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Once it is determined that the contract passes significant insurance risk, the next step is to evaluate whether the contract is prospective or retroactive.
The determination of whether the contract reinsures future versus past insurable events is the key deciding factor in determining the appropriate accounting treatment. ASC 944-20-20 provides the following definitions of prospective and retroactive reinsurance.

Definitions from ASC 944-20-20

Prospective Reinsurance: Reinsurance in which an assuming entity agrees to reimburse a ceding entity for losses that may be incurred as a result of future insurable events covered under contracts subject to the reinsurance. A reinsurance contract may include both prospective and retroactive reinsurance provisions.

Retroactive Reinsurance: Reinsurance in which an assuming entity agrees to reimburse a ceding entity for liabilities incurred as a result of past insurable events covered under contracts subject to the reinsurance. A reinsurance contract may include both prospective and retroactive reinsurance provisions.

It is common industry practice to sign final contracts after the effective date of the coverage. The determination of whether past insurable events are covered should be based on the date on which there is a documented binding agreement on the significant terms of the contract, which may be different than the date the final contract is signed or the effective date specified in the contract.
Question IG 8-6 addresses the accounting for a reinsurance contract for changes occurring between the effective date and the date the contract was signed.
Question IG 8-6
A quota share reinsurance contract with a January 1, 20X6 effective date was first drafted in December 20X5 and signed on May 15, 20X6. All significant terms of the contract remained unchanged from the first draft to the final signed agreement, other than the addition of a new profit commission clause added just prior to the signing of the contract.

What is the appropriate accounting for the reinsurance contract?
PwC response
If the reinsurer is not obligated to consummate the transaction then it is not binding. The negotiation of a profit commission is a significant term of a reinsurance contract that changes the economics of the agreement between the ceding and assuming entities. For instance, the performance of the underlying policies subject to the reinsurance contract to date may have been considered in the negotiation of the profit commission. As a result, the contract should be treated as retroactive, at a minimum, for all activity occurring between the effective date and the date the contract was signed.

8.6.1 Contracts with both prospective and retroactive provisions

Reinsurance contracts may contain both prospective and retroactive provisions. ASC 944-605-25-21 requires that, if it is practicable, the insurer should separate the contract into its prospective and retroactive components and apply the requisite accounting to each component.
There is no prescribed method to allocate reinsurance premiums to the prospective and retrospective portions of the contract. If it is impracticable for the ceding insurer to determine what portion of the contract is prospective and retroactive, then the contract is required to be accounted for as a retroactive contract. In a quota share reinsurance contract (as in Question IG 8-6), the premium associated with the direct policies subject to the contract prior to the signing date could be a practical way to separate the retroactive reinsurance. The allocation becomes more difficult in reinsurance contracts with stated premium amounts as of the effective date, typical in aggregate non-proportional contracts, such as excess of loss and facultative contracts.
Question IG 8-7 addresses the accounting treatment for a reinsurance contract that covers insurance contracts with effective dates after the reinsurance contract date.
Question IG 8-7
A one-year aggregate excess of loss reinsurance contract with a January 1, 20X6 effective date was drafted, negotiated, and signed on May 15, 20X6. The underlying insurance policies subject to the excess of loss contract relate to property exposures in various global geographic locations. The premium amount in the contract is a single fixed amount.

What is the appropriate accounting for the reinsurance contract?
PwC response
As the significant terms of the contract were negotiated subsequent to the effective date of the policy, at a minimum, a portion of the contract should be accounted for as retroactive. As this is an aggregate excess of loss reinsurance contract, losses have been accumulating between the effective date and the date the contract was signed. Since the premium is a single fixed amount, it is impractical to determine the portion applicable to the prospective period. As such, the entire contract should be accounted for as retroactive.

