LC calculation under PAA
Im struggling to wrap my mind around the profit= LRC ex LR - FCF
LRC ex L: I understand as a representation of future cash outflows
FCF are the cash flows, so if FCF are to add up to a cash inflow, and its greater then LRC ex LR wouldn't the formula give us a negative number aka a loss?
Comments
You are right there if the FCF is a cash inflow, then you would have a negative amount.
Remember, when using the PAA, you are still booking a liability at initial recognition despite the policy being profitable.
So at the end of the day, your total profit is actually the sum of:
1. Releasing the liability
2. The actual profit of the policy
And this is in line with the formula for profit since FCF is negative and the formula simplifies to LRC ex LC + Policy Profit
I don't understand this at all:
1) How can you have LRC < 0? Can you disect the formula for LRC vs. FCF? How they differ.
2) Like the gentleman asked, how can a Cash Inf for FCF cause a further loss? Still not making sense, so confusing
I am not understanding why the signs are dislpl
1) The PAA LRC excl LC is simply UEP - DAC. If DAC is > UEP, then it will be negative. I suggest going through the sample LRC Excel provided by the CAS to view his
2) I don't really understand your question so you may need to rephrase it.
However in general, there is the amount of LRC you book on the financials, and the true Profit/Loss which are not the same This example is also specific only for PAA contracts
When you have no LC and no PAA LRC excl LC, the profit is just simply abs(FCF) which is trivial.
When you have a LC, the loss is basically the whole loss component and the definition is just the standard definition above.
When you have a negative FCF, but a positive LRC excl LC, this goes back to my initial statement. You expect to make a profit of X, but you book a liability of Y. When the contract service is fully provided, you release the liability of Y, and have a net return of X, which means that your change in financial position from the time that you initially wrote the policy to when the policy coverage has been fully provided ix X + Y which is the total profit.
A few more questions...
1) For bullet 1, So what would've happened if that FCF was +ve which is a loss (PAA LRC - FCF) = (0 - +####) = -####... this is -ve and no abs value in excel formula.
2) Can you talk about the FCF tied in with PAA LRC. Like why are we combining both? On the Life side it's just FCF.
(I am coming from a Life background so this is confusing to me)
1) Nothing changes. Just use the same formula if both PAA LRC and FCF are positive
2) I'm not sure what you mean by "combining both". The PAA LRC is the PAA LRC and FCF is basically the GMA LRC
Why are there 2 sets of formulas here for part D in the IFRS17-LRC practice problems?
I am assuming it's the same thing? The name is kind of confusing me.
Also, say if you had 'carrying amounts', 'adjustments of fin components' & 'investment component'...
How will these values come into play, if we had it?
Do they get 'ammortized' in or are they just static values?
Can you have an example with these values populated.. want to see the flow.
They're both the same formula - One is just providing more information.
Carrying amount would be the prior LRC that is being roll forwarded.
The adjustments to a financing component are shown in sample 7 of the sample IFRS questions.
I am not sure what you are referring to here with respect to a filled out example. If your prior term LRC is 200 just plug that number into the first part of the formula and it will work