CIA Accounting Standards Flashcards

1
Q

Define Book Value

A

Market value, amortized value, or any other value consistent with Canadian GAAP

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2
Q

Define financial instrument

A

Contract that creates an asset for one party and a liability or equity instrument for the other

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3
Q

Discuss the impact of CICA 3855 and 1530, having some assets supporting liabilities measured on a fair value basis

A
  • Change in the measurement of the value of assets affect the measurement of the IRR and the NPV of policy liabilities
  • NI affected even if assets categorized as available for sale
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4
Q

What are the advantages of fair value asset measurement ?

A

1 - Most relevant basis for financial instruments (if it can be reliably measured)
2 - Reflects market risk preferences and expectations regarding the amounts, timing, and uncertainty of future CF
3 - Based on discounting at the risk-adjusted rate of return available in the market

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5
Q

How is the Investment Income component of Comprehensive Income calculated ?

A

= (Sum of all coupons during CY) + (Market - Amortized Value, of all “Held-for-Trading” Bonds)

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6
Q

Define Comprehensive Income and Other Comprehensive Income. How do they relate to each other ?

A
Comprehensive Income(CI)
- Change in the value of net assets that is not due to owner activities

Other Comprehensive Income(OCI)
- Temporary presentation of certain gains and losses outside of net income (NI)

CI = NI + OCI

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7
Q

Treatment of Held-to-Maturity assets

A
  • Subsequent measurement is on an amortized cost basis

- Gains and losses are recognized in NI when the asset is derecognized

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8
Q

Why must a company be careful classifying assets as Held-to-Maturity ?

A

If a company sells more than an insignificant amount of held-to-maturity assets, ALL held-to-maturity assets must be reclassified as available-for-sale for at least 2 years

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9
Q

Treatment of available-for-sale assets

A
  • Subsequent measurement is at fair value

- Gains and losses are recognized in OCI, transferred to NI when the asset is derecognized

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10
Q

Treatment of held-for-trading assets

A
  • Subsequent measurement is at fair value

- Gains and losses are recognized immediately in NI

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11
Q

Acceptable reasons for using the fair value option (Held-for-Trading asset classification)

A

Either
1 - It significantly reduces the accounting mismatch form measuring assets and liabilities on different bases
2 - Company has a documented risk management strategy for managing the group of financial instruments and can demonstrate significant financial risks are significantly reduced

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12
Q

Measurement hierarchy for fair value

A

1 - Observable market prices, including market-based adjustments
2 - Accepted valuation models, inputs are consistent with the market
3 - Current cost or possibly historical cost
4 - Models which use entity inputs

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13
Q

How will CICA 3855 and 1530 impact Capital Tests (MCT, DCAT) ?

A

MCT
1 - Adjust for excess market value over the current book value
2 - Capital required for assets will change
3 - Capital required for UEPR and Unpaid Claims since the discount rate will be affected

DCAT
1 - Adverse scenarios relating to interest rates may have more impact on projected results

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14
Q

How will CICA 3855 and 1530 impact the valuation of Policy Liabilities ?

A

1 - Selection of Discount Rate will depend on asset classification
2 - Volatility Considerations - market rate is more volatile than book value and since the discount rate will be changing more often, then volatility of the policy liabilities may increase
3 - Future Income Tax - depending on how assets are classified may create tax timing differences
4 - Other Issues - If policy liabilities estimated prior to the close of the accounting period, may need to re-assess portfolio yield and selected discount rate at year-end

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15
Q

Explain Asset Liability Mismatch

A
  • There are situations when the value of the policy “liabilities” does not respond completely to changes in the value of the matching “assets”
  • This situation is applicable regardless of the asset categorization
  • Available-for-sale classification may also create an income statement mismatch
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16
Q

What are the consequences of tainting the HTM portfolio ?

A

1 - Potentially reduces flexibility in managing the portfolio for rebalancing or strategic benefit
2 - Creates significant reporting challenges if asset sale/redeployment becomes attractive

17
Q

Explain the main implication of the CICA Accounting Standards

A

The new standards do have an impact on the valuation of policy liabilities, cause it impact the determination of the discount rate used in calculating policy liabilities