D2. NAIC Accounting Practices And Procedures Flashcards
Users of accounting info
- management
- investors
- lenders
- investment analysts
- regulators
- customers
What is conservatism?
Be conservative when developing estimates to provide a margin of protections. Should aim to prevent sharp fluctuations in surplus
What is consistency?
It is important for the reports to be consistent over the years. Regulators can get an accurate indication of the financial condition of the firm. May have to recognize changes over time
What is recognition?
Liabilities should be recognized as they occur and revenues should only be recognized when earnings process is completed
Codification of SAP purpose
To provide a comprehensive guide to statutory accounting
Life before the codification
- insurers were unsure about what rules to follow
- regulators were unfamiliar with accounting rules being followed by insurers in other states
- insurers financial statements not always comparable
Results of codification
- there will be more complete disclosures and comparable financial statements
- more uniform rules to be evaluated by
- RBC measure more consistent among states
- note intended to preempt state legislative and regulatory authority
Hierarchy of accounting rules
- SSAP
- Consensus of emerging accounting issues working group
- Naic annual statement instructions
- SAP statements of concepts
- GAAP guidance
Materiality
-one large enough that the users of the info will be influenced by it
Permitted vs prescribed accounting practices
Permitted: specifically requested by the insurer that are inconsistent with prescribed
Prescribed: included directly in state laws and applicable to all
What domiciliary regulator must do if considering approval of permitted
Must provide notice within in at least 5 days that discloses:
- nature and clear description of permitted accounting practice request
- quantitative impact of permitted accounting practice
- effect of request on a legal entity basis
- any potential effects to financial statements
Three main focuses
- Conservatism
- Consistency
- Recognition
