CIA Accounting Standards

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  1. New standards and their impact
    • Accounting Standards Board introduced new standards to address when an entity would recognize a financial instrument on its balance sheet and how the financial instrument would be measured once recognized
    • insurance contracts are excluded from scope of new standard, but use of a portfolio-based discount rate in determination of APV of policy liabilities results in an indirect impact of new standards
  2. Capital test would be affected by:
    • adjustment for XS of market value over current book (used to recognize 50% of XS)
    • capital required ¬†for assets (book value may change)
    • capital required for UEP and unpaid claims (APV may change)
  3. Factors influencing expected investment return rate
    • method of valuing assets and reporting investment income
    • allocation of assets and income among LOBs
    • return on assets at balance sheet date
    • yield on assets acquired after the balance sheet date
    • investment expense, and losses from default (C-1 risk)
  4. Held-to-maturity investments
    • measurement is on an amortized basis
    • net income is not affected by changes in fair value
    • tainting: if sell more than an insignificant amount, all h-t-m assets must be reclassified as available-for-sale for at least 2 years
    • this consequence is a major impediment to using this category
  5. Available-for-sale investments
    • carried on the balance sheet at fair value
    • investment income, changes in amortized cost, realized gains are booked to net income
    • changes in the difference between fair value and amortized cost recorded as other comprehensive income (OCI) (segregate volatility of fair value outside of net income)
    • following a market rate increase:
    • assets: invested assets value decreases, no effect on net income, decrease in OCI
    • liabilities: discount rate increases, decreasing liability value, so net income increases, with no effect on OCI
    • equity: can go either way
  6. Held-for-trading including fair value option
    • marked to fair value, with gains and losses recognized immediately in net income
    • category can be used if can be proven that doing so eliminates or significantly reduces an accounting mismatch from measuring assets and liabilities on different bases
    • following a market value increase:
    • assets: invested assets value decreases, decreasing net income
    • liabilities: discount rate increases, decreasing liability value, net income increases¬†
    • equity: can go either way
  7. DCAT impacts of new standards
    • adverse scenarios relating to interest rates may have greater impact
    • asset modelling requires more attention, particularly in regard to categorization
    • models need to take into account new layout of financial statements
    • may need to model tax timing differences
  8. 4-level measurement hierarchy for fair value
    • observable market prices, including market-based adjustments
    • accepted valuation models or techniques
    • (substitute) current cost, with possibility of substituting historical cost
    • (substitute) models and techniques that use entity inputs
Card Set:
CIA Accounting Standards
2014-04-12 23:10:33
Standards of Practice
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