Exam Problem 2018 Fall #10

Turley36Turley36
in NAIC.SSAP-9

I know that part c.) doesn't ask about this particular detail, but on the off chance that this question was rephrased to ask, "If these items were considered material, what type of subsequent of event would each of these items be classified as and describe the reasoning?". Out of curiosity, how would any of you answer this question?

Comments

  • grahamgraham
    edited October 2020

    That's an interesting question. They are definitely referring to subsequent events even though they didn't use that term.

    • The payment of the balances past 90 days due is a Type 2 event. It's assumed that the payment was not foreseen and simply arrived one day after the balance sheet date. I suppose it should be disclosed in the notes to the financial statements for the prior year (2017) but would not be reflected in the numbers until the following year's financial statements (2018).
    • The litigation however falls into the category of something that began before the balance sheet date and was developing all the way up until the settlement after the balance sheet date. That makes it a Type 1 event which does have to be recognized on the prior year's financial statements. As the examiner's report says, the surplus would decrease if the impact is deemed to be material.
  • Turley36Turley36

    This is great! Thank you graham!

  • annie123annie123

    In the examiners report it states that a common mistake is: "Stating that the events are Type 2 subsequent events and therefore would not be reflected in the financial statements (both events are Type 1 subsequent events). "

    How would this change your logic on c.i. (agents' balances) as you noted that it was Type 2?

  • grahamgraham
    edited February 2021

    I believe the examiner's report is wrong about (i). Using the reasoning in my previous post from Oct 2020, I believe (i) is a Type 2 event.

    If (i) were a Type 1 event, then it would have to be reflected in the financial statements (assuming it was material) but the examiner's report (correctly) states that it should not be reflected.

    I will add a footnote to the BattleTable in the wiki with a link to this thread.

  • annie123annie123

    Thanks!

  • JaarndtJaarndt
    Can someone please confirm something with me? I have struggled with the 2018 problem and what is written in the wiki. It seems like the wiki page and the source text say that type 1 events should be reflected in the prior years financial statment regardless of materiallity; however, in this exam 2018 problem and in your note above it seems like it still depends on if the event was material. Do we not have to reflect a type 1 event in the prior years financial statment if it is not material? Also the source text for ssap 9 actually considers agents balances >90 days to be a type 1 event but then says it is specifically prohibited from being recorded in the financial statment Along with a few other items.
  • Staff - ACStaff - AC

    As stated in paragraph 6 of the SSAP 9 source text, material Type I events shall be reflected in the prior year's financial statement.

    Regarding 2018.F.10.c.i (agents' balances), the source text and examiner's sample answer seem to be in agreement.

  • michael7michael7

    So is the agents balance Type 1 but immaterial? Graham above states that he believes this is a Type II event contradicting what you wrote above. Can you clarify please?

  • Staff - ACStaff - AC

    Here is paragraph 6 from SSAP 9:

    _6. An entity shall recognize in the financial statements the effects of all material Type I subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Any changes in estimates resulting from the use of such evidence shall be recorded in the financial statements unless specifically prohibited, (e.g., subsequent collection of agents balances over 90 days due when determining nonadmitted agents balances as prohibited by SSAP No. 6—Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers). _

    I interpret "subsequent collection of agents balances over 90 days due" as an exception to Type I. Graham interpreted it as Type II.

    It is hard to determine which it is, from the definitions of Type I and II. Either interpretation results in it not being reported in the prior year statement.

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