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ASC 944 requires that the substance, and not the form of the contract drive the accounting treatment. When significant insurance risk is transferred, reinsurance accounting is required. In contrast, contracts that do not transfer significant insurance risk that exists in direct contracts are accounted for as deposits (i.e., financing arrangements). Deposit accounting treats the contract more like a financing; cash outflows and inflows increase or decrease the balance and interest is recognized using an effective interest rate approach. Unlike reinsurance accounting, the amounts being paid or received in conjunction with the contract are not presented on the income statement. When direct contracts do not contain significant insurance risk, and are subsequently ceded, these contracts are accounted for as investment contracts.
Recognizing a contract as reinsurance will generally enable the financial statements of the ceding entity to match the recognition of benefits received for claims covered by the reinsurance with the recognition of the expense for claims under the underlying contracts both in timing and covered amount. The reinsurance contract is a contract between the reinsurer and the insurer, separate from the contract between the insurer and the policyholder. However, for income statement purposes, the benefits received are permitted to be presented as a reduction in claims expense, and premiums paid to the reinsurer are permitted to be presented as a reduction in premium revenue, with disclosure of the reinsurance amounts either parenthetically or in the notes to financial statements. On the balance sheet, the reinsurance contract is presented gross of the direct contract liabilities as a reinsurance recoverable asset.
Figure IG 9-3 compares the ceding entity accounting for when contracts transfer insurance risk (reinsurance accounting) and when sufficient insurance risk is not transferred (deposit accounting).
Figure IG 9-3
Comparison of the ceding entity accounting using reinsurance and deposit accounting models
Reinsurance accounting
Deposit accounting
Premiums paid to the reinsurer are recorded as ceded premiums (a reduction to revenue attributable to direct insurance written) over the coverage period of the reinsurance.
Net amounts paid to the reinsurer are recorded as a deposit asset with no effect on revenue.
Expected reimbursements for losses are recorded as a reduction in losses as the losses are incurred with a corresponding reinsurance recoverable asset.
Nonrefundable fees paid are recorded as expense over the period benefited, which is typically the settlement period of the deposit.
The asset is accreted using the interest method to the ultimate expected reimbursements.
Reimbursements for losses are recorded as a reduction in the deposit asset when cash is received. Any benefit to the ceding entity is recognized using the effective yield interest method over the settlement period.
Impacts premiums/surplus ratio/loss ratio (losses/premiums) 
No impact on premiums, losses incurred, or related insurance ratios.
Receivables for amounts recoverable under reinsurance contracts are considered financial assets for impairment purposes and should be assessed for credit impairment. Prior to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, a loss is recorded when a credit loss is incurred. See LI 13.1 for the applicable effective date of ASU 2016-13 and LI 7.8 for further information on the application of the current expected credit losses model to reinsurance receivables.
Assuming reinsurer accounting for deferred acquisition costs, policyholder liabilities and other related balances is the same as that of direct insurers. Reinsurance contracts sometimes specify an effective date for coverage that is prior to the date on which the agreement has been finalized. Reinsurance contracts assumed (or ceded) should be reflected in the financial statements of the reinsurer (or cedant) on the date a legally enforceable contract is finalized. Any amounts exchanged that are characterized in form as assumed (or ceded) premium or assumed (or ceded) losses for periods prior to contract finalization should be viewed as an adjustment to the consideration received or paid that would form part of the price/cost of reinsurance and would not be presented in the income statement as premiums and claims.
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