ASC

ASC 470-944

Financial Services—Insurance

470 Debt

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In brief

IntermediateDebt and equityPresentationDisclosureIndustry-specific

This subtopic governs how an insurance entity that issues surplus notes (also called certificates of contribution, surplus debentures, or capital notes) accounts for them under GAAP. The core rule is that surplus notes are debt, not equity: they are presented as liabilities and interest is accrued over the note's life even though the domiciliary state insurance commissioner must approve each principal and interest payment (470-944-25-1, 35-1, 45-1).

Key points (6)
  • Surplus notes shall be accounted for as debt instruments, and equity treatment is inappropriate (470-944-25-1).
  • Typical characteristics include commissioner approval of issuance and of principal/interest payments, a stated maturity in most cases, scheduled interest, nonvoting status, deep subordination, and limited acceleration rights only on rehabilitation, liquidation, or reorganization (470-944-05-1).
  • Interest shall be accrued over the life of the note irrespective of whether the domiciliary state insurance commissioner has approved interest and principal payments, and is expensed the same way as interest on other debt (470-944-35-1).
  • Surplus notes shall be presented as liabilities on the issuer's financial statements (470-944-45-1).
  • The issuer shall disclose the domiciliary state insurance commissioner's role and ability to approve or disapprove any interest and principal payments (470-944-50-1).
  • The guidance applies only to issuers; it does not apply to investors in surplus notes (470-944-15-2), and otherwise follows the scope in Section 944-10-15 (470-944-15-1).

For students. Surplus notes are the classic GAAP-versus-statutory divergence: statutory accounting treats them as surplus (equity-like), but GAAP insists they are liabilities with accrued interest. The common misunderstanding is assuming that because the commissioner can block payments, no interest expense accrues — 470-944-35-1 says accrual continues regardless.

surplus notescertificates of contributiondomiciliary state insurance commissioner approvaldebt versus equity classificationinterest accrualsubordinationstatutory surplusissuer disclosure

Machine-generated study aid for ASC 470-944. Check the source paragraphs below.

470-944-00Status

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470-944-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
Readily Determinable Fair ValueAmendedAccounting Standards Update No. 2015-1006/12/2015
Readily Determinable Fair ValueAmendedAccounting Standards Update No. 2014-0603/14/2014

470-944-05Overview and Background

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470-944-05-1
This Subtopic provides guidance on accounting, financial statement presentation, and disclosure by the issuers of surplus notes. The term surplus notes is the most common term applied to these financial instruments. Some jurisdictions refer to these financial instruments as certificates of contribution, surplus debentures, or capital notes. The following are some general characteristics of surplus notes:
  1. a
    Approval of the issuance by the domiciliary state insurance commissioner
  2. b
    Stated maturity date in most but not all cases
  3. c
    Scheduled interest payments
  4. d
    Approval of the payment of principal and interest by the domiciliary state insurance commissioner
  5. e
    Nonvoting
  6. f
    Subordinate to all claims except those of shareholders for stock entities
  7. g
    Subordinate to all claims except policyholder residuals for mutual entities (after policyholder liabilities are settled)
  8. h
    No or limited acceleration rights other than for rehabilitation, liquidation, or reorganization of the insurer by a governmental agency
  9. i
    Proceeds from issuance in the form of cash, cash equivalent, or some other asset with a readily determinable fair value satisfactory to the domiciliary state insurance commissioner.

470-944-15Scope and Scope Exceptions

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Overall Guidance

470-944-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 944-10-15, with specific entity exceptions noted below.

Entities

470-944-15-2
The guidance in this Subtopic does not apply to investors in surplus notes.

470-944-25Recognition

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Surplus Notes

470-944-25-1
Surplus notes shall be accounted for as debt instruments; equity treatment for surplus notes is inappropriate.

470-944-35Subsequent Measurement

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Surplus Notes

470-944-35-1
Interest shall be accrued over the life of the surplus note, irrespective of the approval of interest and principal payments by the domiciliary state insurance commissioner, and shall be recognized as an expense in the same manner as other debt.

470-944-45Other Presentation Matters

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Surplus Notes

470-944-45-1
Surplus notes shall be presented as liabilities in the financial statements of the issuer; equity treatment for surplus notes is inappropriate.

470-944-50Disclosure

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Surplus Notes

470-944-50-1
An entity shall disclose the domiciliary state insurance commissioner's role and ability to approve or disapprove any interest and principal payments.

Related subtopics