It is mandatory for all the companies in the United States to use GAAP. There are differences between these two accounting frameworks and these differences are discussed below.ĭifference between GAAP and Statutory Accounting Companies are required to follow GAAP in order to take the investors into confidence who use financial information of the company for investment purposes. These principles provide authoritative accounting standards as well as commonly accepted methods of recording and reporting accounting transactions. Almost every publicly traded company in the United States has adopted GAAP. On the other hand, Generally Accepted Accounting Principles or GAAP provides a common set of accounting standards, procedures and rules that are defined by the professional accountancy body. These principles are designed for the insurance departments of different states to help them regulate the solvency of insurance companies. In the United States, authorized insurers are required to prepare financial information according to SAP. Statutory Accounting Principles, also known as SAP, are used to prepare the financial statements of insurance companies. Two of these statutory bodies are known as GAAP and SAP. These principles define how financial transactions should be accounted for in accordance with the rules and regulations of the statutory bodies. Miller, NY Superintendent of Insurance, 1871source: article titled “Annual Checkup” p.Every industry has a given set of principles for the preparation of financial statements. “The true object and aim of governmental supervision should be to afford the fullest possible protection to the public, with the least possible annoyance or expense to, or interference with, the companies.” The principles are conservative in nature to guarantee that insurance companies are financially sound well into the future. Statutory accounting has evolved from many years of development among state insurance commissioners. Statutory rules also govern such areas as how insurers should establish reserves for invested assets (life insurers only) and claims and the conditions under which they can claim credit for reinsurance ceded. SAP is intended to measure the “liquidation value” of an insurer as of the statement date rather than its value as a “going concern.” Under SAP, most assets are valued conservatively and certain non-liquid assets, e.g., furniture and fixtures, are not admitted in the calculation of an insurer’s surplus. Statutory accounting seeks to determine an insurer’s ability to satisfy its obligations at all times, whereas GAAP measures the earnings of a company on a going-concern basis from period to period. Simply stated, SAP tries to answer that if an insurance company went out of business, would it have enough money to pay its claims. SAP is considered a more conservative view than GAAP because SAP presents a company’s liquidation value as opposed to its “ongoing concern” value. SAP objectives differ from GAAP objectives: whereas GAAP stresses matching revenue to expenses, SAP stresses measuring the ability of an insurer to pay claims in the future.Ī primary distinction between SAP and GAAP is the treatment of deferred acquisition costs and discounting of loss reserves. They are required to maintain records and file annual and quarterly financial statements with regulators in accordance with Statutory Accounting Principles (SAP) which differ somewhat from Generally Accepted Accounting Principles (GAAP). Insurance companies (insurers or carriers) are subject to other regulatory requirements with respect to their financial structure and operations. The regulatory requirements insurance companies must follow in reporting their financial status.
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