Is LC counted in LRC for onerous?
"Note that for onerous contracts, after the CSM is floored at 0, a loss is recorded in the financial statements and the LRC for the onerous contracts is simply equal to the FCF as shown in the formula above. This loss, LC, is reflected in the LRC on the issue date of the insurance contracts." ---- I understand LC is setup for onerous contracts. but for onerous contracts, if we were asked to calculate LRC, should we include LC? LRC=FCF + LC or just LRC = FCF, but LC is set up seperately in financial statment? (or LC is included in FCF for onerous)
Comments
It is all a but confusing because there isn't a clear example of the whole process from start to finish but here's how I think about it.
For non-onerous contracts, the CSM is part of LRC but separate from the FCF because we have the formula:
For onerous contracts the CSM drops out (as mentioned in your post) and the LC becomes part of FCF. So you would not ever write "FCF + LC". The LRC would just be equal to FCF. The source text also mentions this formula:
This formula does not seem helpful to me! You still have to figure out how to calculate (LRC excluding LC) and also LC. I think it's just expressing that the concept of the LC is important and that it's tracked separately.
So either CSM or LC is zero for a given set of contracts correct? One of them must always be zero. If this is the case, it seems similar to DPAC and premium deficiency under IFRS4. Do you agree?
Yes one of them will always be 0 but only under the GMA approach. I guess you can think of it in that it is similar to the DPAC and premium deficiency.
For non-onerous contracts under the PAA approach, you would not need to calculate a CSM because there is no requirement to calculate the FCFs.
For onerous contracts under the PAA approach, that would basically be the GMA method