ACE (Seminar book) Page 75

[stillH2O]

Sorry, another question that needs clarification ( I thought I understood the concept, but this is worrying).

Old reserve method: Reserve increase from 5 to 20
New reserve method: reserve increase from 10 to 40

Why is the additional 20 ( =40-20) only reflected in the capital and surplus account? Why does it not reflect in the stat income statement, since it will affect the taxable income?:-? :-?

Can anyone please help to explain to me? Thanks.

[phdmom]

I'll qualify my answer by saying I don't have this manual & so don't know the problem, but a stat reserve increase caused by a change in reserve method does not flow through the stat income statement.

In practice, a change in stat reserve methodology does not always (or that I have seen, ever) mean a change in tax reserve methodology. So taxable income is not affected.

[UWWF]

Which study note are these questions from?

[ShellBelle]

I have a question on this same problem. What happens on the year 3 income statement and to the capital and surplus account regarding the reserves? Is the increase in reserves on the income statement equal to 20 (since the year 2 reserve is 40 and year is 60 after the methodology change) OR is the increase equal to 10 with another corresponding entry of to the capital and surplus account?

Seeing that they gave us 3 years worth of data, I'm not sure why they didn't do out all three years.

I definetely appreciate any help on this.

[stillH2O]

I'll qualify my answer by saying I don't have this manual & so don't know the problem, but a stat reserve increase caused by a change in reserve method does not flow through the stat income statement.

In practice, a change in stat reserve methodology does not always (or that I have seen, ever) mean a change in tax reserve methodology. So taxable income is not affected.

PHDMOM, you are right. I just checked Chapter 6 ( Valuation Text), Change in reserve due to valuation basis is directly input into Capital and Surplus account.
Does anyone know the answer to ShellBelle's question? I wanted to ask during the ACE seminar, but forgot to.

[phdmom]

I have a question on this same problem. What happens on the year 3 income statement and to the capital and surplus account regarding the reserves? Is the increase in reserves on the income statement equal to 20 (since the year 2 reserve is 40 and year is 60 after the methodology change) OR is the increase equal to 10 with another corresponding entry of to the capital and surplus account?

Seeing that they gave us 3 years worth of data, I'm not sure why they didn't do out all three years.

I definetely appreciate any help on this.

I don't have the question, so I apologize if I'm misinterpreting what you're asking, but if the setup is that the reserve method change was in year 2, then in year 3 the reserves (under the new method) increased by 20, that increase would go through the income statement and none would go to the capital and surplus account.

Basically anything shown on Exhibit 5A is subtracted from the change in reserve line on the income statement and shown as a charge to the capital and surplus account. But Exhibit 5A only shows reserve increases due to changes in method in the current year.

[stillH2O]

I have a question on this same problem. What happens on the year 3 income statement and to the capital and surplus account regarding the reserves? Is the increase in reserves on the income statement equal to 20 (since the year 2 reserve is 40 and year is 60 after the methodology change) OR is the increase equal to 10 with another corresponding entry of to the capital and surplus account?

Seeing that they gave us 3 years worth of data, I'm not sure why they didn't do out all three years.

I definetely appreciate any help on this.


I have checked with my colleague who does alot of Financial Reporting. For 3 year, the increase in reserve ( reserve at year 3 with new method- reserve at year 2 with new method, ie 60-40) will be 20 in the income statement. There should not be any entry to the capital and surplus account in the 3rd year for valuation basis change ( since there is no change). Hope this helps!

[ShellBelle]

Thanks for the help!

[Blur~~]

I am wondering how do you see the changes in the Income statement and capital or surplus account for the 807(f) change in basis ?

The example in the ACE manual pg 97 of the SN has reserve deduction of 20 and income change of 10. This is similar to the ACE sminar pg 75, but the term they use "reserve deduction" of 20 actually means change in valuation in reserve in the capital and surplus right? Income chnage (made over 10years) should be going through income statement right? But why does it says made over 10years?

Can anyone shade some lights on the Reserves change dues to error, change in facts and change in accounting method? How does these changes go through the capital surplus account and income statement?

Thanks for the help!

[phdmom]

I am wondering how do you see the changes in the Income statement and capital or surplus account for the 807(f) change in basis ?

The example in the ACE manual pg 97 of the SN has reserve deduction of 20 and income change of 10. This is similar to the ACE sminar pg 75, but the term they use "reserve deduction" of 20 actually means change in valuation in reserve in the capital and surplus right? Income chnage (made over 10years) should be going through income statement right? But why does it says made over 10years?

Can anyone shade some lights on the Reserves change dues to error, change in facts and change in accounting method? How does these changes go through the capital surplus account and income statement?

Thanks for the help!


The 807(f) change in basis only applies to a change in tax reserve basis. The other changes you mention (changes due to error, change in facts, and change in accounting method) also only apply to tax reserves.

Reserve differences due to a change in stat reserve basis would not flow through the income statement but would go directly to surplus. A change in stat reserve basis does not necessarily imply a change in tax reserve basis.

Similarly, if the tax basis was changed but the stat basis was not changed, nothing would happen to the income statement/surplus account, only the tax statement would be affected.

The part about the reserve change being recognized over 10 years applies to the tax statement only.

I don't have the manual so don't know the specifics about the question you referred to.

[Blur~~]

The question on the manual is
Date old method new method
1/1/1999 400 395
12/31/1999 420 410

Assume that existing business from prior years and 98 tax return can't be changed.

807(f)Change in basis
reserve reduction =420-400=20 (should this go through tax income statement 1999?)
income change (made over 10years) 420-410=10, (so the $1 go through capital and surplus account? )