CIA Accounting Standards Flashcards
Define Book Value
Market value, amortized value, or any other value consistent with Canadian GAAP
Define financial instrument
Contract that creates an asset for one party and a liability or equity instrument for the other
Discuss the impact of CICA 3855 and 1530, having some assets supporting liabilities measured on a fair value basis
- Change in the measurement of the value of assets affect the measurement of the IRR and the NPV of policy liabilities
- NI affected even if assets categorized as available for sale
What are the advantages of fair value asset measurement ?
1 - Most relevant basis for financial instruments (if it can be reliably measured)
2 - Reflects market risk preferences and expectations regarding the amounts, timing, and uncertainty of future CF
3 - Based on discounting at the risk-adjusted rate of return available in the market
How is the Investment Income component of Comprehensive Income calculated ?
= (Sum of all coupons during CY) + (Market - Amortized Value, of all “Held-for-Trading” Bonds)
Define Comprehensive Income and Other Comprehensive Income. How do they relate to each other ?
Comprehensive Income(CI) - Change in the value of net assets that is not due to owner activities
Other Comprehensive Income(OCI)
- Temporary presentation of certain gains and losses outside of net income (NI)
CI = NI + OCI
Treatment of Held-to-Maturity assets
- Subsequent measurement is on an amortized cost basis
- Gains and losses are recognized in NI when the asset is derecognized
Why must a company be careful classifying assets as Held-to-Maturity ?
If a company sells more than an insignificant amount of held-to-maturity assets, ALL held-to-maturity assets must be reclassified as available-for-sale for at least 2 years
Treatment of available-for-sale assets
- Subsequent measurement is at fair value
- Gains and losses are recognized in OCI, transferred to NI when the asset is derecognized
Treatment of held-for-trading assets
- Subsequent measurement is at fair value
- Gains and losses are recognized immediately in NI
Acceptable reasons for using the fair value option (Held-for-Trading asset classification)
Either
1 - It significantly reduces the accounting mismatch form measuring assets and liabilities on different bases
2 - Company has a documented risk management strategy for managing the group of financial instruments and can demonstrate significant financial risks are significantly reduced
Measurement hierarchy for fair value
1 - Observable market prices, including market-based adjustments
2 - Accepted valuation models, inputs are consistent with the market
3 - Current cost or possibly historical cost
4 - Models which use entity inputs
How will CICA 3855 and 1530 impact Capital Tests (MCT, DCAT) ?
MCT
1 - Adjust for excess market value over the current book value
2 - Capital required for assets will change
3 - Capital required for UEPR and Unpaid Claims since the discount rate will be affected
DCAT
1 - Adverse scenarios relating to interest rates may have more impact on projected results
How will CICA 3855 and 1530 impact the valuation of Policy Liabilities ?
1 - Selection of Discount Rate will depend on asset classification
2 - Volatility Considerations - market rate is more volatile than book value and since the discount rate will be changing more often, then volatility of the policy liabilities may increase
3 - Future Income Tax - depending on how assets are classified may create tax timing differences
4 - Other Issues - If policy liabilities estimated prior to the close of the accounting period, may need to re-assess portfolio yield and selected discount rate at year-end
Explain Asset Liability Mismatch
- There are situations when the value of the policy “liabilities” does not respond completely to changes in the value of the matching “assets”
- This situation is applicable regardless of the asset categorization
- Available-for-sale classification may also create an income statement mismatch
