Accounting Standard Updates
Admissibility of Operating and Nonoperating System Software
Article reading time: 1 minute 30 seconds
Hot Take:
Despite their importance to the performance of insurance operations, not all insurance company assets are allowed to be admitted on the statutory financial statements due to the conservative accounting rules governing insurance financial reporting.
In this brief article, we will look at the admissibility rules for operating and nonoperating system software.
Full Article
Readers of SSAP No. 16 can note the following:
- Electronic Data Processing (EDP) equipment and operating system software – are admissible in aggregate with limitations (3% of capital and surplus less EDP and operating system software, net DTA and net positive goodwill)
- Nonoperating system software – is nonadmitted
When calculating the maximum amount allowed to be admitted, accountants sometimes face the dilemma of what constitutes operating system software.
The SSAP Glossary defines an operating system as “a program controlling the data job and task management operations of a computer through executive scheduling and monitoring.” Simply put, the operating system is what makes a computer work, such as Linux or Windows.
The example of an iPhone below is a good way to depict the difference between admissible operating system software and nonoperating system software that is to be nonadmitted.
Following this logic, systems such as policy administration systems are to be nonadmitted, even though they are at the core of insurance company operations.
Conclusion
Because of the strict admissibility rules pertaining to the operating and nonoperating system software, some insurance companies are eager to explore possibilities that would provide temporary relief to their surplus. Sale-leaseback is one of the routes that can be explored and is further governed by SSAP 22.
Some states (e.g., Texas) provide certain overrides of NAIC SSAP governing rules relating to areas such as furniture and software admissibility. It is advisable to check the respective state insurance code or administrative code for potential state overrides of NAIC SSAP promulgations.