Describe deposit accounting for the assuming company: if total losses are valued upwards, what should be recorded?

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Multiple Choice

Describe deposit accounting for the assuming company: if total losses are valued upwards, what should be recorded?

Under deposit accounting for an assuming company, the funds received to cover the assumed business are treated as a deposit liability rather than as earned revenue. The deposit funds are used to finance the eventual losses, so when total losses are valued upwards, the funding requirement increases. That incremental funding is a cost of carrying the deposit, i.e., a financing cost that shows up on the income statement as interest expense. It’s not recorded as revenue because no services are being earned from the assumed block, and it isn’t recorded as interest income or as a separate “deposit expense,” since the change is a cost of the funds used to support higher losses rather than a direct expense of operating activity.

Under deposit accounting for an assuming company, the funds received to cover the assumed business are treated as a deposit liability rather than as earned revenue. The deposit funds are used to finance the eventual losses, so when total losses are valued upwards, the funding requirement increases. That incremental funding is a cost of carrying the deposit, i.e., a financing cost that shows up on the income statement as interest expense. It’s not recorded as revenue because no services are being earned from the assumed block, and it isn’t recorded as interest income or as a separate “deposit expense,” since the change is a cost of the funds used to support higher losses rather than a direct expense of operating activity.

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