In many reinsurance transactions, the ceding company will pay the reinsurer a reinsurance premium for reinsurance coverage and receive a ceding commission from the reinsurer. The ceding commission represents the results of a negotiation for reimbursement to the cedant for both direct and indirect acquisition costs as well as other expenses and any transfer of profit in the premiums. ASC 944-30-35-64 addresses the ceding company’s accounting for these proceeds.

Consistent with the guidance in ASC 944-30-35-64, the ceding allowance DAC offset is limited to the amount that represents recovery of acquisition costs deferred by the cedant. Any remaining amount (i.e., the portion of ceding commission above the amount representing recovery of DAC) should be deferred and amortized rather than recognized in income immediately. The net DAC balance is subject to the simplified DAC amortization model.

For long-duration contracts, the remaining amount should be included as a component of the cost of reinsurance. For short-duration contracts, we believe it would be appropriate to record any remaining commission (i.e., the "excess ceding commission") as an adjustment to unearned ceded premium. The rationale for this view is that reinsurance guidance explicitly acknowledges only two captions for recognition of consideration between the ceding company and the reinsurer: reduction in DAC and unearned ceded premium. However, due to the lack of specific guidance on this issue, we are aware of diversity in practice with regard to balance sheet and income statement classifications for this deferred amount and its subsequent amortization. For example, the SEC staff has accepted the amortization of excess ceding commission as ceding commission income or as a reduction to other underwriting expenses.