This article provides a format of final accounts of LIC.
A life insurance company shall prepare the Revenue Account [Policyholders’ Account], Profit and Loss Account [Shareholders’ Account] and the Balance Sheet in Form A-RA, Form A- PL and Form A-BS, as prescribed in this Part, or as near thereto as the circumstances permit.
Provided that an insurer shall prepare Revenue Account for the under-mentioned businesses separately and to that extent the application of AS 17 shall stand modified:
(a) Participating policies and Non-participating policies;
(b) Linked, Non-linked and Health Insurance;
(c) Business within India and Business outside India.
An insurer shall prepare separate Receipts and Payments Account in accordance with the Direct Method prescribed in AS-3 “Cash Flow Statement” issued by the ICAI.
* Represents the deemed realised gain as per norms specified by the Authority.
** Represents Mathematical Reserves after allocation of bonus.
The total surplus shall be disclosed separately with the following details:
(a) Interim Bonus Paid
(b) Allocation of Bonus to policyholders
(c) Surplus shown in the Revenue Account
(d) Total Surplus: [(a) + (ft) + (c)]
(a) In case of premiums, less re-insurance in respect of any segment of insurance business of total premium earned, the same shall be disclosed separately.
(b) Premium income received from business concluded in and outside India shall be separately disclosed.
(c) Re-insurance premiums whether on business ceded or accepted are to be brought into account gross (i.e., before deducting commissions) under the head Re-insurance premiums.
(d) Claims incurred shall comprise claims paid, settlement costs wherever applicable and change in the outstanding provision for claims at the year-end.
(e) Items of expenses and income in excess of one per cent of the total premiums (less reinsurance) or Rs. 5, 00,000 whichever is higher, shall be shown as a separate line item.
(f) Fees and expenses connected with claims shall be included in claims
(g) Under the sub-head “Others” shall be included items like foreign exchange gains or losses and other items.
(h) 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 source’.
(i) Income from rent shall include only the realised rent. It shall not include any notional rent.
Notes: (Applicable to Schedules—8 and 8A):
(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, which is subject to joint control.
(iii) Joint control is the contractually agreed sharing of power to govern the financial and operating policies of an economic activity to obtain 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,
(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 examples, by representation on the board of directors, participation in the policy-making 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 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 a investor from having significant influence.
(b) Aggregate amount of company’s 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 show separately.
(d) Debt securities will be considered as “held to maturity” securities and will be measured at historical costs 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 purposes.
(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 no-performing loans shall be shown separately.
(c) The nature of the security in case of all long-term secured loans shall 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.
(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.
Explanation of special terms used in revenue account of Insurance Companies
Claims is the amount which is payable by the insurance company at the time of happening of event or at the time of attaining certain age in the case of life insurance. This is the first item which appears on the debit side of revenue account. While calculating the amount of claim, all claims intimated and accepted at the end of year, expenses relating to claims are to be added. Out of the total claims, claims outstanding at the beginning of the year and reinsurance recoveries are to be deducted.
This can be explained as under:
2. Bonus in cash:
Bonus is the share of profit which a policy holder gets from the life insurance company. This is in case where the policy is with profit policy. It is paid in cash, it is shown on the debit side of the revenue account as an expenses.
3. Bonus in reduction of premium:
Bonus in reduction of premium is bonus which is not payable in cash but which is utilised by the policyholder to adjust premium due from him. If it is given in trial balance then it will be shown in the debit side of revenue account as expenses. But if it is given as adjustment then it is shown both on the debit and credit side (by adding to the premium) of revenue account.
Bonus in Reduction of Premium A/c …Dr.
To Premium Account
For example: Premium payable by insured is Rs. 8,000 and he is entitled to receive Rs. 1,600 as bonus in reduction of premium.
As such, in this case the insured, will pay net premium of Rs. 6,400 to the company and the entry for bonus in reduction of premium will be passed for Rs. 1,600 in the following way:
Bonus in Reduction of Premium Account …Dr. 1,600
To Premium Account — 1,600
When an insured gets an insurance policy, there may be possibilities:
(a) He may get claim, in case risk covered falls.
(b) He does not get any claim in case risk has not fallen.
In case of second possibility, insurance company pays bonus to the policy holders. In routine practice this bonus is called ‘No Claim Bonus’ or generally called Bonus in Reduction of Premium.
