Confusion about the sign of inflows and outflows for FCF calculation
in CIA.IFRS17
I was wondering if there was a general rule on how inflows and outflows should be subtracted / added when calculating the PV(Future CFs) for the FCF because it appears that there is some inconsistencies between some of the IFRS 17 readings. For example,
- According to the CSM definition in CIA IFRS 17 (p. 7), we have:
FCF < 0 -> profitable (non-onerous) contract -> Need CSM
- According to the figure in CIA IFRS 17 – LRC (p. 22), we have
FCF = Future cash in-flow – Future cash out-flow + effect of discounting – RA, which seems to imply that
FCF > 0 -> profitable (non-onerous) contract -> Need CSM
In my opinion, whenever FCF is used to calculate some liability account (e.g., LRC), outflows should be positive and inflows should be negative but the above FCF formula seems to contradict this logic.
Thanks
FYI @olidude3121
Comments
I will need to review the source texts and get back to you on this in the next couple of days.
Thanks!
I believe you are correct and I have emailed the Exam 6-Canada exam committee. I will let you know when (if) I receive a response. Thanks for bringing this to my attention.
Sounds good. Thanks Graham.
Will, if I understand correctly, the first formula, definition from CIA IFRS 17 (p. 7) implies that FCF is the cash flow change needed to fulfill the outflow. So by that, if FCF < 0, that means we enough cash inflow to cover the outflow (discounted + adjusted with Risk Margin).
Should the second formula thus have + RA ?
I think in the second formula, it is fine to subtract RA since cash inflows are positive and cash outflows are negative.
Yeah, I think that's right. The inconsistencies with the signs (positive or negative) are confusing the issue, but like Will said, in this formula, if outflows are negative then RA would indeed be subtracted since it's an outflow.
@graham for the PV f=of cash inflow, since this is a liability account, are they referring to negative IBNR (in current terms) or salvage and subrogation for example as a form of cash inflow in a liability account?
We're getting into things that aren't explicitly mentioned in the reading, but I would assume that building block 1, which is PV(future cash flows), is a net value and would incorporate salvage & subrogation, and reinsurance recoverables, to reach the final net value for PV(liabilities). And negative IBNR should only very rarely come up so I wouldn't even worry about that.
Some advice: Normally it's good that you're trying to understand the fine details but try not to get too bogged down on this reading. It is not well written, and indeed has inconsistencies as have been pointed out. If I were taking the exam this Spring, I would just make sure I've memorized the basic facts as given in the BattleCards. There shouldn't be any calculation questions from this reading and I suspect that exam questions will likely be drawn more from the other IFRS 17 readings. And remember that currently, IFRS 17 accounts for roughly 7-10% of the exam, so plan your time accordingly. In other words, 7-10% of your total study time should be spent on IFRS 17, and since there are 6 IFRS 17 readings, that means roughly 1% of your studying on this particular reading.
I received a response from the exam committee and have inserted a note into the wiki here:
sorry, it's still not clear to me. is this statement correct?
FCF > 0 -> profitable (non-onerous) contract -> Need CSM
Please refer to the following discussion:
https://www.battleactsmain.ca/vanillaforum/discussion/710/formula-for-fcf#latest