SAP Invested Assets
From Odomirok pp 325 "...while below-investment grade bonds and lower quality redeemable preferred stocks are held at the lower of cost, amortized cost or fair value". In the battlecard and in the solution for Spring 2018 # 19, the answer is the lower of amortized cost or fair value (cost not included). What's the reason for the discrepancy here?
Comments
This was changed in the 2020 of Odomirok's Financial Reporting text. You are correct that the valuation formula here should now include cost. I have edited the Battle Card and added a footnote to the Battle Table here:
Shouldn't the battle card also say that investment-grade bonds are valued at cost or amortized cost?
Well, technically yes, but I don't think it makes any difference in practice. Statutory guidance phrases it as “cost or amortized cost,” but from a purely practical dollar‐value perspective, it ends up being the same thing if there’s no premium or discount.
If there is a premium or discount, you do that amortization. If there isn’t, it’s effectively zero amortization, so “cost” and “amortized cost” look the same in practice.
But I will change the Battle Card just to make it match the text.
I'm not sure if this is an inconsistency in the Odomirok text or maybe the preferred stock language is important but I see this on page 28 of Odomirok
Looking a bit further down I think the original comment is just poor language in the text trying to discuss both bonds and preferred stocks in the same sentence because on page 29 preferred stocks are commented as
There is inconsistency between page 28 and page 325. Page 28 should probably have included "cost."
Is there some external documentation that leads you to that conclusion?
It seems more likely the language on 325 is ambiguous and being mis-interpreted to apply to both bonds and preferred stock, especially considering page 326 still has the NAIC 3-6 as the 'Lower of amortized cost or fair value'
The page 28 language seems like a generalization that dispensed with some details. Page 325 language, and this Table 102, seems to get into the detail.
If this table applies to SAP, how should GAAP investments be valued? Do we need to know this? (Sorry if I missed this in the reading)
The Odomirok paragraph following Table 102 on page 326 explains GAAP accounting of financial instruments.