Fall 2016 #14

emelndalgic

The examiner's report has this for assuming .35 tax on DTA:

Policyholder surplus = 82000 + 4490 + (-.35)(100) = 82000 + 4490 - 35 = 86455

How do they get 100 for the DTA and why is this tax subtracted?

Thanks

graham

Yes, this is confusing. The examiner's report provides 2 acceptable answers, but in accounting there can only be 1 correct answer and they don't tell us which it is.

First, DTA (net of DTL) is the same as the change in unrealized capital gains in the scenario. That's where the value of 100 comes from: 250-100.

Second, it wasn't clear whether this gain of 100 was net or gross of taxes. If you assumed that "Net Unrealized Capital Gains" meant net of taxes, then you did not have to subtract 0.35x100 because the taxes had already been taken out. That's probably what I would have done, and that answer was accepted.

The other answer, where they subtracted 0.35x100 , meant that taxes had not been taken out so you had to explicitly subtract them.

Note that line 24 of the income statement under Capital & Surplus Account (this pdf is included in the wiki article for Odomirok.8-9-IS) is:

• Change in net unrealized capital gains or (losses) less capital gains tax of $...

So it actually seems like "net" does not mean net of taxes because they still have to subtract it out. Note also that on the Income Statement, it's only lines 10 and 24 where the tax is subtracted. For all other types of income, it seems that the associated taxes appear on a separate line.

I think that in the statement of this problem, where they wrote "Net Unrealized Capital Gains", they should have also added the part about "...less capital gains taxes". Then it would have been clear that taxes had already been subtracted and you wouldn't have had to subtract 0.35x100.

emelndalgic

Thank you for answering so many questions