GMA vs PAA in cash flow projection

JimmythepassJimmythepass
edited February 2022 in CIA.IFRS17-LRC

Hi Graham,

I saw below from section 5:

Cash Flow Projections:
GMA: for non-onerous contracts → yes (cash flows projections are required to estimate LRC)
PAA: for non-onerous contracts → no (cash flows projections are not required to estimate LRC)

For the second statement for PAA here, just wanted to clarify if the cash flow appears in section 5.1 and 5.2 are not considered "projections" and those two sections apply to non-onerous contracts only? While section 5.3 specifically refers to onerous contract and I saw "FCF" there which indicates "projections" and it requires you to calculate FCF to get the LC amount for reporting.

Please let me know if my understanding is correct.

Thanks

Comments

  • grahamgraham
    edited February 2022

    I'm not quite sure I follow what you're asking, but here are a few things that might help. If not, let me know:

    • The cash flows in section 5.1 & 5.2 are acquisition cash flows, which are different from FCFs. The FCFs relate to the policy liabilities arising from claims and that's what you don't have to calculate under PAA.
    • Sections 5.1 & 5.2 apply to both onerous and non-onerous contracts because the formulas are for LRC excluding LC.
    • Section 5.3 discusses how to determine whether a contract is onerous or non-onerous. Maybe this is what you're asking about: The quantitative test in the decision tree requires you to calculate FCFs to determine whether the contract is onerous or non-onerous, but if you go to the trouble of calculating the FCFs anyway, it seems like you might as well just use GMA since it's probably more accurate and you've already done a lot of the work.

    If this last point is what you're asking about, then I'm not sure what the answer is. The source text doesn't have enough examples to make their theoretical discussion clear.

  • JimmythepassJimmythepass

    Hi Graham,

    Thanks you have answered part my question, so cash flow projection is equivalent to FCF then?

    Also from the draft education note I saw that if onerous then you do have to calculate PV & RA (which is FCF) under PAA for LRC, that seems contradictory to your 1st & 2nd point above as 5.1 & 5.2 are w/o calculating FCF.

    Roughly speaking, can I say PAA is essentially same as GMA if onerous?

  • grahamgraham
    edited February 2022

    Yes, I interpret the term "cash flow projections" to mean the same as FCFs.

    About my 1st and 2nd points above: The "IFRS17 - LRC" source text does not state whether sections 5.1 & 5.2 apply only to non-onerous contracts. I was assuming they applied to both since those sections discuss LRC excluding LC and it's the "LC" part relates to onerous contracts, which is calculated separately. The PAA eligibility criteria discussed in other readings do not exclude onerous contracts from using PAA, but this reading does seem to essentially say that PAA and GMA are the same for onerous contracts. So I wonder why they didn't just say directly that GMA is required for onerous contracts. I'm a little confused on this myself because there aren't enough numerical examples to demonstrate the methods. I realize that's not a great answer but what I do know is...

    • If a contract is onerous, PAA is essentially the same as GMA (with CSM=0 and LC≠0 for onerous contracts.)
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