Accounting Practices
1.85 The differences between SAP and GAAP result from their differ
ing emphasis, as noted in the preamble of the revised manual, paragraph 10,
"GAAP is designed to meet the varying needs of the different users of finan
cial statements. SAP is designed to address the concerns of regulators, who are the primary users of statutory financial statements. As a result, GAAP stresses measurement o f emerging earnings o f a business from period to period,... while SAP stresses measurement of the ability to pay claims in the future." Adequate statutory surplus provides protection to policyholders and permits a company to expand its premium writing. Accordingly, SAP places a great deal of em
phasis on the adequacy of statutory surplus. Table 1-1, "Summary of Statutory Accounting Practices and Generally Accepted Accounting Principles," presents a summarized comparison of the major differences in accounting treatment be
tween GAAP and SAP for selected financial statement components. The reader ordinarily should, however, refer to the actual pronouncements for explicit guid
ance in accounting for transactions in each of the areas.
Summary of Statutory Accounting Practices and Generally Accepted Accounting Principles
The following are highlights o f significant differences in accounting treatment between codified statutory accounting practices (SAP) and generally accepted accounting principles (GAAP) for certain financial statement components. As described in paragraph 1.75, statutory accounting may vary by state. The SAP and GAAP references in the chart pertaining to each area are not necessarily inclusive o f all guidance applicable to the subject matter.
Bonds designation of 1 or 2 shall be reported at amortized cost; all other debt securities (NAIC designation 3 to 6) shall be reported at the lower of securities available for sale at fair value; classified as
held-to-maturity at amortized cost, if positive intent and ability to hold to maturity exist.
See Financial Accounting Standards Board (FASB)
Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. When the risk of principal is other than nominal, certain securities (examples, asset backed securities, collateralized debt obligations) are also accounted for under Emerging Issues Task Force (EITF) Issue No. 99-20, Recognition o f Interest Income and Impairment o f Certain Investments in Securitized Financial Assets, as amended by FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
Common stock Investments in unaffiliated common stock are generally reported at fair value as stated by the NAIC's Securities Valuation Office.
See SSAP No. 30, Investments in Common Stock (excluding investments in common stock o f subsidiary, controlled, or affiliated entities).
Fair value.
See FASB Statement No. 115.
Nonredeemable
See SSAP No. 32, Investments in Preferred Stock (including investments in preferred stock o f subsidiary, controlled, or affiliated entities).
First mortgages that are not in default with regard to principal or interest are carried at outstanding principal balance, or amortized cost if acquired at a discount or premium less and Initial Direct Costs o f Leases, less impairment as per FASB Statement No. 114, Accounting by Creditors for Impairment o f a Loan, as amended by FASB Statement No. 118, Accounting by Creditors for Impairment o f a Loan—Income Recognition and Disclosures, Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (AICPA, Technical Practice Aids, ACC sec.
10,880), and FASB Statement No.
5, Accounting for Contingencies.
Depreciated cost, after impairment write-down as per FASB Statement No. 144, Accounting for the Impairment or Disposal o f Long-Lived Assets, if applicable.
Lower of carrying value or fair value less cost to sell.
(continued)
Investment in affiliates
Exchanges o f Nonmonetary Assets, A Replacement o f SSAP No. 28-Nonmonetary in Subsidiary, Controlled, or Affiliated Entities, A
Replacement o f SSAP No. 88.‡
Unrealized comes from a variety of sources, including but not limited to, (FSP) SOP 78-9-1, Interaction o f AICPA Statement o f Position 78-9 and EITF Issue No. 04-5, Capitalization o f Interest Cost in Financial Statements That No. (FIN) 46 (revised December 2003), Consolidation o f Variable Interest Entities, and EITF Issue No. 03-16, Accounting for Investments in Limited Liability Companies.
Recorded in net income for trading, or other comprehensive income for available for sale, as appropriate (except for held-to-maturity).
See FASB Statement No. 115 and FASB Statement No. 130, Reporting Comprehensive Income.
