IFRS Sample Question 20 vs 28: Capital basis for the cost-of-capital method
Hello,
Could someone clarify why the capital basis is calculated differently in Questions 20 and 28?
In Q20, the solution divides the relevant MCT risk capital by 1.5 and multiplies by 2. My understanding is that dividing by 1.5 converts the target-level MCT risk charges to minimum capital required, and multiplying by 2 reflects the company’s 200% MCT operating target.
In Q28, the solution divides unpaid losses by the liability/surplus ratio to obtain total capital, then multiplies by 75% to exclude capital held for market and operational risk.
Is the distinction simply that Q20 starts with regulatory risk capital requirements, whereas Q28 starts with liabilities and a ratio that directly determines surplus? In other words, does Q28’s liability/surplus ratio already determine the capital basis, so no further MCT scaling is needed?
What do these capital pieces mean and what should be the starting point?