FASB 113

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  1. Reinsurance requirements
    • reinsurer assumes significant insurance risks under the reinsured portion of contract
    • it is reasonably possible that the reinsurer may realize a significant loss from transaction, unless substantially all of the insurance risk has been assumed by reinsurer
    • for short duration, it must indemnify insurer against loss or liability from insurance risk
  2. Contractual features to be reviewed
    • limiting the amount of insurance risk (experience refunds, cancellation provisions, etc)
    • delaying the timely reimbursement of claims (payment schedules, accumulating retention)
  3. Novation
    • reinsurance contract legally replacing one insurer by another
    • extinguishes the ceding enterprise’s liability and results in removal of related assets and liabilities from the financial statement
  4. Accounting for prospective reinsurance
    • assets: reinsurance receivables and ceded UEP reserve (prepaid reinsurance premium)
    • liabilities: report gross losses and gross UEP reserve
  5. Accounting for retroactive reinsurance premium
    • reported as reinsurance receivables to the extent those amounts do not exceed the recorded liabilities relating to the underlying contract
    • if liabilities exceed the amount paid, reinsurance receivables shall be increased and the resulting gain deferred
    • when practicable, prospective and retroactive provisions included within a single contract shall be accounted for separately; otherwise use retroactive guidelines
  6. Benefits of review to users of information
    • eliminate the industry practice of offsetting reinsurance and liabilities
    • requiring disclosures about the credit risk associated with reinsurance receivables
    • limiting diversity among ceding enterprises in recognizing revenues and costs
  7. Old accounting method (setoff)
    • setoff: ability to combine balance sheet assets and liabilities, showing only net amount
    • when practiced, reinsurance recoverables on unpaid losses are combined with such losses, and ceded premium is subtracted from UEP reserves (only show net liability & premium)
    • obscures risk associated with reinsurance and accelerates recognition of income
  8. Arguments for contra liability accounting
    • minimizes effect of volatile nature of reinsured risks
    • relationship between losses and reinsurance is more faithfully represented
    • Board rejected this approach; reinsurance recoverables meet qualification of asset
Card Set:
FASB 113
2014-04-12 23:57:14
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