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The AMA Handbook of Due Diligence by Andrew J. Sherman, William M. Crilly

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Investment Management - Form 16-12 (Continued)
Management does, however, have some discretion in establishing investment guidelines and objectives to be
followed by the fund manager(s).
A special situation arises when it is determined that funds supporting defined benefit plans are in excess of
those required to meet the plans’ anticipated future obligations. Under such circumstances the company may
withdraw the excess amount. Form 16-12 is provided to record past withdrawals and provide the current sta-
tus of such funds.
Insurance Management - Form 16-13
Form 16-13, when completed, will indicate where the insurance management function is located organiza-
tionally, the types of insurance coverage and the current annual premium expense.
Form 16-13 summarizes the information generally required to evaluate the adequacy of each type of insur-
ance carried. Space is also provided to summarize the recent claims and premium history. Multiple copies of
this form will undoubtedly be required.
Claim rejections, existing open claims, premium renegotiation experience and total premium expense should
be recorded in Form 16-13.
In recent years the replacement costs of certain types of property and equipment have increased significantly.
Unless the entity has increased its coverage correspondingly, it may be exposed to substantial financial risks.
Form 16-13, when completed, should identify the potential magnitude of these risks.
WHAT TO LOOK FOR
With regard to the investments of excess funds:
• Which of the three pricing criteria are used for balance sheet reporting purposes?
Are there unrecorded potential gains or losses that should be taken into account in valu-
ing the business?
• How does the entity’s investment record compare with the appropriate market averages?
• What has been the investment record in absolute terms?
• In a potential acquisition situation, would the liquidation of these investments represent
a significant contribution to the purchase price?
With respect to pension and other post-retirement defined benefit plan:
• When was the last independent evaluation performed?
• By whom was it performed?
• What was the result of the evaluation?
• Were there excess funds?
• Was there an unfunded liability?
• Has the entity ever withdrawn funds from any of the post-retirement benefit plans?
• If so, what were the circumstances and when were the withdrawals made?
DUE DILIGENCE HANDBOOK 16-05
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