Difference between revisions of "FASB.944"

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&nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/fasb-944<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
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'''Reading''': Accounting Standards Codification 944, “Financial Guarantee Insurance Contracts,” 2011, Section 15, Scope and Scope Exceptions, paragraphs:
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* 1-2
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* 5-7
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* 34-35
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* 41-44
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* 49-54
  
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==Pop Quiz==
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Candidates are not responsible for material relating to long-duration contracts and/or life insurance.
  
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'''Author''': Financial Accounting Standards Board
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[https://battleacts.discourse.group/c/candidates-6u/fasb-944/221<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
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[https://www.battleacts6us.ca/vanillaforum6us/categories/fasb-944 ''&nbsp;&nbsp; (Or click here for Legacy Forum &ndash; no longer monitored)''</span>]
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{| class='wikitable' style='background-color: navajowhite;
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|-
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|| '''BA Quick-Summary''': <span style="color: green;>'''FASB 944 - Financial Guarantee Contracts'''</span>
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This paper provides guidance from FASB regarding <u>Financial Guarantee</u> insurance contracts.
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|}
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__TOC__
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==Study Tips==
 +
 +
Virtually all of the content in this reading is covered in other reinsurance readings. The only thing you might want to learn is the definition of ''financial guarantee'' insurance.
  
 
==BattleTable==
 
==BattleTable==
  
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Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:
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* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''
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*
 
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*
 
  
 
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: {| class="wikitable" style="width: 1000px;"
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|-
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| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(01).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2017.Fall #1)'''</span>
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|| ''no prior questions''
 
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|}
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[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FASB&suffix=944&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
 
[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FASB&suffix=944&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
  
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&nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/fasb-944<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
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==In Plain English!==
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=== Definition of Financial Guarantee ===
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A <u>financial guarantee</u> is a non-cancellable indemnity bond backed by an insurer to guarantee investors that principal and interest payments will be made. Or in simpler terms:
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* It protects the lender if the borrower defaults.
 +
 
 +
The reading draws a distinction between short and long-duration contracts. A <u>short-duration</u> contract is characterized by:
 +
 
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* providing insurance protection for a <u>fixed period</u> of <u>short</u> duration ''(pretty darn obvious!)''
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* enabling the insurer to <u>cancel</u> the contract or <u>adjust</u> the provision at the end of the contract period
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<u>Financial reporting</u> of a reinsurance contract depends on whether the contract is:
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* short or long-duration <span style="color: red;">&larr; ''recall that you are <u>not</u> responsible for the material on long-duration contracts''</span>
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* prospective or retrospective
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=== Review of Reinsurance Accounting Concepts ===
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{| class="wikitable"
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! style="width:50px; text-align:center;" | '''#'''
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! '''Topic'''
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! '''What Matters for Exam 6-US'''
  
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==In Plain English!==
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|-
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| style="width:50px; text-align:center;" | '''1'''
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| '''Two Conditions for Reinsurance Accounting'''
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|
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* '''Significant insurance risk''' must be transferred 
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* '''Significant loss''' to reinsurer must be reasonably possible 
  
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[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FASB&suffix=944&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
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|-
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| style="width:50px; text-align:center;" | '''2'''
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| '''Definition of Significant Insurance Risk'''
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| Insurance risk must include:
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* '''Uncertainty in amount''' of losses 
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* '''Uncertainty in timing''' of losses 
  
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==BattleCodes==
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|-
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| style="width:50px; text-align:center;" | '''3'''
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| '''Mechanics of the Significant-Loss Test'''
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| GAAP rules underlying ERD/10-10 logic: 
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* PV of '''all''' cash flows 
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* '''One consistent''' discount rate 
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* Include all cash flows between parties 
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* Use '''gross premiums''' (no expense netting) 
  
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Memorize:
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|-
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| style="width:50px; text-align:center;" | '''4'''
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| '''Reasonably Possible Scenario Requirement'''
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| A scenario is considered valid only if: 
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* '''The entire set of assumptions''' can reasonably occur together 
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(Prevents cherry-picking assumptions.)
  