Codified Statutory Generally Accepted Statement No. 5, FASB Statement No. 114, as amended by FASB Statement No. 118, and FASB Statement No. 115 and FSP FAS when the risk of principal is other than nominal, certain securities balance sheet and charged to surplus. Major nonadmitted Nonadmitted Assets, No. 29, Prepaid Expenses, No. 68,
Loss Reserves occur and based on the estimated ultimate cost of settling the shall be recorded as a liability.
See SSAP No. 65.
If limitations exist on the amount of net income from participating insurance contracts of insurers that may be distributed to stockholders, provision is made for accumulated earnings expected to be paid to contract holders, including pro rata portion of dividends incurred to valuation date; If there are no net income restrictions, the future dividends
Reinsurance Full credit generally given for authorized reinsurers; net under FASB Statement No. 113, Accounting and Reporting for Reinsurance o f Short-Duration and Long-Duration Contracts, net
Codified Statutory to changes in tax rates and changes in tax status, if any, shall be recognized as a
reporting is not allowed unless a right of offset exists as defined in FIN 39, Offsetting o f Amounts Related to Certain Contracts, as amended by FSP FIN No. 39-1, Amendment o f FASB
Interpretation No. 39. See also FASB Statement No. 113 Statement No. 109, as amended by FSP FIN No. 48-1, Definition o f Statement No. 106, as amended by FASB Statement No. 132, as in FASB Statements No. 87, No.
88, and No. 106.‡‡ Additional information can be found in
(continued)
Pension benefits
Contract acquisition costs
FSP FAS 106-2, Accounting and Disclosure Requirements Related
The excess of plan assets over obligations should be treated as plan over the period in which the employee vests in those contributions. Contributions to plan participants' accounts made prior to vesting shall be treated as prepaid expenses for Pensions, A Replacement o f SSAP No. 8, Pensions, which adopts FASB Statement No. 87, No. 88, Employers' Accounting the Sale o f Investments, SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Codified Statutory Generally Accepted Accounting Practices Accounting Principles*
Nontraditional Long-Duration Contracts and for Separate Accounts (AICPA, Technical Practice Aids, ACC sec. 10,870), and SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
With Modifications or Exchanges o f Insurance Contracts (AICPA, Technical Practice Aids, ACC sec.
10,920).
Consolidation Generally not applied given financial statement focus on presentation from a liquidity of assets standpoint for regulatory purposes.
Majority-owned subsidiaries are not consolidated for individual entity statutory reporting.
See SSAP No. 88.|||| * † ‡
Generally required in accordance with FASB Statement No. 94, ARB No. 51, and FIN 46 (revised December 2003).
* Generally accepted accounting principles (GAAP) in this chart contains numerous references to both financial and nonfinancial assets and liabilities that are sub
ject to fair value measurement. Effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years (with early application encouraged), Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements, establishes a framework for measuring fair value that applies broadly to financial and nonfinancial assets and liabilities and improves the consistency, comparability, and reliability of the mea
surements. The guidance in FASB Statement No. 157 applies under other account
ing pronouncements that require or permit fair value measurements. Accordingly, the statement does not require any new fair value measurements but the applica
tion of it will change current practice. For further information, see www.fasb.org and chapter 5, "Investments."
† In September 2006, the National Association of Insurance Commissioners (NAIC) Financial Condition Committee adopted a short-term resolution for hybrid securi
ties classification. The resolution became effective upon adoption until the earlier of January 1, 2008, or adoption of a long-term proposal by the NAIC. Among other matters, the resolution states that all defined hybrid securities are to be reported as preferred stock. In December 2007, the resolution was extended until January 1, 2009. For additional specifics, see chapter 5, "Investments."
‡ Effective for reporting periods ending on or after December 31, 2007, the NAIC adopted Statement of Statutory Accounting Principle (SSAP) No. 96, Settlement Requirements for Intercompany Transactions, An Amendment to SSAP No.
25—Accounting for and Disclosures about Transactions with Affiliates and Other Related Parties. Related party transactions are now required to be in the form of a written agreement that specifies a due date. Amounts receivable from related parties over 90 days past due from the due date or if the due date is not specified in the agreement, are now nonadmitted.