8.6.2 Prospective reinsurance accounting for ceding entities

If the contract passes significant insurance risk and is prospective, prospective reinsurance accounting should be applied. Prospective reinsurance accounting directly offsets the underwriting results of the direct contracts covered by the reinsurance contract.
The ceding entity will generally record the full premium as a prepaid reinsurance premium (often reported as ceded unearned premium reserve (ceded UPR)) and expense the amount over the contract period or the term of the reinsured policies, assuming the full premium associated with the contract is non-cancellable. Example IG 8-4 and Example IG 8-5 illustrate the accounting by the ceding entity, depending on the type of reinsurance contract.
Example IG 8-4 illustrates the accounting for ceded premium associated with an excess of loss reinsurance contract and Example IG 8-5 shows the accounting for ceded premium associated with a quota share reinsurance contract.
EXAMPLE IG 8-4
Accounting for ceded premium associated with an excess of loss reinsurance contract
Ceding Company entered into a one-year excess of loss contract with Assuming Company covering catastrophic wind loss exposure emanating from its in force US property division. The contract passes the risk transfer criteria, and was finalized and signed the same day as its effective date of January 1, 20X6. The premium is $1.2 million payable at inception. During the exposure period, no losses occurred in excess of the attachment point of the reinsurance contract. The contract is non-cancellable.
How should Ceding Company record the contract at inception, as well as in its March 31, 20X6 quarterly financial statements?
Analysis
At inception, Ceding Company would record the following journal entry.
Dr. Ceded UPR (prepaid reinsurance asset)
$1,200,000
Cr. Cash
$1,200,000
The premium associated with non-proportional reinsurance contracts should be recognized over the contract period. The pattern of recognition of ceded UPR should match Ceded Company’s policy for recognition of covered direct earned premium, in this case, assumed to be straight line.
As of March 31, 20X6, Ceding Company would record the following journal entry to reflect one quarter of amortization.
Dr. Change in ceded UPR (contra revenue)
$300,000
Cr. Ceded UPR
$300,000
EXAMPLE IG 8-5
Accounting for ceded premium associated with a quota share reinsurance contract
Ceding Company entered into a one year 40% quota share contract with Assuming Company reinsuring all personal auto policies underwritten. The contract passes the risk transfer criteria, and was finalized and signed the same day as its effective date of May 1, 20X6. The direct auto policies’ premium underwritten during May and June were $800k and $600k, respectively. As these policies have effective dates distributed evenly throughout the year, the Ceding Company assumed a mid-month convention in reporting ceded UPR. Ceding Company remits cash to Assuming Company each month.
How should Ceding Company record the ceded premium of the reinsurance contract?
Analysis
As of May 31, Ceding Company would record the following journal entries.
Dr. Ceded UPR ($800,000 × 40%)
$320,000
Cr. Cash
$320,000
Dr. Ceded earned premium (contra revenue)
($320,000 ÷ 12) ÷ 2 (mid-month convention)
$13,000
Cr. Ceded UPR
$13,000
In June, Ceded Company would record Ceded UPR of $240 ($600 × 40%) and $37 of Ceded earned premium, calculated as $27k for May ($320 ÷ 12) and $10k for June (($240 ÷ 12) ÷ 2).
Although not reflected in this example, losses associated with the underlying policies would be ceded to Assuming Company at the 40% participation percentage. For example, if $10k of claims expense was recorded relating to the underlying auto policies subject to the reinsurance contract, Ceding Company would record a reinsurance recoverable of $4k, partially offsetting the $10k claims expense in the income statement.

8.6.2.1 Minimum premiums/installments – short-duration reinsurance

Often, reinsurance contracts contain provisions whereby the annual premium amount is estimated at contract inception, but will ultimately vary based on exposure or loss experience. See IG 8.8 for contracts with ceded premium adjusted based on loss experience.
Contracts with exposure-based premium adjustments will typically adjust the premium amount based on the amount of premium related to the underlying policies (subject base premium) that subsequently attach to the reinsurance contract. At inception, the estimated premium amount will be based on the ceding entity’s estimated direct policy premium. However, these contracts typically have a minimum premium, so that even if no policies are underwritten that attach to the reinsurance contract, the ceded premium would not adjust below the stated minimum premium amount.
For these types of contracts, the ceding entity should record the full estimated premium at contract inception. As the underwriting year progresses, the ceding entity should monitor the subject base premium associated with the reinsurance contract, and adjust the ceded premium upward or downward (but not below the minimum premium), pursuant to the contract.
In addition, these contracts may contain quarterly installment payments, either corresponding to the estimated premium or minimum premium amounts. It would not be appropriate to simply record the quarterly payments as ceded premium earned each quarter, with no corresponding unearned, if the contract was not cancellable. Ceded premium recognition should not be based on premium payment schedules, but on estimated premium amounts.
If rather than entering into a reinsurance contract with an annual term, an insurance entity entered into a multi-year short duration reinsurance contract whereby there is a stated premium, payable in equal annual installments, no minimum premium and cancellable by either party, there would be a basis for only recording the ceded premium each year.
Question IG 8-8 addresses the recognition of ceded premium for a contract with a payment schedule determined based on the minimum premium amount.
Question IG 8-8
Ceding Company entered into a one-year aggregate excess of loss contract on January 1, 20X6. Ceding Company reinsures its US homeowners’ insurance portfolio written in January 20X6 with a contract that was negotiated and effective on January 1, 20X6. The contract passes the risk transfer criteria.

