2019 Fall #21

lucylewislucylewis
in EXAM: 2019-Fall

Parts (b) and (c) are grouped together in the Prior Exams Section, and it says that the examiners report solution is outdated. It's a little unclear to me whether both parts are outdated or just part (b).

Comments

  • grahamgraham

    Apologies for the delay in responding. We are looking into this.

  • grahamgraham

    Take a look at this discussion thread to see if this clears things up. Start from the bottom:

  • lucylewislucylewis

    Thank you for looking into this and for the response. It seems clear that the examiners report solution to part (b) is outdated and what the answer should be, but I'm still unsure about part (c):

    "Describe how the valuation of a goodwill asset changes over subsequent reporting periods under each of SAP and U.S. GAAP."

    The solutions listed are:
    SAP: Goodwill value is amortized over time to unrealized capital gains.
    GAAP: GAAP does not amortize goodwill but it is evaluated regularly for impairment.

    Are these answers still correct?

  • grahamgraham
    edited February 3

    Here are concise answers to parts (b) and (c) that I hope are clearer than the examiners' report (which is outdated for SAP in part (c)):

    Part (b) (not outdated) Impact on insurer's income statement under GAAP:

    • Acquiring Insurer A (negative goodwill of 400): income increases by 400
    • Acquiring Insurer B (positive goodwill of 1500): no immediate impact on income (Goodwill is recorded as an asset on the balance sheet.)

    Part (c) How the valuation of the goodwill asset changes over in SAP vs GAAP:

    Under SAP:

    • Insurer A (negative goodwill): Negative goodwill is recognized as an immediate gain to surplus, and not amortized. (The statement about unrealized gains in the examiners' report should be removed.)
    • Insurer B (positive goodwill): Goodwill of 1,500 is recorded as an admitted asset (subject to admissibility limits) and fully amortized over 10 years down to a value of 0.

    Under GAAP:

    • Insurer A (negative goodwill): GAAP requires negative goodwill to be recognized as a one-time gain on the income statement.
    • Insurer B (positive goodwill): GAAP does not amortize goodwill but requires annual impairment testing

    We will make adjustments to the Battle Cards as appropriate in the near future.

  • lucylewislucylewis

    Thank you very much!

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