DAC for FAS 60 includes all expenses that vary with and are directly related to the acquistion of new and renewal contracts. These expenses are capitalized and amortized in proportion to Gross Premiums(GP).

The DAC balance as at the valuation data can be derived using the following two methods:

1)Retrospective Method:

Ending DAC Balance(EOY DAC)
= Beginning DAC Balance (BOY DAC)
+ New DAC
+DAC interest on BOY DAC and New DAC
- DAC Amortization

Mathematically,
The DAC-roll forward is as follows:
DAC(t) = (DAC(t-1)+DAE(t))*(1+i(t))- KDAC*GP(t)*(1+i(t))

Where
•Beginning DAC balance will equal the closing DAC balance from the previous reporting period.

•New DAC is the amount of new DAC created in the reporting period. This reflects the DAC created for new business written in the reporting period as well as the additional DAC created on in-force business. New DAC includes:

Commission DAC
Expense(Non Commission) DAC

•Interest on DAC - As DAC is an asset on the balance sheet of the company, it earns interest.

•DAC Amortization - This reflects the amount of DAC that is charged as an expense in the income statement in the current reporting period.
Mathematically,Amortization for period t = KDAC * Gross Premium(t)
KDAC = PV(Deferrable Acquisition Expenses)/PV(Gross premiums)
It is basically percentage of gross premiums required to provide for deferred policy acquisition costs

2)Prospective Method

DAC balance
= (DAC amortization rate
x PV of future gross premiums)
-  PV of future deferred expenses

Formula(1) is preferred as this DAC-roll forward provides more insight.

To determine if the DAC is recoverable or not, present value of the gross premiums is split as follows:
PV of gross premiums 100%
= PV of future policyholders benefits including related expenses x%
+ PV of policy maintenance expenses y%
+ PV of deferrable acquisition expenses K%
+ PV of future profits including administration expenses p%

In these projections, the locked-in best estimate assumptions including lapse rates and PADs are used.

The DAC is recoverable if the sum of the x,y and k factor is lower than 100% i.e.

if x+y+k<100%
If x+y+k>100%, a portion of the DAC or the total DAC has to be written off immediately, so that the new x+y+k factor is equal to 100%.