The contract has an estimated premium of $1.2 million and a minimum premium of $1 million. The contract states that Ceding Company will pay Assuming Company quarterly premium based on the minimum premium, and the final true-up of premium will be settled in the first quarter of 20X7 based on final expected exposure.

How should Ceding Company recognize ceded premium during 20X6?
PwC response
Ceding Company should record the full estimated premium of $1.2 million on Day 1 as ceded unearned premium and recognize expense (contra revenue) ratably throughout the year. Even though a payment schedule has been determined based on the minimum premium amount, the year’s expense should be based on the estimated premium in the contract of $1.2 million.

Example IG 8-6 illustrates the accounting for a reinsurance contract with a premium adjustment clause.
EXAMPLE IG 8-6
Accounting for a contract containing a premium adjustment clause
Ceding Company entered into a one-year, non-cancellable aggregate excess of loss contract on January 1, 20X6 with Assuming Company covering catastrophic wind loss exposure emanating from its in force US homeowners property division during calendar year 20X6. The contract passes risk transfer.
The contract has a premium adjustment clause as follows:
  • Minimum premium: $1 million
  • If the premium associated with the policies attaching to the reinsurance agreement exceed $10 million, the premium will increase by $50,000 for each additional $1 million of subject base premium in excess of $10 million.
Based on the average premium of the direct policies over the previous three years of $12.5 million, both the Ceding and Assuming Company agreed to an estimated premium of $1.1 million at contract inception. Ceding Company recorded the $1.1 million as Ceded premium at contract inception to be expensed ratably over the contract period. The contract has a funds withheld clause.
During the first six months of the year, Ceding Company’s subject base premium associated with this contract was $8 million, and the Company expects the subject base premium to continue at this pace for the duration of the year.
What entries should Ceding Company record as of June 30, 20X6?
Analysis
As of June 30, Ceding Company would record the following journal entries.
Dr. Ceded UPR (asset)
$100,000
Dr. Ceded premium earned (contra revenue)
$100,000
Cr. Funds withheld payable
$200,000
This would reflect the fact that Ceding Company is projecting $16 million of subject base premium for the full year, which based on the contract clause, would entitle the reinsurer to a total ceded premium of $1.3 million. As $1.1 million of ceded UPR was recorded as of January 1, 20X6, Ceding Company would true-up the ceded UPR to reflect the newly estimated Ceded premium amount. However, since 50% of the exposure period has elapsed, $100k of Ceded UPR was expensed immediately and the remaining $100k would be recognized ratably throughout the remainder of 20X6.
If instead, during the first six months of the year, Ceding Company’s subject base premium associated with this contract was $4 million, and the Company expected the subject base premium to continue at that pace for the duration of the year, Ceding Company would have recorded the following entry as of June 30, 20X6.
Dr. Funds withheld payable
$100,000
Cr. Ceded premium earned (contra revenue)
$50,000
Cr. Ceded UPR (asset)
$50,000
Because Ceding Company was projecting $8 million of subject base premium for the full year, the reinsurer would have been entitled to a total ceded premium of $1 million, as the subject base premium would be below the minimum. As $1.1 million was recorded as of January 1, 20X6, Ceding Company would need to true-up the ceded premium earned and remaining ceded premium UPR to reflect the new estimate.

8.6.2.2 Written premium – short-duration reinsurance

Many entities present written premium as an income statement amount used to measure sales effort in the period. As this is not GAAP earned revenue, another financial statement line item, change in unearned premium, is presented to reconcile to GAAP earned revenue. These entities also present ceded written premium and change in ceded written premium accounts that reduce a direct written premium and change in direct written premium accounts in the income statement for ceded reinsurance activity. The net impact of these amounts is $0, as the Ceded written premium expense offsets the impact of the Change in ceded UPR in the income statement, resulting in an earned premium revenue amount net of earned ceded premium.
As these amounts are non-GAAP, there is no guidance regarding their presentation. Diversity exists on the amount of future earned premium included in written premium. Many reinsurance contracts have payment clauses that allow for quarterly remittance, often allowing the ceding entity the ability to cancel. Some ceding entities have therefore established a practice of recording the quarterly installments as Ceded written premium with no Ceded UPR. Reporting entities should determine which method corresponds best with the economics and business purpose of the reinsurance contract, as well as to the exposure of the underlying direct policies, and apply the method consistently.

