Fall 2012 #17
For a, why are we not considering the net investment income and the realized capital gain for the next investment gain? Is it because it’s not for PPA-liability specifically?
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For a, why are we not considering the net investment income and the realized capital gain for the next investment gain? Is it because it’s not for PPA-liability specifically?
Comments
Yes, correct. Also, remember that:
net investment income + realized capital gain = investment gain on insurance transactions + investment gain on capital and surplus
Thanks!
Sure, good luck.
Hello, for this question, I did not deduct Prepaid Expense Incurred from the pretax profit excl investment gain as I thought that it is already included in the Total Investment Gain calculation, why should we include this? Also, why should we only deduct half of the Net General Expense Incurred?
Prepaid expense is commission. It is not an investment expense. It belongs in the profit calculation.
The problem is old (2012) and I do not find this taking half of general expense mentioned in the Odomirok IEE text. So, I think this solution is outdated and you should use the full GE amount.
For GE, would it be based on the answer provided in the following forum discussion?
https://www.battleacts6us.ca/vanillaforum6us/discussion/23/prepaid-expenses-for-uep#latest
In which, we should use 50% GE since the net acquisition expenses for the PPER includes the other 50%?
Yes, I see the discrepancy in our two statements. Here is Graham's comment on this:
This is a case where official syllabus readings don't quite line up and I don't know what the graders would do. If you don't take 50%, that should probably be marked correct without further comment since it isn't mentioned in the Exam 6 syllabus readings. If you do take 50%, then a brief reference to the pricing convention would be advisable.
One point which I didn't think about before is that here we are constructing financial statements whereas in Exam 5, we are doing a pricing analysis. Those are different purposes so the methods may not have to completely agree.
So, no definitive answer here but my advice in these situations is to provide a brief explanation so the grader knows you understand what you're doing and that it's intentional.
More on the 50% General Expense:
I am comparing Fall 2012 Q17 to Fall 2018 Q16.
Both questions state that they are providing data from the IEE.
Both questions provide General Expense Incurred.
The former question asks for the IEE profit, and uses 50% * GE.
The latter question asks for the change in Surplus and uses the full GE.
Something feels fishy here. The IEE's General Expense is NOT thoroughly covered in the syllabus, and I suspect that these 2 questions are making contradictory assumptions. Would you agree?
I think this is simply a case of one solution writer using the pricing reference and the other one not doing so.