C - CIA Accounting Standards

Question 1

CIA ACCOUNTING STANDARDS

3 measurement alternatives for financial instruments.

which is preferred by IFRS?

Answer 1

Fair Value (preferred)
Historical Cost
Current Cost

Question 2

CIA ACCOUNTING STANDARDS

3 items likely to affect Capital Tests due to implementation of new accounting standards

Answer 2

• Adjustments for XS of market value over current book value
• Capital required for assets
• Capital required for UEP and unpaid claims (because the ActPV may change)

Question 3

CIA ACCOUNTING STANDARDS

Expected investment return rate for calculation of the PV(CF) is that to be earned on assets supporting policy liabilities.

Criterias on which the expected investment return rate depends on:

Answer 3

Method of valuation of assets and reporting investment income

Allocation of assets and income along LoBs

Return on the assets at the balance sheet date

Yield on assets acquired after the balance sheet date

Capital gains and losses on assets sold after the balance sheet date

Investment expenses and losses from default

Question 4

CIA ACCOUNTING STANDARDS

Consequence of selling more than insignificant amount of HELD TO MATURITY assets?

Answer 4

ALL held-to-maturity ASSETS must be RECLASSIFIED as available-for-sale for at least 2 years (which would result in a discontinuity in investment income)

Question 5

CIA ACCOUNTING STANDARDS

Contrast
impact of change in Accounting Standards
in US vs Canada

Answer 5

–US–
policy liabilities are NOT DISCOUNTED

invested assets are generally classified as available-for-sale

so that change in FAIR VALUE flow through OCI, and not NI

–CANADA–
policy liabilities are DISCOUNTED

Change in value affects the Investment Return Rate (IRR), which affects PV(liabilities)

Hence, NI is impacted, even when available-for-Sale

Question 6

CIA ACCOUNTING STANDARDS

Contrast
Fair (Market) Value
vs
Amortized Value

Answer 6

–fair (market) value–
a/l price at open market

–amortized value–
a/l price using interest rate method

Question 7

CIA ACCOUNTING STANDARDS

Amortized or Fair Value?

Loans and Receivables
Held-to-maturity
Available-for-sale
Held-for-trading

Answer 7

–loans and receivables–
AMORTIZED

–held-to-maturity–
AMORTIZED

–available-for-sale–
FAIR (MARKET) VALUE

–held-for-trading–
FAIR (MARKET) VALUE

Question 8

CIA ACCOUNTING STANDARDS

FORMULAS :

Comprehensive income
Investment Income
Total AOCI
OCI
Net Income

Answer 8

–Comprehensive income–
CI = NI + OCI

–Investment Income–
Sum(All Coupons) + (MV - AV)held for trading

–Total AOCI–
(MV - AV) available for sale

–OCI–
Delta (MV - AV) available for sale

–Net Income–
Sum(All Coupons) + Delta AV held for maturity + Delta AV available for sale + Delta MV held for trading

Question 9

CIA ACCOUNTING STANDARDS

2 A and 2 D of Held to Maturity

Answer 9

A
change in market rate have no effect on financial statement

NI not affected by change in fair value, reducing volatility

D
consequence of selling more than an insignificant amount is that all HTM assets must be reclassified as AFS for at least 2 years

less flexibility in managing portfolio

creates significant reporting challenge if asset sales/redeployment becomes attractive

Question 10

CIA ACCOUNTING STANDARDS

1 A and 1 D of Available for Sale

Answer 10

A
separate volatility of fair value change outside of NI

D
income mismatch because A/L change do not flow through the same category (OCI vs NI)

Question 11

CIA ACCOUNTING STANDARDS

1 D of Held for Trading

Answer 11

D

greater volatility of assets and investments gains/losses