reference- pg11 of ch8 (para 4 and 5) BEL =1100, RM=200 and accounting basis liab = 1000. Tax rate =20% and assets = 2000 in both the cases Then under SII, surplus = (2000-1100-200) =700 and tax = 140. But under accounting, surplus = 2000-1000=1000 and tax = 200. Therefore, prepaid tax asset = 20 (SII liab vs accounting liab) and DTA = 40 (in respect of RM) .... Am I right? OR prepaid tax asset and DTA are same and hence, DTA = 60? There are two scenarios - either BEL itself > accounting liab OR BEL+RM >accounting liab. The impact of tax treatment is different under both the cases, right? Please clarify Thanks in advance
Hi Yes the 60 difference in tax payable will be a deferred tax asset (DTA). The DTA only really applies to the capital (ie RM and SCR) because the release of this capital will increase profits and therefore tax payable in the future. However, this tax has already been paid so when the risk margin or SCR is released, the DTA is written down. Makes sense? Thanks Em
So that means there are no two scenarios? tax treatment is same under both the scenarios mentioned above?
Apologies, I was referring to ‘temporary’ differences in my previous post. The deferred tax can also apply to BEL (if these are different from the liabilities in the accounts). Please appreciate that you will not be expected to know the exact tax treatment. What is important for SA2 (with regard to deferred taxes and Solvency II) is: A deferred tax asset (DTA)/liability (DTL) will arise where there are differences in: · the SII liabilities and the tax balance sheet liabilities (ie the accounts) · and/or the SII assets and the tax balance sheet assets. And any DTA can be reduced by: LACDT = DTL before SCR shock test - DTL after SCR shock test - DTA before SCR shock test + DTA after SCR shock test. With rules around when the LACDT can be recognised. Hope this helps. Thanks Em
Hi, the notes say that : If s2 BEL > accounting Liab then we set up/recognise a DTA. I guess that if it is s2 BEL < accounting Liab we set up a DTL (right?) what about the assets ? is it : 1. S2 assets > Acc Assets -> DTL ? and 2. S2 assets < Acc Assets -> DTA ? thanks
only the DTA can be reduced ? what about DTL ? I thought LACDT it was a positive thing as it decreases the scr. but if at the same time it gives room for decreasing the DTA then the OFs are decreased. Am i missing sth ? thanks
Thanks for clarification. Also, could you please help me to understand how best estimate liability can be higher than accounting liab? I always thought no other liab calculation can be lower than BEL as it is on best estimate basis. Why would accounting liab be calculated at less prudent assumption than best estimate basis?
I agree - it seems highly unlikely that we would have accounting liabs < BEL. [I guess it could be the case if the accounting principles don't require the time value of guarantees to be included in liabilities (whereas they do have to be in the Solvency II BEL). I suppose that there might be some EU local GAAPs where it isn't required (sorry - beyond SA2 required knowledge and my own!), so unlisted companies might be in that situation - but as the tax chapters are written in relation to the UK tax environment I wouldn't get too hung up on that.] A more useful way to think about this point is to consider instead the size of the accounting liabilities (which drives profit recognition for tax purposes) relative to the size of the technical provisions (which is what effectively releases 'profit' in the Solvency II balance sheet). It could be the case that accounting liabilities are less than or greater than Solvency II technical provisions, and this is what leads to an acceleration or deferral of tax recognition between the two measures.
Hi Lindsay, thanks again for all the help with questions!... I just wanted to check something regarding DTA in the solvency II balance sheet. I understand that deferred tax must be allowed for wrt temporary differences between the accounting balance sheet and the Sol II balance sheet. But must we also allow for the DTA/DTL that also arise due to the difference between the accounting basis and the specific tax rules eg unrealised capital gains? My understanding would be that the DTA on the Solvency II balance sheet should be = 1. temporary differences in Accounting balance sheet vs Sii balance sheet + 2. Accounting basis vs specific tax rules.. Is that broadly correct?
Hi Yes, and this is what Section 3.1 is referring to. But (2) is effectively a timing issue as tax will be paid when they become realised gains (tax basis) but the unrealised capital gains will impact the taxable profit in the accounts. And so a DTL is set up in the accounts to recognise this and is amortised as the tax is actually paid.
