Capital Contribution to Sub using Cash & Bonds

[ChristineT-AAIC]

Hi, we are trying to understand the accounting for recording a capital contribution from parent to sub using a combination of cash and assets.

We are looking at SSAP 25 and determine that this is an economic transaction, thus recording the asset sale at FMV but deferring the gain on the Parent through debit to unrealized and credit to deferred gain.

Looking for any guidance on whether our interpretation is correct and/or what if anything are we missing.

thanks

[Glenn]

Hello,
I would concur with your interpretation of the guidance in SSAP 25, by using paragraphs 15,18 &19 for your set of circumstances

SSAP 25 excerpt par.18 &19 and 15 states:
Transactions involving services between related parties must be recorded at amount charged
( 18, 19)
Amounts charged can be at current market rates or based on allocations of costs
Subject to regulatory scrutiny when amounts charged do not meet fair and reasonable standards of Appendix A-440 Insurance Holding Companies
♦ Could be either treated as dividends or capital contributions, reversed, modified or nonadmitted

 Transactions between related parties may qualify as economic transactions at one level of financial reporting but may not qualify at common parent level ( 15)
Purchase of securities at fair value between affiliates would be considered economic transaction
♦ Seller would recognize any gain or loss on disposal
♦ Buyer would record securities received at cost (fair value on transaction date)

Common parent would treat transaction as non-economic when it results in gain
♦ Regulators see it as mere inflation of surplus at common parent level
♦ Common parent must record deferred gain and unrealized loss (to offset unrealized gain on investment in subsidiary) until these securities are sold to outside third party in arms-length transaction


Regards,
Glenn S Sackett