Asset Valuation Method

[Guest Texas_Acty]

Consider:

MVA=market asset value

AVA=actuarial asset value

t=0 is beginning of year 0

t=1 is beginning of year 1

A=MVA @t=1

B=MVA @t=0

C=Assets purchased during year 0 to 1

D=Assets sold during year 0 to 1

E/(E)=Appreciation/(depreciation) from 0 to 1= A-B-C+D

F/(F)=Appreciation/(depreciation) carried forward from 0 to 1

abs=absolute value operation

AVA @1 = MVA @1

+

Min{abs[(E)+(F)], Max(20% x abs[(E)+(F)], 1% x MVA @1)}

where the 80%/120% corridor around MVA applies

i.e., MVA is increased by an adjustment for net depreciation or decreased by an adjustment for net appreciation

In words, MVA is increased by the smaller of (i) 20% of the net depreciation, or (ii) 1% of the MVA @1, but the increase can be no larger than 100% of the net depreciation, with the overall result constrained by the 80/120 corridor.

Is this method reasonable under the asset valuation method regulation? Comments? Votes? Reasons?

[david rigby]

Reasonable? Probably.

Under Rev.Proc. 2000-40? I don't think it would be considered one of the pre-approved methods, but may not have difficulty being approved under Rev.Proc. 2000-41.

[Guest Texas_Acty]

Reasonable? Probably.

Under Rev.Proc. 2000-40? I don't think it would be considered one of the pre-approved methods, but may not have difficulty being approved under Rev.Proc. 2000-41.

Thanks, pax. Actually, I was expecting to hear that this method might not be reasonable.

Why? Because the method seems to create fictitious deferred losses which, when added to MVA to obtain AVA, results in AVA that consistently exceeds MVA under certain conditions that are independent of investment returns.

Example. Say that MVA is $1.0 million at t=0 and t=1, and there have been no transactions (i.e., contributions, payments, expenses, transfers, etc.) in or out. Thus, return on MVA was $0. If asset purchases were $200K and asset sales were $100K, the method produces a "loss" of $100K, despite that MVA remained unchanged by either investment returns or transactions.

Thus, if the plan consistently makes more asset purchases than sales, AVA will be consistently above MVA, at least until the pattern reverses and sales exceed purchases.

[Guest Ron Sevcik]

I would vote that this is not a reasonable asset method. My reasoning is that it appears that your method will always produce an AVA that is higher than MVA. My understanding of the reasonable asset method rules is that one of the characteristics of a reasonable method is that it does not always exceed or is not always less than the market value of assets.

[david rigby]

After re-reading (and paying attention to the absolute value function), I agree with Ron.

[Guest gdburns]

I have no expertise in this area but I always like to try and understand things.

I thought that if you wre going to limit the increase in MVA so that "the increase can be no larger than 100% of the net depreciation, with the overall result constrained by the 80/120 corridor" . Have you not created a smoothing period and a need for a smoothing factor?

Also, Would MVA=AVA in year 1 in real life? If not then it seems that to use that as the base which would make the whole thing unreasonable.