(continued)
Consolidated Financial Statements—an amendment o f ARB No. 51. The objective FASB Statement No. 160 is to improve comparability and transparency of consoli
dated financial statements by establishing accounting and reporting standards and is effective fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. For more information, see chapter 5, "Investments."
# The NAIC has passed Issue Paper No. 124 and exposed SSAP No. 92, both titled Treatment o f Cash Flows when Quantifying Changes in Valuation and Impair
ments, an Amendment to SSAP No. 43, Loan Backed and Structured Securities. The draft amends SSAP No. 43, Loan-backed and Structured Securities, to require the use of discounted cash flows (rather than undiscounted cash flows) when calculat
ing new prepayment assumptions related to changes in valuation and impairment in certain instances. Readers should remain alert to any final pronouncement.
** FASB has a risk transfer project on the agenda to clarify what constitutes transfer of significant insurance risk in insurance and reinsurance contracts by (1) defining insurance contracts, (2) evaluating risk transfer display and disclosure, (3) apply
ing risk transfer guidance to both policyholders and direct insurance contracts, and (4) codifying related guidance in current FASB and AICPA literature. Readers should remain alert to any final pronouncement.
†† The NAIC Statutory Accounting Principles Working Group has formed a subgroup to consider the guidance in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation o f FASB Statement No. 109.
‡‡ FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment o f FASB Statements No. 87, 88, 106, and 132(R), does not address the measurement and recognition issues related to changes in the fair value of plan assets and benefit obligations. These issues are relegated to a forthcoming phase II project planned for 2009. Additionally, the Statutory Accounting Working Group is currently evaluating the effects of FASB Statement No. 158 on statutory accounting. Readers should remain alert to any final pronouncement.
|||| The NAIC adopted SSAP No. 96, with an effective date of December 31, 2007. This SSAP deals with the application of the 90-day admissibility rule with respect to intercompany transactions. It amends SSAP No. 25, Accounting for and Disclosure about Transactions with Affiliates and Other Related Parties, to include certain criteria for the admissibility of the related party receivable.
Exhibit 1-1
Evaluation of the Appropriateness of Informative Disclosures in Insurance Enterprises' Financial Statements Prepared
on a Statutory Basis1,2
Question. Insurance enterprises issue financial statements prepared in ac
cordance with accounting practices prescribed or permitted by insurance reg
ulators (a statutory basis) in addition to, or instead of, financial statements prepared in accordance with generally accepted accounting principles (GAAP).
Effective January 1 , 2001, most states are expected to adopt a comprehensively updated Accounting Practices and Procedures Manual, as revised by the Na
tional Association of Insurance Commissioners' (NAIC's) codification project.
The updated Accounting Practices and Procedures Manual, along with any subsequent revisions, is referred to as the revised manual. The revised manual contains extensive disclosure requirements. As a result, after a state adopts the revised manual, its statutory basis of accounting will include informative dis
closures appropriate for that basis of accounting. The NAIC annual statement instructions prescribe the financial statements to be included in the annual audited financial report. Some states may not adopt the revised manual or may adopt it with significant departures. How should auditors evaluate whether informative disclosures in financial statements prepared on a statutory basis are appropriate?3
Interpretation. Financial statements prepared on a statutory basis are finan
cial statements prepared on a comprehensive basis of accounting other than GAAP according to paragraph .04 o f AU section 623, Special Reports (AICPA, Professional Standards, vol. 1). Paragraph .09 of AU section 623 states that
"When reporting on financial statements prepared on a comprehensive basis of accounting other than generally accepted accounting principles, the auditor should consider whether the financial statements (including the accompany
ing notes) include all informative disclosures that are appropriate for the basis o f accounting used. The auditor should apply essentially the same criteria to financial statements prepared on an other comprehensive basis of accounting as he or she does to financial statements prepared in conformity with gener
ally accepted accounting principles. Therefore, the auditor's opinion should be based on his or her judgment regarding whether the financial statements, in
cluding the related notes, are informative of matters that may affect their use, understanding, and interpretation as discussed in section 411, The Meaning o f Present Fairly in Conformity With Generally Accepted Accounting Principles, paragraph .04."
