Discounting the cash flows

Learning objectives

• Explain that discount rates reflect the time value of money and the characteristics of the cash flows, not the return on assets held.L2
• Calculate the present value of a cash flow from a given rate and term.L3

Normative references

• IFRS 17 §36Discount rates reflect the time value of money, the characteristics of the cash flows and the liquidity characteristics of the contracts, are consistent with observable market prices for instruments with comparable cash flows, and exclude the effect of factors that influence such prices but do not affect the contracts' cash flows.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• What do the discount rates used for the cash flows of a group of insurance contracts reflect? More than one answer is possible.L2
• Rivière SA estimates at {claims_amount} the claims it will pay in two years and at {expenses_amount} the administration costs it will pay in one year, on a group of contracts. Case data: the discount rate reflecting the time value of money is {discount_rate} (management's judgement, a rate not imposed by the standard). Calculate the present value of the claims and that of the costs, one flow at a time.L3