LC at subsequent measurement
Hello,
Let's say we have a contract for 2 years. At recognition, contract is onerous, say $100. According to the accounting statement, book LC (Book LC of $100 in the LRC and $100 in the insurance service expense)
From my initial understanding, $100 would be recognized fully in expense and decrease net profit by $100 in the first year?
The wiki then say that amortization of the LC would INCREASE the insurance service expense. Using some figures, could you please explain the accounting entries of the LC over the 2 year period, assuming no change in assumptions.
Comments
i though LRC decrease was offset by the LIC increase and the paid as the contract mature.
i am not sure i understand how we recognize a loss in the ISE initially and then increase ISE further as we amortize LC?
Yes, but we are talking specifically about LRC here. The LIC is its own thing.
As I mentioned above, the decrease in LRC would be off-setted by an increase in ISE leading to a net position of 0, all things equal.
Thus, at time 0 you have a net loss = loss component, and at every other time period you have a net loss of 0
Hi @Staff-T1 ,
What I meant is could you please explain how we treat the LC at each stage? At t=0, t=1 and say at t=2 when everything is paid for example.
If we have an initial LC, do we book LC=$100 and also $100 in statement of performance? Or it is either or?
Here, you said here, it is either or https://www.battleactsmain.ca/vanillaforum/discussion/comment/3811#Comment_3811
Also, what net position are you refering to? I am not sure how you relate liabilities with expense.
LC is amortize as coverage is provided, similar to the CSM - For a policy with LC of 1000 and coverage period of a year, at T = 0.25, LC = 750, T = 0.5, LC = 500 and so on.
If you have an initial LC, you take a 100 dollar loss on the income statement and you would have a 1oss component on your LRC as a liability.
When you amortize the LC, your LRC will decrease by an equal amount in which the expenses increase. This means your net loss for that period is 0.
Thank you @Staff-T1 . That was really helpful!
Last follow-up question, We initally take a loss. Then when we amortize LC, I agree that net loss should be zero, since we already recognized this loss. But how is it zero?
As you said above, we decrease LRC, but increase expenses. The way I currently see it is we will have it twice in the loss (Since we already took a loss at initial recognition). Can you please clarify how the expense is increasing but we still take a net loss = 0 after?
Thanks again!
Decreasing the LRC is not a loss -> It is a gain as your liabilities have decreased, which is then offset by an equal amount of expenses, which means your net loss in every period is 0, except at time 0 when you booked your LC