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|-
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| style="width:50px; text-align:center;" | '''5'''
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| '''"Substantially All" Exception'''
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| Risk transfer may still exist if significant loss is not possible, provided: 
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* Reinsurer assumes '''substantially all''' risk 
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* Cedant retains '''no more than trivial''' risk 
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* Reinsurer's economics ≈ '''direct writer''' 
  
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Conceptual:
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|-
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| style="width:50px; text-align:center;" | '''6'''
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| '''Deposit Accounting Trigger'''
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| If no indemnification of insurance risk exists: 
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* Ceded premium treated as a '''deposit''' 
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* No reserve credit / no reinsurance accounting 
  
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|-
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| style="width:50px; text-align:center;" | '''7'''
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| '''Prospective vs. Retroactive Reinsurance'''
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| Conceptual distinctions: 
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* '''Prospective''' reinsures future events 
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* '''Retroactive''' reinsures past events 
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* Some treaties contain '''both''' types 
  
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Calculational:
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|}
  
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==POP QUIZ ANSWERS==
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[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FASB&suffix=944&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>

Latest revision as of 16:04, 30 November 2025

Reading: Accounting Standards Codification 944, “Financial Guarantee Insurance Contracts,” 2011, Section 15, Scope and Scope Exceptions, paragraphs:

  • 1-2
  • 5-7
  • 34-35
  • 41-44
  • 49-54

Candidates are not responsible for material relating to long-duration contracts and/or life insurance.

Author: Financial Accounting Standards Board

Forum    (Or click here for Legacy Forum – no longer monitored)

BA Quick-Summary: FASB 944 - Financial Guarantee Contracts

This paper provides guidance from FASB regarding Financial Guarantee insurance contracts.

Study Tips

Virtually all of the content in this reading is covered in other reinsurance readings. The only thing you might want to learn is the definition of financial guarantee insurance.

BattleTable

  • this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.
reference part (a) part (b) part (c) part (d)
no prior questions

Full BattleQuiz You must be logged in or this will not work.

In Plain English!

Definition of Financial Guarantee

A financial guarantee is a non-cancellable indemnity bond backed by an insurer to guarantee investors that principal and interest payments will be made. Or in simpler terms:

  • It protects the lender if the borrower defaults.

The reading draws a distinction between short and long-duration contracts. A short-duration contract is characterized by:

  • providing insurance protection for a fixed period of short duration (pretty darn obvious!)
  • enabling the insurer to cancel the contract or adjust the provision at the end of the contract period

Financial reporting of a reinsurance contract depends on whether the contract is:

  • short or long-duration ← recall that you are not responsible for the material on long-duration contracts
  • prospective or retrospective

Review of Reinsurance Accounting Concepts

# Topic What Matters for Exam 6-US
1 Two Conditions for Reinsurance Accounting
  • Significant insurance risk must be transferred
  • Significant loss to reinsurer must be reasonably possible
2 Definition of Significant Insurance Risk Insurance risk must include:
  • Uncertainty in amount of losses
  • Uncertainty in timing of losses
3 Mechanics of the Significant-Loss Test GAAP rules underlying ERD/10-10 logic:
  • PV of all cash flows
  • One consistent discount rate
  • Include all cash flows between parties
  • Use gross premiums (no expense netting)
4 Reasonably Possible Scenario Requirement A scenario is considered valid only if:
  • The entire set of assumptions can reasonably occur together

(Prevents cherry-picking assumptions.)

5 "Substantially All" Exception Risk transfer may still exist if significant loss is not possible, provided:
  • Reinsurer assumes substantially all risk
  • Cedant retains no more than trivial risk
  • Reinsurer's economics ≈ direct writer
6 Deposit Accounting Trigger If no indemnification of insurance risk exists:
  • Ceded premium treated as a deposit
  • No reserve credit / no reinsurance accounting
7 Prospective vs. Retroactive Reinsurance Conceptual distinctions:
  • Prospective reinsures future events
  • Retroactive reinsures past events
  • Some treaties contain both types

Full BattleQuiz You must be logged in or this will not work.

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