company must try to provide the fair and true information to the users.
Reference
Tower Insurance | New Zealand | Be confident. (2016). Tower.co.nz. Retrieved 28 May 2016, from https://www.tower.co.nz
Home — The Treasury – New Zealand. (2016). Treasury.govt.nz. Retrieved 28 May 2016, from https://www.treasury.govt.nz
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