ASC 944 is generally silent on the assuming entity accounting for retroactive reinsurance contracts. In practice, the assuming entity typically records an unpaid claim liability at inception of a retroactive reinsurance contract using its own assumptions and estimates. Any difference between that liability and the fair value of the consideration received often represents, at least in part, a financing element resulting from recording claim reserves at gross rather than discounted amounts. This financing element is deferred (i.e., a deferred charge asset or a deferred gain liability) and amortized over the loss settlement period using a method that is consistent with the recognition of interest on other financial instruments. That method should reflect the actuarial projection of the claim settlement pattern associated with the claim liability.

If the consideration received exceeds the liability assumed, some may view the difference (i.e., a deferred gain liability) to be analogous to unearned premium revenue, representing the risk margin being charged as a result of assuming the risk of adverse development, and amortized over the claim settlement period.

The deferred charge asset is subject to a recoverability test. If the deferred charge asset is deemed not to be recoverable (e.g., the actual and expected return to be earned are lower than the required return on the invested assets related to the assumed business to cover all expected claim payments over the remaining claim settlement period), an impairment charge is recorded in the income statement.

For reinsurance transactions that are determined for accounting purposes to be business combinations, specific insurance industry considerations are discussed in IG 12.3.

The accounting should reflect the terms of the contract, rather than automatically being recorded as a capital contribution. This transaction is not a “transfer” of an asset or a liability in accordance with ASC 860, Transfers and Servicing, but rather an insurance contract between related parties. Because ASC 850, Related Party Disclosures, does not require imputing arm’s length terms in related party transactions, in most circumstances the insurer should not impute a capital contribution for the difference between the liability assumed and the cash received in its separate company financial statements. Disclosure of the related party transaction and its terms should be included in the footnotes as required by ASC 850.