Where it is not possible to reasonably estimate the amounts and timing of recoveries, the ____________is to be amortized using the recovery method.

Question

Options

• Ainceptor contract
• Bdeferred gain
• Ccredit loss
• Dpotential benefit

• A
  8% (1)
• B
  85% (11)
• D
  8% (1)

Explanation

Deferred gain is correct because, in retroactive reinsurance accounting (under US GAAP ASC 944), when a cedant cedes risk and receives payment exceeding the liabilities assumed, the excess is recorded as a deferred gain - and when recovery timing/amounts cannot be reliably estimated, that deferred gain must be amortized using the recovery method, recognizing income only as actual recoveries are received.

Option A (inceptor contract) is not a recognized accounting term in this context - there is no such standard concept tied to amortization methodology. Option C (credit loss) belongs to impairment accounting for financial instruments (e.g., IFRS 9/CECL), not to the amortization of gains from reinsurance arrangements. Option D (potential benefit) is a vague term with no defined role in amortization standards for reinsurance or contract accounting.

Memory tip: Link "recovery method" to "deferred gain" by thinking: when you can't predict future recoveries, you defer the gain and recognize it only as recovery actually happens - the method name literally tells you how it works.

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