Myhr & Markham

  1. 6 Di fferences Between GAAP and SAP
    • 1. Purpose
    • 2. Non-Admitted Assets
    • 3. Policy Acquisition Costs (PAC)
    • 4. Bonds
    • 5. Subsidiaries and Affiliates
    • 6. Pensions
  2. GAAP vs. SAP: Purpose
    • 1. GAAP
    • a) Designed to meet varying needs of di fferent users of financial statements
    • b) Focuses on correctly measuring earnings
    • 2. SAP
    • a) Designed to address concerns of regulators
    • b) Focuses on correctly measuring liquidation values
    • c) SAP takes precedence over GAAP for insurers
  3. GAAP vs. SAP: Non-Admitted Assets
    • 1. GAAP - would give some value to non-admitted assets
    • 2. SAP - assigns zero value on balance sheet for
    • a) Tangible property
    • b) Unsecured loans and cash advances
    • c) Prepaid expenses
    • d) Agents' balances and premium balances more than ninety days past due
    • e) Bills receivable that are past due
    • f) Reinsurance recoverables deemed uncollectible or due from unauthorized reinsurer and are not secured
  4. GAAP vs. SAP: Policy Acquisition Costs & Commissions
    • 1. GAAP
    • a) Allows these to be capitalized and amortized over policy's life
    • 2. SAP
    • a) Requires that they be immediately written o ff as expenses once incurred
    • b) E ffect is to create a loss on new policy because premiums earned over term of policy
    • c) Growing insurer will experience a drain on surplus
  5. GAAP vs. SAP: Bonds
    • 1. GAAP
    • a) Amortized valuation is permitted only if insurer is able and intends to hold bond to maturity
    • b) Otherwise, must be reported at market values
    • 2. SAP
    • a) Valued at amortized amount
    • b) Results in even appreciation or depreciation toward face amount
  6. GAAP vs. SAP: Subsidiaries, Affiliates, & Business Combinations
    • 1. GAAP
    • a) financial statements of majority-owned subsidiaries are consolidated with the parent company's financial statements
    • 2. SAP
    • a) produce financial statements for each organization
  7. GAAP vs. SAP: Pensions
    • 1. GAAP
    • a) recognizes expenses as incurred for all employees, vested and non-vested
    • 2. SAP
    • a) Considers only current retirees and employees who are fully vested
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Myhr & Markham