LRC using PAA at end of year 1
For the excel example, the question (d) calculate LRC using PAA at the end of year 1.
Why is the initial recognition (calculated in a) not the beginning balance of LRC?
I also get 800 but in a different way.
carrying amount at the start of reporting period = 1200 (calculated in a)
- premium received in the period = 0 cause premiums are paid upfront
- acquisition cash flow = 0 cause paid upfront
- amortization of acquisition cash flow as an expense in the reporting period = 200 (600/3)
- adjustments to a financing component = 0
- insurance revenue = 600 (1800/3)
- investment component = 0
I get LRC at end of year 1 = 1200+0-0+200+0-600-0 = 800
Also, where will the LRC at initial recognition be used?
Comments
The formula for the PAA is UEP-DAC. At time 0, your expected premium = UEP since all your premiums are unearned. The Initial recognition calculation in (a) is the opening balance of the LRC.
Uhhh no you got your 800 in the exact same way as the formula given in the Excel sheet
A shortcut because I am lazy -> The time 1 LRC = UEP - DAC again.
UEP is now 1800(*2/3) - Remaining DAC(400) = 800
Either way works.
Not sure what you mean by "where it will be used" -> It goes into the balance sheet I suppose
Shouldn't the carrying amount at the start of the reporting period = 1200 as calculated at initial recognition? Like how it is done in excel sample question #7 from CAS?
Yeah carrying amount at the start of the reporting period is 1200. That's the answer to part (a)
There is something I noticed in this question that I wanted to confirm:
When calculating the other expenses for the Profit/Loss, we subtract the totality of the Non Directly attributable acquisition expenses. Without amortizing it. I understand that for maintenance fees, we don't amortize it, but does that mean we cannot amortize the Acquisition Cosst non Attributable to specific contracts? (My hypothesis would be that since it is not attributable, we cannot know how much of the service was provided)
Yeap pretty much!