Change In Present Value Research Articles

Does the Pension System’s Income Statement Really Matter? A Proposal for An NDC Scheme with Disability and Minimum Pension Benefits

This paper develops a full accounting model for monitoring the solvency of a notional defined contribution (NDC) pension scheme with disability and minimum pension benefits. Using the annual report of the Swedish pension system as a benchmark (TSPS, 2019), we extend the “Swedish” actuarial balance developed by Perez-Salamero et al. (2017) by adding an income statement which fully explains the reasons behind the changes in the system’s solvency by type of benefit. In line with the reference model, assets and liabilities are measured at present value at each reporting date, and changes in present value are reported in each period as income or expenses and are included on the income statement. Our proposed model is a step forward because it, also, incorporates the changes for disability pensions, the value of change in the discount rate and the explicit recognition of non-contributory rights (NCRs) into the Income statement. This accounting framework integrates both contributory and social aspects of public pensions and discloses the real cost of the disability contingency and the redistribution through minimum pensions. The paper contains a numerical example consisting of an income statement for a (fictional) already-functioning system to illustrate the main differences between the Swedish NDC scheme and our model. Mathematical details are presented in a comprehensive technical appendix.

How Correlated are Changes in Banks' Net Interest Income and in Their Present Value?

We use portfolios of passive investment strategies to replicate the interest risk of banks' banking books. The following empirical statements are derived: (i) Changes in banks' present value and in their net interest income are highly correlated, irrespective of the banks' portfolio composition. (ii) However, banks' portfolio composition has a huge impact on the ratio of changes in net interest income relative to changes in present value.

How Correlated are Changes in Banks' Net Interest Income and in Their Present Value?

We use portfolios of passive investment strategies to replicate the interest risk of banks' banking books. The following empirical statements are derived: (i) Changes in banks' present value and in their net interest income are highly correlated, irrespective of the banks' portfolio composition. (ii) However, banks' portfolio composition has a huge impact on the ratio of changes in net interest income relative to changes in present value.

Analysis of Change in Present Value Measurements

In recent years, the leading standard setters for financial reporting have shown an increasing preference for fair value measurement. However, present value is often the only acceptable method of estimating fair value and therefore the actual result of the swing to fair value is likely to be increased use of present value in financial reporting. This paper addresses the issue of interpretation of a change in present value between successive reporting dates and shows that the change can be analyzed by use of the familiar variance analysis framework widely used in management accounting.

Risk‐Adjusted Discount Rates Revisited

AbstractThis paper shows that small changes in even slightly negative discount rates can cause substantial changes in present value. Small changes in the discount rate, which may seem appropriate, turn out to have huge effects on present value and are not economically justified. This paper also points out problems associated with large negative discount rates. It is shown that the present value can become discontinuous as the discount rate is lowered and that the present value of the risky cash outflows becomes erratic depending on whether the outflow is discounted an even or odd number of periods.

The Economic Impact of Individual Fires on the Whole Forest

A method is presented whereby the economic impact of a forest fire can be calculated, not just on the burned stand alone, but on the entire area under management. The main question is whether, when the burned area would have been ready for harvesting, another area will be substituted in its place. If so, then the economic impact is diffused throughout all stands younger or less desirable than the burned one, and the present value of the burned stand only may not be a fair measure of loss. The true loss would be, instead, the change in present value of the whole forest as a result of the fire. Some examples are given, and the effects of varying the rates of interest and forest growth are illustrated.