Spring 2004 Exam 7 #23

[MathGuy]

23. An insurance company is building a new corporate headquarters. Given the following investments related to the new facility, calculate the impact on statutory surplus:

Building 2,000
Land 500
Network and computer equipment 150
Desks and chairs 100
File cabinets 50
Total cost 2,800

A. 0 B. -150 C. -300 D. -500 E. -800

Now, the All10 solution says that the answer is -150, because statutory surplus is reduced by an increase in non-admitted assets (in this case, desks, chairs and file cabinets). However, they say that "Network and computer equipment" is admitted because it's treated as "operating software," which is clearly bunk because equipment in this case clearly means "hardware" not "software." As the official answer key also gives B as the correct answer, there must be an alternative (correct) explanation for why network and computer equipment is admitted. Is it considered "Electronic Data Processing Equipment (EDP)?" or perhaps something else.

Thanks.

P.S., I love the new wysiwyg editor :)

[Ike Broslofski]

Hi, I'm addressing your problem because I ALSO had an issue with this problem. They kill you on semantics. Thankfully it wasn't enough to make me prepare for 7 again!

I'm sorry this is long and I hope that it makes sense. I will not have any further info. on it because it's already left my mind.

Here was the exact question that I asked the Course 7 instructor I had (after the mult. choice answers came out):

I was wondering your opinion on something. On #23 of the multiple choice, I had narrowed my choices down to 2 answers.... -150 (the correct) and -300... of course, in 50/50 I always select wrong. I put -300. I assumed that the "Network and Computer Equipment" was NOT EDP. Do you feel there is any chance that they would accept the 2 answers if I wrote something to them to that extent? Or should I have obviously known that "Network... Equip" was EDP?

This next part is the argument I was going to use:

4th paragraph 7th Ed. (middle to bottom): "And the question of whether to capitalize or expense the cost of software is not new. The NAIC instructions for the Annual Statement now provide that computer application software may be expensed when purchased OR established as a nonadmitted asset and written off over a period of years not to exceed the software's useful life."

This part was where the instructor said I would probably not make the cut:

He stated that my quote came from a section that relate to application software.

"There are two things here that I may need to make more clear. Operating software (windows, dos) and equipment (computers, screens, cables, printers) are capitalized and set up as an asset (admissibility subject to state rules). Application software (copies of access and excel), gets no admitted asset. So for your case here to be valid, one needs to assume that the network and computer equipment is application software and not equipment and operating software - I think this will be hard to demonstrate."

GOOD LUCK AND SORRY THAT YOU HAVE TO PLAY AROUND WITH THIS SEMANTICS NONSENSE!!

[GefilteFish144]

In general, whenever you see something about EDP equipment, just assume it's admitted and don't bother with the hardware/software details. CAS loves asking this question because it is the exception to the rule that office equipment is not admitted. And be sure to know the rationale for the EDP exception -- that's been asked a lot too.