GAAP Treatment of Discounting Loss Reserves
Going through past exam questions, I am confused as to how GAAP handles the discounting of reserves.
2019 Spring #17 lists "GAAP: discounts reserve" as an answer worth full credit of .5 points
2014 Fall #19 lists "With the exception of fixed and reasonably determinable payments such as those emanating from workers’ compensation tabular indemnity reserves and long-term disability claims, property and casualty loss reserves shall not be discounted" as an answer worth full credit of .5 points. Additionally, under common mistakes, it says: "Loss reserve discounting: stating that GAAP simply allows discounting with no limitations."
These seem directly contradictory. One states it is allowed, one states that it is not allowed with an exception. Which is correct?
Comments
I don't think there's a contradiction. Examiner says stating that GAAP allows all kinds of discounting with no limitations is a mistake. Examiner gives disallowance of discounting except for tabular discounting as a correct answer. These two statements follow logically.
I agree that logically it follows but it is nevertheless confusing and I'm trying to figure out how much to memorize to get full credit on the test, since that sentence from the 2014 Fall exam will be difficult to memorize all of.
On 2019 Spring #17, the following were accepted answers:
However, SAP does allow discounting in some scenarios, according to the examiner report on the fall 2014 test. Additionally, it says for GAAP it is "permissible to apply the same discount calculated under SAP". But according to an acceptable answer on 2019 Spring, SAP does not allow discounting for loss reserves.
I guess what I'm trying to boil everything down to, is what should I memorize for the exam? On my flash cards I have been memorizing the two bullet points from above, but now I'm wondering if that is not sufficient.
Discounting is allowed under both SAP and GAAP. The linked wiki note, and the full BattleQuiz question 17's answer, gives the discounting rates allowed under either system.
[https://battleacts6us.ca/wiki6us/Odomirok.22-23-GAAP#:~:text=Discounting loss reserves (no,SAP%20rate%20or%20reasonable%20alternative](https://www.battleacts6us.ca/wiki6us/Odomirok.22-23-GAAP#:~:text=Discounting loss reserves (no,SAP%20rate%20or%20reasonable%20alternative "https://battleacts6us.ca/wiki6us/Odomirok.22-23-GAAP#:~:text=Discounting loss reserves (no,SAP%20rate%20or%20reasonable%20alternative")
The statement in 2019.S.17 sample answer, that SAP does not allow discounting, is wrong.
Trying the link again:
[https://battleacts6us.ca/wiki6us/Odomirok.22-23-GAAP#:~:text=Discounting loss reserves (no,SAP%20rate%20or%20reasonable%20alternative](https://www.battleacts6us.ca/wiki6us/Odomirok.22-23-GAAP#:~:text=Discounting loss reserves (no,SAP%20rate%20or%20reasonable%20alternative "https://battleacts6us.ca/wiki6us/Odomirok.22-23-GAAP#:~:text=Discounting loss reserves (no,SAP%20rate%20or%20reasonable%20alternative")
Sorry, direct linking to the wiki note doesn't seem to work. It's in the second table of the article, under 2014.Fall #19.
Going back to 2019 Spring #17, since one answer says "GAAP: Discounting of Loss Reserves is common", would this contradict the BattleAct notes of "no discounting except in certain cases"? Or would it mean the certain cases are common for GAAP?
Overall, should I assume GAAP uses discounting generally?
Here is Odomirok's treatment of reserve discounting in GAAP:
For U.S. GAAP, ASC 944-40-S30-1 refers to an SEC staff bulletin that indicates it is
permissible to apply the same discount calculated under SAP for U.S. GAAP purposes. It also indicates that an alternative discount rate could be used as long as the alternative rate “is reasonable on the facts and circumstances applicable to the registrant at the time the claims are settled.” This SEC staff bulletin was prepared in response to an inquiry from a registrant asking if it was permissible to discount for U.S. GAAP purposes based on the company’s historical investment yield.
Odomirok's treatment of reserve discounting in SAP was analyzed in this thread:
https://battleacts6us.ca/vanillaforum6us/discussion/605/statutory-loss-reserves-are-booked-at-their-nominal-undiscounted-value#latest
From these, one may conclude that reserve discounting is done in specific cases, in both SAP and GAAP.
Thank you.
Could it be interpreted (including info from the answer key) that GAAP is generally discounted as long as it is discounted either using SAP or an alternative rate that fits the SEC's criteria, while for SAP, it's not generally done except on select certain cases?
I am able to speak to it only with respect to the text. I read the text above as saying that GAAP will discount under the same conditions as SAP. And the thread above deals with how SAP discounts only under special cases. This is congruent with what is in the wiki. The exam problem may have been made before this text was introduced.