Presently the following rates of Bonus in Reduction of Premium are applicable 1st year @ 20%:
2nd year @ 35%
3rd year @ 50%
4th year @ 65%
4. Reversionary bonus:
In the case of policies with profit, the policyholder has a right to take bonus in cash, adjust against the future premium due from the policyholders or it can be paid on the maturity of the policy, together with the policy amount. Bonus paid at the end along with the policy amount is called reversionary bonus.
5. Interim bonus:
Interim bonus is the bonus payable on the maturity of the policy pending the ascertainment of profit.
6. Annuity and consideration for annuity granted:
Annuity refers to fixed annual payment made by the insurance company to the insured on his attaining a specified age in consideration of a lump-sum money received in the beginning. The annual payment is called annuity which is shown on debit side of revenue account as expense and the lump-sum received in the beginning is called “Consideration for Annuities Granted” which is shown on the credit side of Revenue Account as income.
7. Surrender value:
Surrender value is the amount which a policyholder can get in cash from the life insurance company, if he is unable to pay the future premium. It is the present cash value of the policy. Amount paid as surrender value is an expenditure and is shown on debit side of revenue account.
8. Expenses of management:
The details regarding management expenses can be given either in the revenue account or in the form of an attached schedule of working note.
The followings leads are included under the Expenses of Management:
(i) (a) Commission to insurance agent less that on reinsurances
(b) Allowances and commission other than commission in sub item
(ii) Salaries etc. other than to agents
(iii) Travelling expenses
(iv) Director’s fees
(v) Auditor’s fees
(vi) Medical fees
(vii) Law charges
(ix) Printing and stationary
(x) Other expenses of management (accounts to be specified)
(xi) Rent for office belonging to and occupied by the insurer.
(xii) Rents for other offices occupied by the insurer.
Premium received during the year, plus outstanding at the end of the period, plus bonus in reduction of premium reduced by the amount of premium outstanding at the beginning of the period and reinsurance premium paid during the year. The net amount should be shown in the outer column.
Premium paid at the time of insurance agreement is called “First Premium’. Premiums paid subsequently are known as Renewal Premium. In case total premium is paid only once, is called ‘Single Premium’. Life insurance premiums are collected monthly, quarterly half yearly or yearly but general insurance premiums are normally collected or charged for one year. It is income of the insurance company.
The amount of insurance premiums to be credited to Revenue Account may be ascertained as under:
The closing balance of insurance premium outstanding is to be shown as an asset in the balance sheet of the insurance company. In the case of general insurance business ‘Outstanding Premium’ cannot take place because the policies in general insurance business are taken normally for one year and the insured is not under any obligation to continue the policy for the next year. But in case of life insurance business, the outstanding premium may occur at the end of the accounting year because the policies are taken for a longer period.
When one company in order to reduce the risk wants to pass some business to another company, it is called reinsurance. The company which makes a contract with other company for reducing risk will get commission which is called “Commission on reinsurance business ceded and is shown on the credit side of revenue account. The company which accepts such business is required to pay commission on reinsurance business accepted and such commission will become an expense and will be shown on the debit side of revenue account.
A company has issued an insurance policy by insuring a building for Rs. 50 lacs. Company thinks, the risk involved is too large for the company to bear, in case of loss. It signed a contract with B insurance company to transfer a part of the risk to the tune of Rs. 30 lacs. The agreement between A insurance company and B insurance company is called contract of ‘Reinsurance’.
And for B insurance company, it is ‘reinsurance accepted’ and for A company it is reinsurance ceded. A company will pay proportionate premium (60% of the amount collected as premium) and will be an expense for A company and it will be an income for B insurance company. In the event of loss, the first company will pay full claim to the insured and will recover proportionate amount of claim from B insurance company.
11. Interest, dividend and rents:
If the company received any interest, dividend and rent on its investment, the income tax thereon should be deducted out of the gross receipt of interest, dividend etc. The net balance may be shown in outer column. If there is outstanding amount of interest, dividend etc., it should be added in this item.
12. Commission on reinsurance accepted:
The company which has accepted reinsurance, will pay commission to the company which has given reinsurance. The payment made as commission is called ‘commission on reinsurance accepted’. It is the expenses of the company, therefore, it is debited to revenue account.
Maximum limit of commission:
Commission on direct insurance by agents cannot exceed 5% of the premium in case of fire and marine businesses and 10% in case of miscellaneous business. If the policies have been affected through principal agents the maximum limit is 10% for fire and marine insurance and 15% in case of miscellaneous insurance.
