Embedded value

Abstract: This paper reviews the principal candidates for bases of measurement in financial reporting - historical cost, value to the business (also known as deprival value or current cost), fair value, realisable value, and value in use - explains how they work, and discusses their advantages and disadvantages.

Abstract: The informational content and relevance to external stakeholders of voluntary financial disclosures by commercial banks is now becoming more widely recognized. For instance, banks voluntary disclosures of liquidity, interest rate and market risk metrics have been found to be closely associated with market value of equity and credit ratings. So far, there has been very scarce published research on investigating the informational content and relevance to external stakeholders of voluntary financial disclosures by life insurance companies during the recent period of market turmoil. In order to improve upon this situation, this paper updates previous findings and reports on the informational content of voluntary embedded value (EV) financial disclosures by Canadian life insurance companies during the 2000-2010 time period. As opposed to traditional statutory balance sheet and earnings reporting, EV voluntary disclosure attempts to estimate the present value of future earnings generated by a life insurers current book of various insurance businesses. The preliminary results presented in this study indicate that recent EV voluntary financial disclosures failed to communicate intrinsic informational content and to provide value relevance to external stakeholders in the sense that they were not found to be closely associated with life insurers market value of equity and credit ratings during the recent 2007-2010 period of market turmoil.

Abstract: This paper will focus on the relationship between mortgages and income developments in the U.S. Individual household’s asset values and liabilities obligations are often combined; for instance in home mortgages. The two main sources of savings, built up over a lifetime, are pension savings and the net worth embedded in one’s own home. Pension savings are normally deducted from annual income levels and transferred to specialist collective pension funds or insurance companies; an instant cash transfer. Mortgage borrowings are different in that future income levels are committed in meeting the payment obligations. The U.S. financial crisis of 2007-2008 was a home mortgage crisis. From 2004, some irresponsible lenders enticed many buyers to acquire homes in the U.S., of which a number of homes were bought for speculative reasons. In the U.K., the main reason of increasing house prices, above average income growth levels, is that house-building levels have lagged behind population growth levels for at least the last ten years. About only 160,000 homes were built per annum, while the population growth required between 230,000 and 300,000 homes annually. In the U.S., during the period 2004-2008, the financial sector made a huge collective mistake in assessing what was the appropriate individual mortgage level. The buyers over this period -many of them lower income households- were confronted with large numbers of repossessions after 2008. Heavy job losses occurred. Where economic theories seem to fail is when liabilities, like a home mortgage, can at the same time represent an asset with an embedded value in a home. Many households in both the U.S. and the U.K. were and are “displaced”, either by repossessions or by the inability to purchase a home. There exists, as yet, no government institution in either country that is able to replace bank funding, when income levels drop in a recession. High unemployment and falling wage levels reflect recessions. The key is to stabilize mortgage expenditure levels as a percentage of incomes over long periods of time. Banks cannot operate such products; only a government institution can do so. Why and how such a system can work in the U.S. is explained in this paper.