Capital baseCapital base

Capital base

19. In assessing the adequacy of a fund’s or a life company’s capital base, attention must be paid not only to the risks it is likely to face, but also the quality of the support provided by various forms of capital. In assessing the quality of support provided by a particular form of capital, regard must be had to the extent to which it:
(a) provides a permanent and unrestricted commitment of funds;
(b) is freely available to absorb losses;
(c) does not impose any unavoidable servicing charges against earnings; and
(d) ranks behind the claims of policy owners and creditors in the event of the winding-up of the life company.
20. Not all forms of capital meet these criteria equally. Due to the need to ensure that the capital base of a life company provides adequate support for its activities, APRA imposes some restrictions on the composition of the capital base. The forms of capital deemed eligible for inclusion in the capital base, and the conditions as to their inclusion, are specified in Prudential Standard LPS 112 Capital Adequacy: Measurement of Capital (LPS 112). LPS 112 defines the different categories and components of the capital base and the restrictions on the quality of the capital that is used to meet the required level of capital for regulatory purposes.
21. A fund or life company’s balance sheet may contain certain assets (such as deferred tax assets, goodwill and other intangibles) that are acceptable from an accounting perspective. However, for supervisory purposes, such assets are either generally not available, or of questionable value, should the fund or life company encounter difficulties. Similarly, the policy liabilities on the balance sheet may reflect allowance for future transactions (such as future premium income) that it is not appropriate to recognise for supervisory purposes. A life company is therefore required to make certain adjustments in determining the capital base. Details of these adjustments are specified in LPS 112.