8.6.3 Retroactive reinsurance accounting by ceding entities

Retroactive reinsurance accounting applies when a reinsurance contract transfers significant risk and the contract premium, in part or in its entirety, relates to reinsured losses of past insurable events. Retroactive reinsurance accounting is applied to the premium relating to the past insurable events. When only part of the contract premium relates to past insurable events, the ceding entity should split the premium into retroactive and prospective components, unless impracticable. Common examples of retroactive reinsurance contracts are loss portfolio transfers and agreements that cover potential adverse development on currently carried loss reserves, known as adverse development covers or “ADCs.”
Retroactive reinsurance is accounted for as a financing of existing obligations and as a result, most cash flows associated with the contract are recognized as deposits on the balance sheet. The income statement benefits are recognized ratably over the life of the contract in contrast to matching any accounting for covered direct policies. The ceded premium and ceded benefits applicable to prospective reinsurance accounting are not presented. The accounting result is similar to accounting for a financial instrument; the economic benefit of transferring the risk of future changes in the covered insurance obligation is not recognized immediately. Subsequent changes in the covered obligation are not immediately offset in the period of the change. Any initial gains and any benefits due from a reinsurer as a result of any subsequent adverse development are deferred, and any premium payments to the reinsurer in excess of direct insurance liabilities are immediately recognized as a loss.

8.6.3.1 Payment to reinsurer exceeds retroactive reinsured liabilities

If the amounts paid to the reinsurer exceed the recorded liabilities for covered claims, ASC 944-605-25-23 requires the ceding entity to either increase the related covered claims liabilities or reduce the reinsurance recoverable (or both) at the inception of the reinsurance contract, with the offset to earnings. Determining whether the reinsurance recoverable is reduced or the ceding entity’s related claim liabilities are increased depends on the facts and circumstances. Generally, increasing the ceding entity’s liabilities would be appropriate, as the reinsurance premium is an indicator of estimated future payments on the claims. Increasing the liability reflects the expense as a claims expense in the income statement. Alternatively, the excess could solely reflect the compensation for the uncertainty of future claims development, which is not being measured in a best estimate claim liability. In this case, the receivable could be reduced, but the charge is still to earnings.

8.6.3.2 Retroactive reinsured liabilities exceed payments to reinsurer

When claims liabilities are measured on an undiscounted basis, the reinsurance premium negotiated between the parties will often reflect the present value of the expected future claim payments and will be less than the undiscounted recorded reinsured liabilities. To the extent that the reinsured liabilities are in excess of the amounts paid to the reinsurer, the ceding entity would record the excess as a deferred gain. The deferred gain would be amortized using either the interest method or the recovery method over the estimated remaining settlement period. The interest method is used when the amounts and timing of the reinsurance recoveries can be reasonably estimated. In this method, the deferred gain is amortized using the effective interest rate inherent in the amount paid to the reinsurer.
When the amount and timing of the reinsurance recoveries are uncertain, the recovery method should be used. Under the recovery method, the deferred gain is reduced based on the ratio of actual recoveries to total expected recoveries. Example IG 8-7 and Example IG 8-8 illustrate the recovery and interest methods.
Determining whether the amount and timing of reinsurance recoveries can be reasonably estimated in order to determine the amortization method requires judgment. If the future claim amounts or timing are highly unpredictable and the liability reserve estimate is based on a diverse set of scenarios with no good “baseline” emerging as having some significant likelihood of occurring, it may be difficult to demonstrate the “reasonable estimated” criteria. Alternatively, the discounting of underlying claim liabilities would be evidence that the amount and timing are reasonably estimable. Although, the reasonably estimable criteria may be met even if the claim liabilities are not discounted (see ASC 944-20-S99-1).