AU section 623 paragraph .02 states that generally accepted auditing standards apply when an auditor conducts an audit o f and reports on financial statements prepared on an other comprehensive basis of accounting. Thus, in accordance with the third standard o f reporting, "informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report."
Question. What types of items or matters might be considered by auditors when evaluating whether informative disclosures are reasonably adequate?
Interpretation. AU section 623 paragraphs .09-.10 indicate that financial statements prepared on a comprehensive basis of accounting other than GAAP should include all informative disclosures that are appropriate for the basis of
from GAAP. The provisions of the preamble of the revised manual that states,
"GAAP pronouncements do not become part o f Statutory Accounting Principles until and unless adopted by the NAIC," do not negate the requirements of AU section 623 paragraph .10, which also states that when "the financial state
ments [prepared on an other comprehensive basis of accounting] contain items that are the same as, or similar to, those in financial statements prepared in conformity with generally accepted accounting principles, similar informative disclosures are appropriate."
Question. How does the auditor evaluate whether "similar informative disclo
sures" are appropriate for
a. items and transactions that are accounted for essentially the same or in a similar manner under a statutory basis as under GAAP?
b. items and transactions that are accounted for differently under a statutory basis than under GAAP?
c. items and transactions that are accounted for differently under re
quirements of the state of domicile than under the revised manual?
Interpretation. Disclosures in statutory basis financial statements for items and transactions that are accounted for essentially the same or in a similar manner under the statutory basis as under GAAP should be the same as, or similar to, the disclosures required by GAAP unless the revised manual specifi
cally states the NAIC Codification rejected the GAAP disclosures.1 2 * 4 Disclosures should also include those required by the revised manual.
Disclosures in statutory basis financial statements for items or transactions that are accounted for differently under the statutory basis than under GAAP, but in accordance with the revised manual, should be the disclosures required by the revised manual.
If the accounting required by the state o f domicile for an item or transaction differs from the accounting set forth in the revised manual for that item or transaction, but it is in accordance with GAAP or superseded GAAP, the dis
closures in statutory basis financial statements for that item or transaction should be the applicable GAAP disclosures for the GAAP or superseded GAAP.
If the accounting required by the state o f domicile for an item or transaction dif
fers from the accounting set forth in the revised manual, GAAP or superseded GAAP, sufficient relevant disclosures should be made.
When evaluating the adequacy of disclosures, the auditor should also consider disclosures related to matters that are not specifically identified on the face of the financial statements, such as (a) related party transactions, (b) restrictions on assets and owners' equity, (c) subsequent events, and (d ) uncertainties. Other matters could be disclosed if such disclosures are necessary to keep the financial statements from being misleading.
1 Reprinted from AU sec. 9623, Special Reports: Auditing Interpretations o f Section 623 (AICPA, Professional Standards, vol. 1).
2 This exhibit reflects the amendments to AICPA Auditing Interpretation No. 12, "Evaluation of the Appropriateness of Informative Disclosures in Insurance Enterprises' Financial Statements Prepared on a Statutory
(continued)
Basis," as amended, o f AU section 623, Special Reports (AICPA, Professional Standards, vol. 1, AU sec. 9623 par. . 6 0 - .77), as made by Statement of Po
sition 01-5, Amendments to Specific AICPA Pronouncements for Changes Related to the NAIC Codification (AICPA, Technical Practice Aids, ACC sec.
10,840), effective December 15, 2001, and by the amendments made by the Auditing Standards Board, effective January 2005, subsequent to the Public Company Accounting Oversight Board adoption o f the AICPA standards as interim, on April 16, 2003.
3 It is possible for one of three different situations to occur: the state adopted the revised manual without significant departures, adopted the revised man
ual with significant departures, or has not yet adopted the revised manual.
4 The provisions o f the revised manual preamble that state, "GAAP pro
nouncements do not become part o f Statutory Accounting Principles until and unless adopted by the NAIC," or any other explicit rejection of a GAAP disclosure does not negate the requirements of paragraph .10 o f AU sec
tion 623. (Note that NAIC Interpretation 04-1, Applicability o f New GAAP Disclosures Prior to NAIC Consideration, is consistent with the revised man
ual.)