13. Commission of reinsurance ceded:
An insurance company will receive commission from other insurance companies, if it shifts a part of its business to other insurance company. Such commission is called ‘commission on reinsurance ceded’ and is credited to revenue account.
14. Paid up policy:
If a policy holder stops payment of premiums and does not opt for surrender value then he has another option i.e., to get it paid up for smaller value. In such cases he receives the paid up value of policy at the maturity. A policy can be got paid up only if it has remained in force for at least two years.
Paid up value is calculated as follows:
Paid up value of policy = Sum assured x Number of premium paid/Total number of premium payable
15. Fines on revival of policies:
If the insured does not pay premium within grace period granted to him then his policy gets lapsed i.e., the contract stands to seize and insurance company in that case will not be responsible for any claim. However, if the insured is allowed to revive his policy upon payment of some fine then the fines on revival of policies becomes a source of income and is shown as income in revenue account.
16. Assignment fee:
A policy holder can assign his policy by paying me assignment fee. It is credited trade to revenue account.
17. Life assurance fund:
This represents the excess of the revenue receipts over revenue expenditures related with life business. The fund is available to meet the liability on all policies outstanding. Revenue account is prepared every year to ascertain the balance of life assurance fund at the end of the year. In the preparation of revenue account, the opening balance life assurance fund is the starting point.
Calculate the amount of net premiums to be credited to Revenue Account for the year ending 31st March, 2006.
Following entries are recorded at the time of preparing final accounts for recording unrecorded transactions in the books of insurance company:
The revenue account of a life insurance business shows the fund at the end of the year 2006 at Rs. 48, 78, 000 before taking into account the following items:
(a) Claims intimated but not admitted Rs. 65,500
(b) Bonus utilised in reduction of premium Rs. 6,500
(c) Interest accrued on securities Rs. 19,500
(d) Outstanding premium Rs. 18,000
(e) Claims covered under reinsurance Rs. 27,000
Pass the necessary journal entries and show the true life insurance fund at the end of the year 2006, after making the above adjustments.
Ascertainment of Profit:
Ascertainment of profit in the case of life insurance is done after the expiration of a two-year period. For this purpose a valuation balance sheet is prepared. The balance of life insurance fund is compared with the amount of net liability as per actuarial valuation. In case the balance of life insurance fund on the valuation date is more than the net liability, there is said to be a surplus. In a reverse case there will be a deficiency.
The form of the valuation balance sheet is given below:
Treatment of Profit:
According to section 28 of Life Insurance Corporation of India Act, 95% of the surplus as disclosed by the valuation Balance Sheet has to be allocated to or reserved for the policy-holders of the Corporation. The balance of the amount is to be paid either to the Central Government or utilised for such other purposes and in such manner the government may determine.
The following points should be kept in mind while determining the share of the policy holders:
(i) Any interim bonus paid to the policy holder should be added back to the surplus as disclosed by the valuation balance sheet since the interim bonus is really an advance payment of the bonus.
(ii) Any expenditure still to be incurred, e.g., dividends to shareholders should be deducted from the surplus as disclosed by the valuation balance sheet.
(iii) The share of the policy-holders will be 95% of the surplus left after any deduction made as above. Any interim bonus already paid should be deducted from the amounts as calculated.
The balance is the amount now due to the policy-holders.
From the following Trial Balance of Long Life Assurance Company, prepare the Revenue Account and the Balance Sheet. The statements need to be in the prescribed formats.
1. Premium less reinsurances include Rs. 8 crores first year’s premium, Rs. 11 crores renewal premium and Rs. 1 crore single premium.
2. Premium outstanding at the end xx£ the year Rs. 250 lakhs.
3. Commission on outstanding premium Rs. 7.5 lakhs.
4. Claims less reinsurances outstanding at the end of the year are Rs. 50 lakhs (by death) and Rs. 30 lakhs (by maturity).
5. Depreciation to be provided Rs. 10 lakhs on property and Rs. 1.6 lakhs on furniture and office equipment.
6. Income tax provision to be made for Rs. 20 lakhs.
7. Expenses of Rs. 3 lakhs and Rs. 10 lakhs are prepaid and outstanding respectively, at the end of the year.
8. Accrued interest, dividend and rent are Rs. 25 lakhs.