Expense analysis

[k6ashok]

It is mentioned that notional rent to be charged for self occupied properties which forms part of the long term fund. I would like to know whether this is done for the purpose of expense allocation only or is absorbed as such in accounts.

If absorbed, should we not include the notional rental income as income for consistency.

If not absorbed, will there not be a difference between the total actual expense incurred and total expense allocated.

 

[Charlie]

I assume that there will be consistency within the P&L account (or whatever it's called these days!), so it will be included as an expense. And it'll appear as a fixed asset in the balance sheet (or as an asset backing the reserves if it's part of the policyholder fund).

 

[k6ashok]

i am sorry. can u elaborate further. i don't understand.

 

[Charlie]

I'm not sure I understand what you mean by absorbed and non absorbed, but this is how I see it ...

I don't think there should be an allowance for notional rental income and I don't think this will lead to an inconsistency.

We have a long-term fund. We can use this to buy assets. Let's say we have two choices:

(1) we can use it to buy equities, on which we earn dividends

(2) we can use it to buy an office, which we will then occupy.

In Scenario 1, we will earn an income, but we will have to pay (actual) rent on the office that we have to rent (because we don't own one). These should (more-or-less) offset each other.

In Scenario 2, we will not earn an income and we will not pay an actual rent.

So the P&L will be similar under each scenario.

I think the P&L should include actual expenses and actual income (so no notional stuff).

 

[k6ashok]

Thanks.