statement is known as amortization and refers to the DAC asset being amortized, or reduced over a number of years. The amortization requires an amortization basis that determines how much DAC should be turned into an expense in each accounting period. The amortization basis varies by FAS classification: FAS 60/97LP – Premiums FAS 97 – Estimated gross profits (EGP) FAS 120 – Estimated gross margins (EGM) Under FAS 60, assumptions are "locked in" at policy issue and cannot be changed. However, under FAS 97 and 120, assumptions are based on estimates that require adjusting DAC as needed. In addition, DAC amortization uses estimated gross margins as a basis and an interest rate is applied to the DAC based on investment returns. The rate at which one amortizes the DAC is referred to the k-factor. A write-off of DAC or amortization of DAC may be caused by dynamical unlocking or true up. The replacement of assumptions by experience for the projections of future years is called "dynamical unlocking". The replacement of assumed values by realized values of the past year is called "true up process". Shadow DAC includes unrealized gains as required for balance sheet reporting. In other words Shadow DAC is applied to reduce or increase the amortization of the DAC taking into consideration the unrealized gains and losses. Regular DAC amortization affects the income statement and does not take unrealized gains into account. In other words, regular DAC amortization takes into account any realized gains and losses in order to smooth out earnings. In case of a large loss regular DAC amortization can be applied to "defer" the acquisition costs to future periods thereby reducing the expenses and increasing yield for the specific period. The DAC amortization will thus increase in future reporting periods. K-factor Also referred to as KDAC, the K-factor is basically the percentage of gross profits required to provide for deferred policy acquisition costs. KDAC is DAC amortization rate = [present value of DAE + accumulated value of DAC]/[present value of estimated gross profits (EGPs) + accumulated value of actual gross profits (AGPs)] The K-factor can change from year to year due to: The true-up process (replacement of expected values by realized values, i.e. actual historical gross profits (AGP) replace prior EGPs) The dynamical unlocking (replacement of assumptions by experience for the projections of future years) The DAC is recoverable if the K-factor is less than