32 Provisions

Question 1

Wat are provisions [1]

Answer 1

Provisions are the amounts set aside to meet future L

Value highly dependent on assumptions used which are highly dependent on reason for calculating provision

Question 2

Reasons for calculating individual provisions [5]

Answer 2

FOR ACCOUNTS:

• L in published accounts
• demonstrate supervision & solvency in other accounts
• L in internal management accounts

FOR MANAGERS:

• value for mergers, acquisitions or transfers
• influence investment strategy
• expected credit loss for a bank

FOR BENEFICIARIES:

• discretionary benefits can be awarded
• value benefit improvements for a benefit scheme
• to set future contributions levels of benefit scheme
• calculate surrender/ discontinue rates
• provide disclosure info to beneficiaries

Question 3

Reasons for calculating global provisions [1.5]

Answer 3

1) act as additional protection against insolvency
2) cover risks fin & non-fin that cannot be individual contracts
3) reflect the degree of mismatching of A & L

Question 4

Basis for calculating provision & factors affecting choice of basis [3]

Answer 4

BASIS 
1) optimistic - used for mergers
    & acquisitions 
2) best estimate - used for
    managers & published account
3) cautious - for solvency 

FACTORS AFFECTING CHOICE

1) reason/ purpose of valuation
2) need of the client
3) regulatory or legislation
4) nature of the assets