Learning the Language of SAP

Learning a foreign language can be difficult. There are new expressions to learn, grammatical rules to follow, sentence structure guidelines and even diverse pronunciation styles. It takes significant time, practice and sometimes exposure to native speakers to master another language. The same can be said of learning new accounting principles such as Statutory Accounting Principles (SAP). SAP is the insurance industry’s accounting language. While similar to Generally Accepted Accounting Principles (GAAP), SAP provides guidance on how key financial information for an insurance company should be reported. While there are many similarities between the two, there are also many important differences that need to be understood. To help clients, prospects and others understand the main differences between SAP and GAAP, JLK Rosenberger has provided a brief summary below.

SAP – A Different Purpose

A key difference between the accounting principles used in GAAP versus SAP is the objective each is attempting to accomplish. The reality is that each standard is seeking to provide conformity to the presentation of financial information for very different reasons. GAAP is designed to present financial information to a diverse audience with multiple needs. This system focuses on measuring the financial performance of a company over a period of time (month, quarter or year) and is characterized by concepts such as matching expenses to revenue. SAP, on the other hand, is designed to present financial information to a very limited audience – regulators. The system focuses on measuring the ability of an insurance company to pay claims in the future where the stakeholders are the policyholders themselves or their named beneficiaries.

SAP – Key Differences from GAAP financial statements and related disclosures

  • A statement of comprehensive income is not provided
  • The methods of accounting for certain aspects of reinsurance under GAAP may vary from SAP (e.g., credit for reinsurance in unauthorized companies)
  • Cash flow presentation is not consistent with GAAP, and a reconciliation of the net gain or loss from operations is not provided under SAP
  • The criteria for realization of deferred tax assets are not consistent with GAAP, and deferred tax assets are recognized through a direct charge to surplus under SAP
  • Premium income is taken into earnings over the periods covered by the policies, whereas the related acquisition and commission costs are expensed when incurred
  • Assets must be included in the statutory statements of admitted assets, liabilities, capital and surplus at “admitted asset value,” and “non-admitted assets” (as defined by SAP) are excluded through a direct charge to surplus
  • Business combinations do not reflect the fair value of assets and liabilities acquired, but the historical basis of the acquired or merged entity continues to be recognized in the financial statements of the surviving entity
  • The approximate rental value of space occupied by the company in its own building is included as an expense with an offset included in rental income
  • Ceded reserves that are recoverable from reinsurers for losses and loss adjustment expenses are reflected as reductions to the related direct reserves rather than as assets

Contact Us

Understanding the differences between GAAP, and SAP, is comparable to learning a new language. If you have questions about a SAP pronouncement or application or need assistance with other insurance audit needs, JLK Rosenberger wants to help! For additional information, call us at 818-334-8623, or click here to contact us. We look forward to speaking with you soon.