1. Jiří Fialka, Partner, Actuarial & Insurance Solutions Seminář z aktuárských věd, 25. listopadu 2005 IASP4: Investiční smlouvy. Oceňování investičních smluv a smluv o službách

2. Page 2 Agenda Measurement Investment Contracts –Amortised costs –Fair value Service Contracts

3. Page 3 Source International Actuarial Standard of Practice No.4, Practice Guideline: Measurement of Investment Contracts and Service Contracts under IFRS [2005] as prepared by the International Actuarial Association, published 16 June 2005

4. Page 4 OCEŇOVÁNÍ

5. Page 5 Initial measurement of investment contracts IAS39.43: Fair Value + directly attributable transaction costs (does not apply to liability at FV through PL) Interpretations: 1) Some transaction costs to be subtracted from liability 2) All transaction costs and fees relate to the investment management contract and should be deferred

6. Page 6 Treatment of transaction costs IAS 39 prohibits the deferral and amortisation of transaction costs for financial instruments through the concept of a deferred ACQUISITION COST asset. In respect of service contracts the IFRSs permit transaction costs for the service element to be deferred to match the related fees (IAS 18, Appendix A, paragraph 14(b)(iii)).

7. Page 7 Subsequent measurement Depends on the accounting policy: at amortised cost, using the EFFECTIVE INTEREST METHOD except for financial liabilities measured at fair value through profit and loss If the reporting entity’s policy does not specify, then the practitioner may choose to apply an internally consistent approach and document the approach selected…

8. Page 8 INVESTIČNÍ SMLOUVY: MODEL AMORTIZOVANÝCH NÁKLADŮ

9. Page 9 Amortised cost model - appoach Not deferred initial fees covering transaction costs are subtracted from the liability and treated as one of the cash flow items in calculating the effective interest rate Cash flows typically would be developed based on expected surrenders Margins for risk and uncertainty are NOT included in the cash flows The expected cash flows normally would be determined for each duration and, therefore, it would be appropriate to select an appropriate probability distribution for each duration Appropriate requirements under IFRSs, such as a minimum floor, would apply.

10. Page 10 Amortised cost model – technical aspects administrative costs are not to be included in the projected cash flows contractual loadings or fees would be included in the projected cash flows inclusion or exclusion of renewal payments may be part of the accounting policy non-DPF bonuses should be included

11. Page 11 Amortised cost model – Minimum floor IAS 39, AG30(g) (also BC94) If the surrender value is more than the amortised cost of the liability, and the surrender value is more than the fair value of the benefit at maturity the reporting entity should measure the investor’s option to surrender at the expected surrender value. This would be an embedded derivative and would be measured as such. This also would provide an effective minimum floor for financial instruments on an amortised cost measurement.

12. Page 12 INVESTIČNÍ SMLOUVY: MODEL FÉR HODNOTY

13. Page 13 Fair value model - approach Selection of an appropriate model Selection of current estimate assumptions The determination of margins for risk and uncertainty Availability of market data to calibrate the provisions for risk and uncertainty Application of the requirements of IFRSs

14. Page 14 Market Value Margins Margins for risk and uncertainty need reflect the compensation for risk required by a typical third party to take on the liability. It may not be necessary to include a margin in respect of every assumption, and the selected risk margins need not imply a particular level of confidence. There is no commonly accepted practice for the application of the concepts.

15. Page 15 Market Value Margins (2) Uncertainty may result from one or more: Errors of estimation that may be favourable or adverse Deterioration or improvement Statistical fluctuation. A larger margin is appropriate if: There is less confidence in the current estimate assumption The event is further in the future The potential consequences of the event assumed are more severe The occurrence of the event assumed is more subject to statistical fluctuation The risk is not diversifiable.

16. Page 16 Assumptions, calibration, minimum floor In the FINANCIAL REPORTING period in which a financial instrument is first recognised, adopting assumptions different from pricing assumptions … would need a good reason IAS 39.49 requires at each valuation date a fair value that is at least equal to the amount payable on demand which means Fair Value ≥ Surrender Value

17. Page 17 SMLOUVY O SLUŽBÁCH

18. Page 18 Service contracts: approach Revenue is recognised by reference to the stage of completion of the services The fees need to be allocated among services according to the nature and substance of the services provided Reliable cash flows are needed to measure the expected revenue and the stage of completion of the transaction needs to be reliably determined Margins for risk and uncertainty will NOT normally be included in the cash flows Requirements under IFRSs apply

19. Page 19 Front-end fees IAS 18, Appendix A, paragraph 14(a)(iii) Front-end fees are deferred in the same manner as transaction costs. If it can be shown that such fees are directly related to the transaction cost, they can be netted with simultaneously incurred transaction cost. Otherwise, deferral of front-end fees and of transaction costs are to be separated, the first a liability, the second an asset, with no off- set allowed.

20. Page 20 Transaction costs The transaction cost is amortised in proportion to the nature of the service fees as outlined in the IFRSs. Projection of the total fees to amortise the transaction cost over the life of the contract, for example, a portion of the investment management fees. Amortisation of deferred transaction cost and the test on recoverability can be based on a portfolio level.

21. Page 21 Other requirements IAS 18, Appendix, paragraph 14(b)(iii) Recoverability test at a portfolio level For more guidance refer to IAS36, IAS37, IAS38, and IASP6 Liability Adequacy Testing, Testing for Recoverability of Deferred Transaction Costs, and Testing for Onerous Service Contracts under IFRS [2005]

22. Copyright © by Deloitte & Touche, 2004. This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside of the client organization without prior written approval from Deloitte & Touche.