FFA and Estate on a balance sheet

[Jimmy white]

Can somebody please explain the difference between the fund for future appropriations and the inherited estate, and how they fit in (if at all) with the assets and liabilities in a Peak 2 valuation?

From the descriptions of both the FFA and the estate, I can't seem to distinguish between how the two are valued, they seem like the same thing to me!

Is the FFA simply a liability to distribute the remaining free assets between policyholders and shareholders within a WP fund, and hence offsets the estate being an asset on the other side of the balance sheet? Do they always equal each other?

Confused, please help. Thanks!

 

[margaret.emery]

The different calculations that are described in the course are designed to help us understand different issues. For example, "How can we avoid insolvency? (i.e. prudent basis)", "How much profit did we make this year, and what should appear in the accounts? (i.e. realistic)", "What is the value of a book of business if we decide to sell it? ... or buy it?".

Sometimes, the terms we use are a bit loose, and at other times have very specific meanings. I think 'Estate' is on the loose side, but 'FFA' has a specific meaning.

So, Estate usually means the the excess of the realistic value of the assets over the realistic value of the liabilities. How you measure assets and liabilities will depend on the purpose of the exercise.

FFA (Fund for Future Appropriations) has a very specific meaning, because it is used in a Profit Reporting context, on the Balance Sheet.
It sits on the Liabilities side of the Balance Sheet, which is divided into three parts, (i) Technical Provisions (PH), (ii) Shareholder Funds (SH), and (iii) FFA: Money that has not yet been allocated to PH or SH.

FFA is covered in detail in Chapter 21, and its calculation would be based on MSB (Modified Statutory Basis), which as the name suggests, is the FSA Pillar 1 Peak 2 Valuation Basis, with some modifications!

Hope this helps.