8.6.3.3 Retroactive reinsurance - subsequent recognition

Changes in the estimated amount of the direct reinsured liabilities are recognized immediately in the period of the change. Figure IG 8-6 summarizes the manner in which subsequent movements in the reinsured liabilities are recognized pursuant to ASC 944-605-35-12 and ASC 944-605-35-13.
Figure IG 8-6
Subsequent measurement of retroactive balances
Day 1 accounting
Subsequent liability movement
Subsequent accounting
Deferred gain
(i.e., reinsured liabilities exceed amounts paid)
Adverse development
  • Increase the reinsurance recoverable in the amount of the adverse development
  • Increase the deferred gain for the same amount
Favorable development
  • Decrease the reinsurance recoverable in the amount of the favorable development
  • Decrease the deferred gain for the same amount
  • If the decrease in the reinsurance recoverable is in excess of the deferred gain, reduce the deferred gain to zero and immediately expense any remaining amount of the decrease
Loss
(i.e., amounts paid exceed reinsured liabilities)
Adverse development
  • Increase the reinsurance recoverable in the amount of the adverse development
  • Reverse the loss initially recorded to the extent of the increase in the reinsurance recoverable
  • Once all previously recorded losses have been reversed, defer any resulting gains
Favorable development
  • Decrease the reinsurance recoverable in the amount of the favorable development
  • Record this additional loss immediately
When a deferred gain is recorded, subsequent changes to the underlying liabilities associated with the retroactive reinsurance contract (i.e., either adverse or favorable development), the amount of the deferred gain should be adjusted and a cumulative amortization adjustment recognized in the income statement. In the reporting period in which the adverse or favorable development is recognized, the deferred gain would be adjusted to reflect what the gain would have been at inception of the reinsurance contract had the reserve development been known at that time. Under both the interest and recovery methods, a recalculation of the experience to date is performed and a cumulative amortization adjustment in the income statement is recognized based on the new deferred gain balance.
The guidance does not specify a required presentation in the statement of net income of any losses or amortization of the deferred gain relating to retroactive reinsurance. In practice, we have seen cedants record day 1 losses as ceded premium or as an adjustment to losses incurred, depending on whether the corresponding entry for the loss is a decrease to the reinsurance recoverable or an increase in the direct liability. Deferred gain amortization is typically recorded in underwriting income, often as a reduction to incurred losses.
The retroactive reinsurance model may need to be applied in situations when the underlying claim liabilities and the reinsurance recoverable are discounted. In such cases, the retrospective catch up adjustment would need to be made when there is a change in the timing or amount of expected future cash flows, but also when there is a change in the discount rate used to discount the recoverable, which should mirror the underlying direct liabilities.
EXAMPLE IG 8-7
The recovery method of amortization of a deferred gain
As of December 31, 20X6, Ceding Company has an unpaid losses incurred (i.e., case and IBNR) liability of $250k. On January 1, 20X7, Ceding Company enters into a retroactive reinsurance agreement with Assuming Company. For a premium of $200k, Assuming Company agrees to indemnify Ceding Company for the unpaid incurred losses on this block of business. Ceding Company has determined that the contract passes risk transfer and therefore, qualifies for reinsurance accounting. Ceding Company is unable to reasonably estimate the timing of the recoveries on this block of business, and will therefore use the recovery method to amortize the expected gain on the transaction.
During 20X7 and 20X8, Ceding Company paid $40k and $30k, respectively, to the insureds relating to the liabilities ceded to Assuming Company. Ceding Company recognized $100k of adverse development at the end of 20X7.
What journal entries should Ceding Company record for this reinsurance contract at inception, as well as during 20X7 and 20X8?
Analysis
At the inception of the contract, Ceding Company would record the following entry ($ ‘000s):
Dr. Reinsurance recoverable
$250,000
Cr. Cash
$200,000
Cr. Deferred gain
$50,000
Ceding Company would record the following entry for the $40k of reinsurance recoveries received during 20X7.
Dr. Cash
$40,000
Cr. Reinsurance recoverable
$40,000
Dr. Deferred gain
$8,000
Cr. Underwriting gain/other income
$8,000
The amortization of the deferred gain was calculated using the recovery method. $40k losses recovered divided by total expected recovery of $250k (16%) multiplied by the deferred gain of $50k.
