Financial risk under IFRS 17

ildikobildikob
in CIA.IFRS17

I have gone through this paper multiple times and still struggling with multiple parts of it one week before the exam :( :( :(

Question: Isn't financial risk now included under building block 1: PV of future cash flows automatically?

How I understand under current practice we use one single discount rate to calculate the PV of cash flows, then we add PfAD in investments which captures the uncertainty around the selection of the discount rates used. Under IFRS 17 there is no longer a need to apply a PfAD for investments because the cash flows and the new approach of selecting the discount curves under IFRS 17 already reflect the financial risk.

How I see it the PV of future cash flows under IFRS 17 is the same as the PV of cash flows + PfAD (investments) under current practice. Isn't this correct?

Comments

  • grahamgraham
    edited October 2019

    I completely understand your struggles with this reading. Let me try to ease your anxiety:

    • You are not alone in feeling like this. This reading has a lot of details and it is very difficult to sort it all out.
    • I've noticed that for new readings, exam questions normally only require that you have memorized basic bullet point lists. (For readings that have been on the syllabus for several sittings, the questions get harder but you don't have to worry about that for now.)
    • At the very least, make sure you can do problem Q4 from the 2019.Fall practice exam. There's a link on the main page of the BattleActs website to this practice exam.
    • Then if you have more time, and aren't getting too stressed out, try expanding your knowledge according to the BattleCards.

    About your specific question on the inclusion of financial risk in building block 1:

    • If I had read only the first source text for IFRS 17, the one published by the CIA, I would conclude that all financial risk is indeed automatically included in building block 1. (So your statement would be correct.) The text says:

    • estimate of future cash flows

    • = probability-weighted mean of the full range of possible outcomes

    This is noted also in Section 7 of the wiki article CIA.IFRS17

    This seems to imply that financial risk does not need to be considered separately as in current practice.

    But the second source text on IFRS17, the one published by the International Actuarial Association, specifically includes an extra term for financial risk in bullet point (a).(ii) on page 20. It says that an adjustment to financial risk is included to the extent it is not included in the estimates of future cash flows.

    There is a further explanation near the top of page 21 that defines a further risk adjustment as an amount A such that the company is indifferent between having the following on its balance sheet:

    • PV(cash flows) + A with exposure to underlying uncertainties
    • PV(cash flows) without exposure to underlying uncertainties

    This is discussed in the context of non-financial risk, but this value of A seems like it can include both financial and non-financial risk.

    Anyway, that's my understanding of it. I didn't include all of that in the wiki because it seemed like too much detail. To reiterate a point I made near the beginning of my answer is that if you know some basic bullet point lists, you should probably be ok on the exam this time around.

  • ildikobildikob

    Thanks a lot for your response. Makes sense from this point of view.

    It's really frustrating when it's not just the struggle of how much material we need to remember but there are additional hurdles like contradictions between the papers to jump through :( anyway this is exam 6 for all of us!!!!

  • AndrewLAndrewL

    Sorry for the dumb question but is PV(Future CF)=Estimates of Future CF?

  • Staff-T1Staff-T1

    PV(Estimates of future cash flow) + Risk Adjustment = Fulfillment Cash Flow

    Estimates of future cash flows are undiscounted

  • AndrewLAndrewL

    Thank you!
    And probability weighted Cash flow=estimates of future cash flow that are undiscounted?

  • Staff-T1Staff-T1

    Correct

  • exam6passerexam6passer

    is non-financial under IFRS17 the same as non-economic risk under CIA?

  • Staff-T1Staff-T1

    pretty much, although you don't need to know the details of the exact difference between the two

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