2019Fall15-RR vs APV
I am confused with RR vs APV in future income taxes calculation.
(1) RR is reserve, should it be Equity; while APV is liability. Shouldn't they be the same in value?
(2) In 2019Fall 15(d), net APV=84325.9814 is actually liability, why we say ReportReserve(RR)=net APV? Then what is APV in 95%min(RR, APV)?
Comments
The difference between RR and APV is as follows:
For example, suppose the actuary does a reserve analysis and calculates that APV = $98.5 million. This is the actuary's best estimate of the required reserves but that isn't necessarily what management books in the financial statements. Maybe management wants an extra cushion and decides to book RR = $100 million. Or maybe they feel the actuary's best estimate is too high and decided to only book RR = $95 million. Or maybe management feels the actuary is correct and sets RR = APV = $98.5 million.
In this problem you have to make the assumption that RR = APV because you are not given the actuary's APV estimate. The value of RR is given as 120,000 and the only way to do the problem is to make the assumption that RR = APV. (I think the examiner's were just trying to make this problem a little harder versus similar problems on prior exams. I don't think it was a good question.)
Would the calculated net APV be equal to the actuary's estimate in this question?
Yes, the APV is always calculated by the AA
Hey,
I have a question about part (d) of this question.
Why do we use the DR - MfAD for investment return rates and not the following formula: ((PV+PfAD(invest))/net undiscounted estimate to calculate the PVfacr in the discounting effect formula?
Thanks,
We do not use DR - MFAD here to calculate the discounting factor. The discounting factor was calculated in Part A using the payment patterns.
You could use the second formula and it will provide you the same PV factor