PAA Eligibility
Looks like this is an exhaustive list of all the eligibility criteria for PAA:
1) can be used for short-term contracts <1 year
2) can be used for longer duration contracts if PAA is not materially different than GMA
3) No significant variability in FCFs
4) if revenue for a group < 1% of total companys revenue
5) If PAA-GMA < groups share of aggregate threshold
Do you agree with this? I want to confirm bc it seems like eligibility is mentioned here and there in different papers.. I have not seen a list like this... even the decision tree does not include all 5 items above.
Comments
Yes, you are correct but I have just one correction - Point 4 would not necessarily be 1%. 1% is provided in the case study in the educational note but this threshold will vary on a company to company basis
5) would basically be a quantitative assessment of 2), right?
Yes that is correct. But, you also need to test for the difference between PAA - GMA for PAA eligible contracts (< 1 year) that are onerous too when calculating 5)
For the LC adjustment (= PAA - GMA estimates of LRC), do we only apply this to groups with contract terms all ≤ 1 year containing onerous contracts? Or is it applied if we apply threshold 2 or 3 (as labelled in the wiki, not as numbered above) as well?
I know if we determine the PAA and GMA approaches aren't materially different, this LC adjustment wouldn't be large, but it wouldn't necessarily be 0 either.
You wouldn't have to calculate a LC adjustment if a contract is < 1 year and not onerous.
For threshold 2 and 3, maybe I do not understand your question - But we do need to calculate the GMA approach quantitatively and that will give us an LC or CSM respectively