Comments on ‘Earned profit method’, ‘Indexed discount rate method’ and ‘Is Paul vs. Virginia dead?’
Michael McLaughlin presented the case for the indexed discount rate method for fair valuation of liabilities using realistic assumptions as to future experience. McLaughlin states that multiple realistic scenarios covering the range of feasible options should be observed. The projected cash flows for each scenario are discounted at the Treasury spot rate appropriate for the duration of the cash flow. McLaughlin argues that no adjustment should be added to the Treasury rate because it would inappropriately overcount risk and optimistically reduce fair value of liabilities. In essence, McLaughlin shifts the complications imputed in the discount rate decision to the estimation of the cash flow.