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2019 Question 4 (a) and (b)

Discussion in 'SP2' started by Helloall, Jun 27, 2022.

  1. Helloall

    Helloall Very Active Member

    I don't seem to quite understand this sentence in the past paper solution or Acted solution.

    "The expense assumptions should allow for the costs of the old offices up to the relocation date and thereafter the cost of the new offices"

    Why would the expense assumptions only allow for the costs of the new offices from the relocation date onward? The building has been purchased pre-relocation.

    Assuming no one is working in this new building, this represents an expense to the company. An expense we need to cover in some way. I would have imagined that after we purchased this building we would have wanted to spread the cost of our new office rent over all of our policies in some way (obviously not in the standard floor space way but perhaps by number of policies).

    Then when we relocate office we would then remove our old building cost assumptions and then add in our new building cost assumptions using the floor space approach. We would then allocate some new expense assumptions for our old office building (for the unused floor space, perhaps again split over all policies).

    When we stop paying the old building notional rent, we would then remove all expenses in relation to this building from our assumptions.

    I would argue the same for the introduction of the new computer system -

    "The renewal expenses would need to allow for the existing computer costs up to the migration date and then for the new system costs post migration."
     
    Helloall, Jun 27, 2022
    #1
  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    To (hopefully!) reassure : your understanding of how the company could (potentially with more sophistication and accuracy) allow for these in its expense allocations seems fine to me.

    Of course I can't speak for the examiners, but when I look at the solutions I'm struck partly by the range of different issues covered (each fairly briefly), eg the different sub divisions of the expense items. So, I think an answer that covers a range of different ideas, rather than lots of details on a single issue is ideal.

    About the specific issue you raise of having periods of 'two sets' of expenses rather than assuming a single 'switch over' date, I'd hope that would be equally acceptable to the single switching date the solution implies. Keeping in mind that expense allocations typically involve some degree of approximation, maybe the solution is assuming the overlap is short enough that it can be ignored (or can be treated as part of the 'relocation costs' that the solution also says should be included).
     
    Lynn Birchall, Jul 1, 2022
    #2

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