Minimum profit is calculated similarly to the trading profit formula in ch6. Ch7 core reading says that minimum profit is the accounting profit (including dividends), after a (1) deduction for policyholder bonuses and (2) adjustment for current and deferred tax on policher I-E items. I'm trying to understand the differences between the two: Are expenses still the full expenses (no spread of acquisition costs)? Ch6 formula defines benefit payments as including terminal bonus. Given (1) above, are terminal bonuses excluded in the minimum profit calculation? What does (1) refer to otherwise? What does (2) mean? Also in either case (trading profit and minimum profit), are the reserves in the calculation SI reserves (given that trading profit is from the statutory accounts)?
Your last question was asked before on the forum and it was confirmed that the profits would be based on the accounting profit from statutory accounts with the reserves being calculated based on SI rules i.e. UK GAAP. The core reading discusses "weakening of the valuation basis" in these chapters which can only be done in SI.
Thanks Viki! To pick up on the first questions, the idea of the adjustments to the minimum profit calculation is to leave only that part of trading profit that relates to the shareholder share. (1) refers to being able to deduct increases in provisions for future policyholder bonus (to the extent that these have not already been allowed for via the change of reserves within the profit calculation) and (2) refers to making an adjustment in relation to the policyholder share of "I-E" tax (noting that the starting point for the trading profit calculation is the pre-tax profit). What is left is thus the (pre-tax) shareholder share of trading profit. Expenses will be as brought through into the accounts. The "spreading" of acquisition costs is allowed for via the change in DAC asset.
Thanks Lindsay and Viki! Sorry, Lindsay - I'm a little bit unclear on this. We need minimum profit (pre-tax profit) to calculate the policyholder share of I-E tax so this seems circular...I feel like I'm missing something?
Yes, you are right - there are complications here in practice. There are more detailed tax rules that work through how this adjustment should be done, but this is well beyond what is required for SA2 (done by tax experts rather than actuaries). You just need to be aware that the aim is to obtain a "shareholder profit" figure as the starting point and that there are some adjustments that have to be made to trading profits in order for that to be the case. What is more important for SA2 is (for a proprietary company) to understand the relevance of the minimum profit in determining the overall amount of tax payable, how this taxable amount is then split between shareholder and policyholder parts, and the concept of carrying forward XSE.
