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American Institute of Certified Publicd Accountants. Reinsurance Auditing and Accounting Task Force

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University of MississippieGroveGuides, Handbooks and Manuals American Institute of Certified Public Accountants(AICPA) Historical Collection1-1-1985Accounting for loss portfolio transfers that arefinancing arrangements.American Institute of Certified Publicd Accountants. Reinsurance Auditing and Accounting Task ForceFollow this and additional works at: https://egrove.olemiss.edu/aicpa_guidesPart of the Accounting Commons, and the Taxation CommonsThis Book is brought to you for free and open access by the American Institute of Certified Public Accountants (AICPA) Historical Collection ateGrove. It has been accepted for inclusion in Guides, Handbooks and Manuals by an authorized administrator of eGrove. For more information, pleasecontact egrove@olemiss.edu.Recommended CitationAmerican Institute of Certified Publicd Accountants. Reinsurance Auditing and Accounting Task Force, "Accounting for loss portfoliotransfers that are financing arrangements." (1985). Guides, Handbooks and Manuals. 365.https://egrove.olemiss.edu/aicpa_guides/365AICPA.Auditing Standards Division. Reinsurance TaskForce.Accounting for loss portfolio transfers that are financing arrangements.1985. cop. 3CPA American Institute of Certified Public Accountants1211 Avenue of the Americas, New York, NY 10036-8775 (212) 575-6200 Telex: 70-3396January 16, 1985J.T. Ball, CPAFinancial Accounting Standards BoardHigh Ridge Park P. O. Box 3821 Stamford, CT 06905-0821Dear J.T.:Attached is proposed guidance on accounting for loss portfolio transfers that are financing arrangements. The guidance was prepared by the Reinsurance Auditing and Accounting Task Force of the AICPA Insurance Companies Committee, and it has been approved by the Accounting Standards Executive Committee for submission to the FASB for its consideration.The proposed guidance describes loss portfolio transfers, provides certain conditions which, if not met, should cause the transaction to be considered a financing arrangement, and describes the accounting by ceding and assuming companies for financing arrangements.The proposed guidance was developed as part of a broader project to consider accounting and reporting issues for reinsurance transactions. Those issues include, among others, the transfer of risk and gain and loss recognition under reinsurance trans­actions. Because loss portfolio transfers have recently become more common, and because concern has been expressed about current accounting practices for loss portfolio transfers that, in substance, are financing arrangements, we believe that guidance on this particular issue is needed at this time. The guidance addresses only accounting for financing arrangements. The task force and the Insurance Companies Committee will continue their project to develop guidance on accounting for reinsurance.The proposed guidance is based on paragraph 40 of FASB Statement No. 60, "Accounting and Reporting by Insurance Enterprises." However, because the proposed guidance is more specific than the830450J.T. Ball, CPA January 16, 1985 Page 2existing standard, AcSEC recommends that guidance on this issue by the FASB be effective for transactions entered after December 31, 1984.Representatives of the Accounting Standards Division or of the Insurance Companies Committee will be happy to assist the Board or its staff with this matter at your convenience.Sincerely,Roger Cason, CPA ChairmanAccounting Standards Executive CommitteeRC:r jAttachmentcc; Accounting Standards Executive Committee Task Force on Reinsurance Auditing andAccounting (3164)ACCOUNTING FOR LOSS PORTFOLIO TRANSFERS THAT ARE FINANCING ARRANGEMENTSConcern has been expressed relating to certain loss portfolio transfer agreements being entered into by some insurers. These are agreements whereby, under their present accounting practices, insurers (ceding companies) have recognized current gains as the result of payment to other insurers (assuming companies) for undertaking loss obligations already incurred in excess of the consideration paid. The characteristics of many of these agreements are such that, in substance, they are not reinsurance, but rather are financing arrangements (for example, the arrange­ments are such that the present value of the consideration paid by the ceding company and the present value of the scheduled reimbursement under the agreement, at current interest rates, are substantially equivalent). Such agreements should be considered financing arrangements unless they meet all of the following conditions:a. The agreement should provide for the assuming com­pany to reimburse the ceding company currently on payment of covered losses by the ceding company; such reimbursement should be made at least annually. The agreement should not include provisions that specify the amounts to be re­imbursed at fixed or determinable future dates, nor should it include predetermined payment schedules, delayed payment clauses, or formulas that, in substance, delay reimbursements to the ceding company.b. The consideration to be paid by the ceding company (net of commissions, if any) should be a fixed amount specified in the agreement. The agreement should not include provisions that require or permit the payment, directly or indirectly, of additional consideration by the ceding company to the assuming company. The agreement may include provisions that permit the ceding company to participate in the ultimate profit, if any, of the assuming company.

Accounting for loss portfolio transfers that are financing arrangements.

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Accounting for loss portfolio transfers that are financing arrangements.

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