LC = LRC using GMA - LRC using PAA

HateExams99HateExams99
in CIA.IFRS17-PAA

Hi,

I don't get the logic behind this formula, why is it GMA - PAA, but not the other way around (ie. PAA - GMA)?

Thanks!

Comments

  • Staff-T1Staff-T1

    If your GMA estimate is < PAA, you wouldn't have a loss component. Only when your GMA estimate is > PAA would you need to "top-up" a LC to make the PAA estimate = GMA. The PAA is meant to be a simplification of the GMA and we are okay to use it if the PAA estimate > GMA estimate since we are being more conservative. It is only when the PAA estimate is < GMA estimate when we need to book a LC.

  • hidraghidrag

    And this is true even if both are in an asset position ?

  • Staff-T1Staff-T1

    I have not actually seen the mechanics of a PAA eligibility test for the ARC in practice, nor do the papers go into any detail on it. For the purpose of the exam, it is probably safe to assume you won't be asked about this

  • NycxBattleNycxBattle

    For this example:

    If we are not given the LRC (GMA), how do we know if there is going to LC.

    Because by definition the LC is LRC (GMA) - LRC (PAA)?

    If we don't know LRC (GMA), than we don't know if there is a LC. Should we just assume that there is no LC? If we state this assumption in the exam, will it be correct?

    And in the case of portfolio C why would we even choose LRC(PAA), we already know LRC (GMA) its more accurate and it gives a lower liability. Why would we choose the LRC (PAA), is there any rationale that we would want to choose LRC (PAA)?

  • Staff-T1Staff-T1

    You are given the GMA LRC in the second last column? the LC is given to you in the final column.

    The whole point of PAA is to simplify financial reporting, it's not about being more accurate. The GMA is incredibly cumbersome to calculate and report in the financials in practice, so no you would always report under PAA if you can. the PAA estimate is meant to be a more conservative estimate of the GMA and should in theory be higher most of the time. If not, you will end up with a LC

  • NycxBattleNycxBattle

    I mean for porfolio/group A-1. How do we know there is no LC?

    Or did we already split the contacts into two groups:
    A-1 is non - onerous
    A-2 is onerous?

    Thanks for the clarification on why we should always use PAA since its less costly. If we already have both PAA and GMA, can we either one provided we are always consistent with out selection methodology?

  • Staff-T1Staff-T1

    If you are not onerous then you would not have a LC. If you are not onerous, and a group of contracts are PAA eligible, then you always go with the PAA estimate

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