CIA Accounting Flashcards

1
Q

What are the considerations when selecting a discount rate (or expected investment return rate)? (6)

A

M-A-R-Y-I-C

METHODS for asset valuation and reporting investment income
ALLOCATION of assets and investment income by LOB
RETURN on assets @ B/S date
YIELD on assets acquired after B/S date
INVESTMENT EXPENSES and losses from default
CAPITAL gains/losses on assets sold after B/S date

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2
Q

Different types of bond classifications. (3)

A

HTM (Held to Maturity)
AFS (Available for Sale)
HFT (Held for Trading)

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3
Q

Explain how a change in asset measurement can cause a change in the valuation of policy liabilities. (3)

A

A change of asset measurement:

  • Causes a change in the Investment Return which;
  • Causes a change in the Discount Rate which;
  • Causes a change in the PV of Policy Liabilities.
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4
Q

How are (HTM, AFS, HFT) bond assets carried on the Balance Sheet (B/S)?

A

HTM: carried at AV (Amortized Value)
- Note 1: changes in FV (Fair Value) DO NOT affect the NI (net income) associated with HTM Assets.
- Note 2: income related to HTM bonds doesn’t flow into NI until they are no longer recognized.
AFS: carried at FV or MV (Market Value)
HFT: carried at FV
- Note 3: gains/losses associated with HFT asset are IMMEDIATELY recognized in NI.

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5
Q

How can HTM assets be tainted and what are the consequences or disadvantages of being tainted?

A

Definition of Tainting: HTM assets are tainted by the act of selling off more than an insignificant volume of the assets.

The consequence of Tainting: all HTM assets must be reclassified as AFS for least 2 years.

  • this reduces flexibility for managing the portfolio by rebalancing for strategic benefit;
  • it also creates reporting challenges if the sale becomes attractive.
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6
Q

In what ways can asset classification impact NI (Net Income) and equity? (3)

A

M-M-R

MIX of invested assets (debt vs equity securities)
MATCHING between invested assets and policy liabilities
RELATIVE QUANTUM of invested assets vs policy liabilities

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7
Q

Formula for Net Income related to HTM bonds.

A

NI (HTM) = Δ(Amortized Value) + (Dividends and Coupons)

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8
Q

Why is income related to AFS bonds segregated between Net Income and Other Comprehensive Income?

A

To ensure that the volatility of the Fair Value measurement of invested assets stays outside of the Net Income.

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9
Q

Formula for Net Income related to AFS bonds.

A

NI (AFS) = Δ(Amortized Value) + (Dividends and Coupons)
Note: Include only realized gains/losses. This means that changes in Fair Value (possibly caused by an interest rate change) are not booked to NI unless the asset is SOLD.

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10
Q

Formula for Other Comprehensive Income related to AFS bonds.

A

OCI (AFS) = Δ(Fair Value - Amortized Value)

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11
Q

Formula for Net Income related to HFT bonds.

A

NI (HFT) = Δ(Fair Value) + (Dividends and Coupons)

Note: gains/losses are recognized immediately (both realized and unrealized)

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12
Q

Formula for Other Comprehensive Income related to HFT bonds.

A

OCI (HFT): none

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13
Q

Most relevant basis for financial instrument measurement.

A

FV (Fair Value), provided it can be reliably measured.

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14
Q

When can FV be reliably measured?

A

When there is an active and liquid market.

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15
Q

When is a financial instrument recognized?

A

When the entity becomes a party contract creating the instrument (must be classified into one of the three main categories).

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16
Q

How is a financial instrument initially measured?

A

Initial measurement is Fair Value (based on payment given or received) regardless of classification.

17
Q

When is a financial instrument no longer recognized?

A

It is no longer recognized when it is removed from the Balance Sheet.

18
Q

Define FV (Fair Value)

A

The amount at which an asset could be exchanged between knowledgeable/willing parties (captures changes in Asset/Liability values over time).

19
Q

Define AV (Amortized Value)

A

The accumulated portion of the recorded cost that has been charged to expense through either depreciation or amortization.

20
Q

Define CV (Carrying Value)

A

The value that is shown on the insurer’s Balance Sheet

CV = par value + (unamortized premiums - unamortized discounts)

21
Q

Define HC (Historical Cost)

A

HC = Original Purchase Price - Depreciation