CIA Accounting Flashcards
What are the considerations when selecting a discount rate (or expected investment return rate)? (6)
M-A-R-Y-I-C
METHODS for asset valuation and reporting investment income
ALLOCATION of assets and investment income by LOB
RETURN on assets @ B/S date
YIELD on assets acquired after B/S date
INVESTMENT EXPENSES and losses from default
CAPITAL gains/losses on assets sold after B/S date
Different types of bond classifications. (3)
HTM (Held to Maturity)
AFS (Available for Sale)
HFT (Held for Trading)
Explain how a change in asset measurement can cause a change in the valuation of policy liabilities. (3)
A change of asset measurement:
- Causes a change in the Investment Return which;
- Causes a change in the Discount Rate which;
- Causes a change in the PV of Policy Liabilities.
How are (HTM, AFS, HFT) bond assets carried on the Balance Sheet (B/S)?
HTM: carried at AV (Amortized Value)
- Note 1: changes in FV (Fair Value) DO NOT affect the NI (net income) associated with HTM Assets.
- Note 2: income related to HTM bonds doesn’t flow into NI until they are no longer recognized.
AFS: carried at FV or MV (Market Value)
HFT: carried at FV
- Note 3: gains/losses associated with HFT asset are IMMEDIATELY recognized in NI.
How can HTM assets be tainted and what are the consequences or disadvantages of being tainted?
Definition of Tainting: HTM assets are tainted by the act of selling off more than an insignificant volume of the assets.
The consequence of Tainting: all HTM assets must be reclassified as AFS for least 2 years.
- this reduces flexibility for managing the portfolio by rebalancing for strategic benefit;
- it also creates reporting challenges if the sale becomes attractive.
In what ways can asset classification impact NI (Net Income) and equity? (3)
M-M-R
MIX of invested assets (debt vs equity securities)
MATCHING between invested assets and policy liabilities
RELATIVE QUANTUM of invested assets vs policy liabilities
Formula for Net Income related to HTM bonds.
NI (HTM) = Δ(Amortized Value) + (Dividends and Coupons)
Why is income related to AFS bonds segregated between Net Income and Other Comprehensive Income?
To ensure that the volatility of the Fair Value measurement of invested assets stays outside of the Net Income.
Formula for Net Income related to AFS bonds.
NI (AFS) = Δ(Amortized Value) + (Dividends and Coupons)
Note: Include only realized gains/losses. This means that changes in Fair Value (possibly caused by an interest rate change) are not booked to NI unless the asset is SOLD.
Formula for Other Comprehensive Income related to AFS bonds.
OCI (AFS) = Δ(Fair Value - Amortized Value)
Formula for Net Income related to HFT bonds.
NI (HFT) = Δ(Fair Value) + (Dividends and Coupons)
Note: gains/losses are recognized immediately (both realized and unrealized)
Formula for Other Comprehensive Income related to HFT bonds.
OCI (HFT): none
Most relevant basis for financial instrument measurement.
FV (Fair Value), provided it can be reliably measured.
When can FV be reliably measured?
When there is an active and liquid market.
When is a financial instrument recognized?
When the entity becomes a party contract creating the instrument (must be classified into one of the three main categories).
