Document ID: chunk:federal_register_of_legislation:F2023L00015:reg:21:p44
Version: federal_register_of_legislation:F2023L00015
Segment Type: reg
Provision Reference: reg 21 (pt 44/101)
Character Range: 152252–155355

entities have no reason to be risk averse.

          (d) Zero risk adjustments (and, therefore, zero changes from period to period in risk adjustments) would avoid misleading impacts on the income statement, since risk adjustments tend to create short term losses and longer-term gains as actual claims revert to the best estimate over the long term.

          (e) Zero risk adjustments would reduce report preparation costs by removing the need for management (and auditors) to determine (and assess) risk adjustments and to make disclosures about risk adjustments.

     BC124        The Boards considered the possible disadvantages of requiring public sector entities to have a zero risk adjustment.

          (a) Many public sector entities hold strong views on the need to show their users that claim liabilities carry a level of uncertainty as to timing and amount, and consistency does not necessarily lead to comparability. All entities are risk averse to varying degrees.

          (b) There would be no changes in risk adjustments to provide useful information about changes in the levels of uncertainty among cash flows over time.

          (c) There are often obstacles to exercising monopoly and other powers. For example, it might not currently be feasible to increase levies in either the short to medium term to meet shortfalls in a timely manner. The risks that exist within in-force arrangements should not be regarded as being able to be offset by possible future transactions.

          (d) It is normal commercial practice to determine risk adjustments and many public sector entities, particularly those with independent boards of management, would wish to have a risk adjustment for financial reporting purposes to match their risk management activities (and management reporting).

Approach 3: Require a particular confidence level (above 50%) for determining risk adjustments for liabilities for incurred claims for all public sector entities

     BC125        The Boards considered the possible advantages of requiring a particular confidence level (above 50%) for determining risk adjustments for liabilities for incurred claims for all public sector entities.

          (a) All public sector entities would have a consistent approach (based on a common confidence level).

          (b) A common confidence level would reduce report preparation costs by removing the need for management (and auditors) to determine (and assess) risk adjustments. In particular, this requirement would be generally consistent with prevailing current practice (which is long-standing) and be readily understood by all relevant stakeholders.

          (c) Relative to having a zero risk adjustment, the common confidence level approach would show, from period to period, the impacts of any changes in risk adjustments, which provides useful information about changing levels of uncertainty on the amount and timing of cash flows over time.

     BC126        The Boards considered the possible disadvantages of requiring a particular confidence level for liabilities for incurred claims