The adverse development at the end of 20X7 would cause the amount of deferred gain and the amortization rate to be recalculated. In December 31, 20X7, Ceding Company would record the following entry to reflect the $100k of adverse development.
Dr. Underwriting loss
$100,000
Cr. Loss reserves
$100,000
Dr. Reinsurance recoverable
$100,000
Cr. Deferred gain
$100,000
In addition, Ceding Company would record the following entry to record a cumulative adjustment on the deferred gain.
Dr. Deferred gain
$9,000
Cr. Underwriting gain /other income
$9,000
The adjustment to the deferred gain was calculated using the recovery method. $40k cumulative losses recovered divided by the new total expected recovery of $350k (11.4%) multiplied by the new deferred gain of $150k is a new total amortization of $17. As Ceding Company previously recognized $8k, the additional deferred gain amortization is $9k.
Ceding Company would record the following entry for the $30k of reinsurance recoveries received during 20X8.
Dr. Cash
$30,000
Cr. Reinsurance receivables
$30,000
Dr. Deferred gain
$13,000
Cr. Underwriting gain/other income
$13,000
The new total amortization of the deferred gain is the $70k cumulative losses recovered divided by the total expected recovery of $350k (20%) multiplied by the total deferred gain of $150k, which is a cumulative gain of $30k. As Ceding Company previously recognized $17k, the additional deferred gain amortization is $13k.
EXAMPLE IG 8-8
The interest method of amortization of a deferred gain
As of December 31, 20X6, Ceding Company has an unpaid losses incurred (i.e., case and IBNR) liability of $250k. On January 1, 20X7, Ceding Company enters into a retroactive stop loss reinsurance agreement with Assuming Company. For a premium of $200k, Assuming Company agrees to indemnify Ceding Company for the unpaid losses incurred on this block of business. Ceding Company has determined that the contract passes risk transfer and, therefore, qualifies for reinsurance accounting.
On the date of entering into the contract, Ceding Company expects to receive $50k of claim payments in each of the subsequent five years. The premium paid to Assuming Company assumes a discount factor of 7.93%. As the amounts and timing of recoveries can be reasonably estimated, the interest method will be used to amortize the deferred gain.
At the inception of the contract, Ceding Company records the same entry as that under the recovery method in Example IG 8-7.
What journal entries should Ceding Company record each year, assuming there are no changes to the timing of the claim payments?
Analysis
For the next five years, Ceding Company will amortize the deferred gain using the interest method. Amortization, assuming a 7.93% discount rate, would be as follows:
Date
Unpaid losses liability
Present value of remaining claim payments*
Unamortized deferred gain
Annual amortization
1/1/X7
$250,000
$200,000
$50,000
$0
12/31/X7
$200,000
$165,865
$34,135
$15,865
12/31/X8
$150,000
$129,018
$20,982
$13,153
12/31/X9
$100,000
$89,249
$10,751
$10,231
12/31/X0
$50,000
$46,326
$3,674
$7,077
12/31/X1
$0
$0
$0
$3,674
* Calculated by taking the present value of an annuity at the end of N years.
The journal entry to record the subsequent recovery as of December 31, 20X7 and to amortize the gain would be as follows.
Dr. Cash
$50,000
Cr. Reinsurance receivables
$50,000
Dr. Deferred gain
$15,865
Cr. Underwriting gain/other income
$15,865
An identical entry would be made each year for the remainder of the settlement period using the above amortization schedule. Changes in the estimated amount of the liabilities relating to the underlying reinsured contracts would be recognized in earnings in the period of change. When changes in the estimated amount recoverable or the timing of receipts related to that amount occur, a cumulative amortization adjustment should be recognized in earnings in the period of the change so that the deferred gain reflects the balance that would have existed had the revised estimate been available at inception, including a new implied interest rate.

Question  IG 8-9 addresses the accounting for reinsurance cash premiums received from affiliated entities in the separate financial statements of an assuming entity.
Question IG 8-9
Assuming Company enters into a loss portfolio transfer with its parent and affiliates, assuming workers’ compensation liability for several prior loss periods. The premiums paid by the parent and affiliates to Assuming Company for the policy exceed the best estimate of the ultimate liability assumed. The contract passes risk transfer and will be accounted for as retroactive.

Should the difference between the cash received and the liability assumed be accounted for in the separate financial statement of Assuming Company as a capital contribution?
PwC response
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 imputation of arms 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. Robust disclosure of the related party transaction should be included in the notes to the financial statements, as required by ASC 850.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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