Settlement is the procedure that allows accounts to be settled and financial obligations to be finalised. Its application varies depending on the context in which it’s used, whether in the insurance, corporate, tax or financial sectors.
Consequently, the calculation of a settlement depends on the type of obligation being resolved:
- In insurance: it’s based on the assessment of the claim, the cover taken out and the terms of the policy. The process typically requires the involvement of loss adjusters to determine the amount of compensation and usually has specific timeframes set out in the policy and prevailing legislation.
- In financial transactions: it’s determined based on the outstanding balance of an account or contract, taking into account interest, fees and market values. For example, when settling an investment product, its current value is calculated by taking into account the initial capital, the returns generated and the applicable fees.
- In taxation: it’s used to calculate the amount of tax due after taking into account income, deductions and other tax obligations. For example, when settling VAT, a company compares the VAT it has charged its customers with the VAT it has paid on its purchases. If it has charged more than it has paid, it must pay the difference to the tax authorities; if, on the other hand, it has paid more than it has charged, it may claim a refund or offset it against future tax returns.
- In company liquidation: this involves converting assets into cash, settling debts and distributing the remaining assets among the partners or shareholders. This process follows an established legal procedure that gives priority to different types of creditors.
