Slide 1

Accounting and taxation aspect of insurance

BY Kirti Sharma

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Insurance Taxes The Governors 21st Century Tax Reform Commission

State Insurance History

1868 2% gross premium tax on foreign insurance companies 1872 domestic companies were included 1983 tax administration transferred from Department of Commerce to Department of Revenue, Insurance Premium Tax Section of the Corporate Income Tax Division 1986 transferred to Special Taxes Division

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Insurance Taxes The Governors 21st Century Tax Reform Commission

Taxes and Surcharges (CY2007)

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Insurance Taxes The Governors 21st Century Tax Reform Commission

Premium Tax
Property and Casualty, Title and Risk Retention Groups
1%, 1.26% or 2% of premiums

Life Insurers
2007 1.75%; 2008 1.625%; 2009 1.5%

Township Mutual Insurers

1%

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Slide 2

Types of Tax Subsidies for Health Care Under Current Law

Health insurance subsidies
Employer contributions for insurance are exempt from taxes for employees Section 125 plans subsidize worker contributions Self-employed can deduct premiums Self-

Subsidies for out-of-pocket health care out-ofexpenses

Health Savings Accounts (HSAs) Health Reimbursement Arrangements (HRAs) Flexible Spending Accounts (FSAs) Deduction for expenses >7.5% of income
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Slide 4

Tax Subsidies for Out-of-Pocket Out-ofHealth Spending: HRAs, FSAs, Deduction

Health Reimbursement Arrangements Used with any type of plan Tax-free contributions by employers only Tax Flexible Spending Accounts Tax-free employer/individual contributions Tax Money is deducted from paycheck, lowering taxable income Use it or lose it Deduction for medical expenses Direct expenses and insurance premiums Only expenses above 7.5% income can be deducted Must itemize deductions
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Slide 5

Tax Subsidies for Health Insurance: Employers

Employers can deduct cost of health benefits for workers (but not a special subsidy for health insurance) Employer contributions for insurance are exempt from taxes for employees Benefits provided as tax free compensation No income or payroll tax paid by workers on value of benefit Worker contributions can be made pre-tax (125 plan) pre(125 plan) Taxable income is reduced by amount of contributions Self-employed can deduct premiums Self Individuals buying insurance on their own do not generally get subsidies
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Example 1: Modest Income Family (15% Income Tax Bracket)

With Tax Exemption
(current law)

Without Tax Exemption

(if taxable)

Difference

Wages Taxable income, before insurance Employer premium contribution Worker premium contribution Wages, with insurance Taxable income, with insurance Income taxes Worker payroll taxes
(Social Security and Medicare)

$50,000 $30,000 $10,000 $2,000 $48,000 $28,000 $3,398 $3,672 $3,672

$50,000 $30,000 $10,000 $2,000 $60,000 $40,000 $5,198 $4,590 $4,590 $12,000 $1,800 $918 $918 $12,000 x 15%

Employer payroll taxes

(Social Security and Medicare) Source: Kaiser Family Foundation calculations.

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Slide 8

What Does the Exemption Cost?

A tax provision that acts like an entitlement costs go up annually without an act of Congress But, subsidies are hidden from workers and the federal budget As a result, costs can only be estimated Estimated federal cost = $224.7 billion in 2008 for active workers ($134.3 billion for income taxes, $90.5 billion for payroll taxes)
Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for active workers only. Return to Tutorial Page

li e 9

Value of the Tax Exe ption n rea e ith n o e

3 or er

663 3 6 9

vg u

Per

3 9

a il

n o e

Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for active workers only.

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Slide 10

Arguments Made For and Against the Tax Exemption

For: Encourages employer coverage and pooling Reflects negotiated tradeoffs between benefits and wages Against: Provides regressive benefits; no subsidy for those without employer coverage Encourages over insurance (more generous coverage) Provides little opportunity to control federal cost
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Accounting Standards 15 (Revised)

Revised AS15 requires an approved provident fund to be treated as a Defined Benefit Plan however there is no clarity on getting the same actuarially valued as the actuaries have shown their inability to value the same.

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Accounting Standards 15 (Revised)

Treatment of Transition provision in AS 15 - how should we treat the impact of revised AS 15 pertaining to previous years (transition proviso of AS 15). There is as such no clarification on the treatment - whether the same has to be adjusted below the line (through FFA) in technical account or directly take into Balance sheet. The question is to how it will be charged to policyholders as if the Salary cost is being related to Policyholders then this impact should also be taken into policyholders account (technical Account).

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Accounting Standard 22
Should tax be an appropriation or a charge in Policyholder account?

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Accounting Standard 17
Need for a guidance note on allocation of expenses and assets and liabilities for preparation of segmental revenues and segmental balance sheets. Presently each Insurance company is using different methods of allocation. The guidance note will help in following uniform methods of allocation and thus enhance the effectiveness of comparison of financial statements of Insurance companies

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Accounting Standard 19
Expert advisory opinion on Accounting for scheduled rent increase in case of operating lease - The opinion refers to operating leases which are renewable after specified time intervals at the option of the lessee. The lease agreement provides for an escalation clause in lease payments at each such renewal .

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Accounting Standard 19
The opinion expressed by the esteemed committee requires that in respect of such operating leases, lease payments must be recognized on a straight line basis from inception of the lease. This requires the recognition of future income / expense in the current period, thus necessitating the creation of liability / receivables in the initial years as lease payments are lower than expense / income.
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Accounting Standard 19
The increase in costs refers to changes on account of inflation and does not represent structured defined payments over a period of time. The increased costs refer to future contingent liabilities; the recognition of the same in current periods is inconsistent with the matching principles of recognizing income and expenses. It is felt that the above accounting treatment has significant taxation impacts on account of TDS and Service Tax. Further the treatment doesnt reflect a true and fair presentation of costs.This position is requested to be revisited.

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Disclosure of non financial data

Non financial data provides the users of financial statement with additional information and increases the value of financial information. Thus should be mandated, eg: Burn rate Value of New Business Persistency No. of branches No. of agents
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Enhancing the credibility of the External Financial Information: Auditing Issues

Joint Audit:
Centralised accounting models Varying materiality definitions Overlap of coverage Difficulties in tax audits

Limitation of 2 audits
Not conducive to development of specialists

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Auditing Issues
Actuarial Numbers
Actuarial liabilities certified by appointed actuaries Audit coverage restricted to confirmation of actuarial assumptions Not covered by an independent audit

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Auditing Issues
Guidance Note on Insurance Audit:
Need for update To include a more detailed guidance on evaluation of actuarial estimates Preparing auditors to meet the challenges placed by new accounting pronouncements AS-30, AS-31, AS-15 IFRS

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Auditing Issues
Clarifications required in respect of regulations
Certification of management report Reporting on contraventions of the provisions of the Insurance Act, 1938 Whether term deposits with banks are to be reckoned for the purpose of computing limits for the industry sector to which the investee belongs

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Auditing Issues
Cash flow statements
Could an option be given to insurance companies to present cash flow statements using the indirect method

Segment reporting
Segments defined under the regulations are not necessarily the manner in which insurance companies organise their operations

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Auditing Issues
Interim financial reporting: Half Yearly / Quarterly financial reports which could be subjected to a limited review could assist insurance companies in meeting their listing requirements. Audit of internal control systems Currently restricted to a statement in the management report Assertion on design and operation of internal controls Separate certification by auditors

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 Thank you.

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