SSAP No. 10 affects insurance companies.

Statement of Statutory Accounting Principles (SSAP) No. 10, Income Taxes, provides new rules for the statutory accounting of income taxes by insurance companies. The guidance is likely to affect all insurance companies and will require significant compliance effort, even by companies that currently report income taxes under Financial Accounting Statement (FAS) No. 109, Accounting for Income Taxes. Companies need to evaluate the impact of SSAP No. 10, including annual statement presentations and disclosures, new information or data that may be required to implement SSAP No. 10 and the integration of the changes required by codification with existing SAP, GAAP and tax processes.

Effective Dates

A majority of states have adopted or will adopt codification of SSAP No. 10 effective Jan. 1, 2001. In accordance with Staff Accounting Bulletin No. 74, companies should provide, in their financial statements or management discussion and analysis of financial condition or both, the impact that recently issued accounting standards will have on their financial statements when adopted. Disclosures that should be considered include the impact that the standard will have on the financial statements (to the extent reasonably estimable) and any other effects reasonably likely to occur (e.g., changes in business practices, changes in availability or cost of capital and violations of debt covenants). Companies will be required to disclose the expected impact of codification on their Dec. 31, 2000 financial statements and to quantify that impact.

Overview of SSAP No. 10

Generally, SSAP No. 10 adopts FAS No. 109, with modifications for state income taxes (deferred state income taxes are not addressed), the realization criteria for deferred tax assets and the reporting of changes in deferred tax balances.

Financial statements will recognize current and deferred income tax assets and liabilities. Current SAP recognizes only current tax assets and liabilities. The annual statement will not include a separate line item for deferred taxes; rather, the annual statement balance sheet will show a current tax recoverable or current tax liability net of deferred taxes. The deferred tax asset or liability will be disclosed as a memo to these lines. Unlike FAS 109, changes in deferred tax assets or liabilities will not be reported in the income statement as a deferred tax expense or benefit. Changes in deferred tax assets and liabilities will be charged directly to a separate and new line item, Change in Net Deferred Income Tax, added to the reconciliation of surplus in the annual statement's "Capital and Surplus Account" section.

Temporary differences are identified and measured using a "balance sheet" approach by comparing statutory and tax basis balance sheets. Temporary differences include unrealized gains and losses and nonadmitted assets, but do not include differences between SAP and tax for asset valuation reserves, interest maintenance reserves, Schedule F penalties, policyholder surplus attributable to stock life insurance companies prior to 1984 and, in the case of a mortgage guaranty insurer, amounts attributable to a statutory contingency reserve to the extent "tax and loss" bonds have been purchased.

Deferred Tax Assets

Unlike FAS No. 109, SSAP No. 10 requires a specific admissibility test for deferred tax assets. Gross deferred tax assets are admitted in an amount equal to the sum of the following items:

1. Federal income taxes paid in prior years recoverable through loss carry-backs for existing temporary differences that reverse by the end of the subsequent calendar year. In determining the Federal income taxes recoverable through loss carrybacks, the amount and character (i.e., ordinary versus capital) of the loss carrybacks and the impact of the alternative minimum tax must be taken into consideration;

2. Gross deferred tax assets, after application of item 1, to be realized within one year of the balance sheet date, limited to 10% of adjusted statutory capital and surplus for the company's most recently filed statement (including quarterly statements);

3. The gross deferred tax assets after application of items 1 and 2 that can be offset against existing gross deferred tax liabilities.

Current Income Taxes

SSAP No. 10 also addresses accounting for current income taxes. Current income taxes incurred include the current-year estimates of Federal and foreign income taxes and any tax contingencies for the current or prior years. True-ups incurred during the current year for prior years (expense or benefit) are deemed to be changes in accounting estimates and will be included in the statement of income in the period when the change becomes known (SSAP No. 3, Accounting Changes and Corrections of Errors). This may be a significant change from current practices in which prior-year adjustments may have been reported as an adjustment to surplus. For purposes of the 2000 annual statement, preparers should ensure that estimated liabilities associated with prior years are appropriate and supportable.

Current tax recoverables include all current income taxes reasonably expected to be recovered in a subsequent accounting period. Current income tax recoverables are reasonably expected to be recovered if a refund is attributable to overpayment of estimated tax payments, errors, carrybacks or items for which the insurer has substantial authority (as defined for Federal income tax purposes). A recoverable can be recorded whether or not a claim has been filed. Current tax recoverables also include interest.

Current state income taxes should be computed under SSAP No. 5, Liabilities, Contingencies and Impairments of Assets, and reported as other underwriting expenses for a property and casualty company and general expenses for a life insurance company.

Consolidated Returns

The statement provides rules for insurance companies that file a consolidated income tax return with one or more affiliates. Income tax transactions between affiliated parties are recognized if transactions are economic transactions (as defined in SSAP No. 25, Accounting for and Disclosures about Transactions with Affiliates and Other Related Parties), and are carried out pursuant to a written income tax allocation agreement, and if income taxes incurred are accounted for in a manner consistent with the principles of FAS No. 109, as modified by SSAP No. 10.

Intercompany amounts owed to an insurance company are treated as loans or advances and are nonadmitted if the recoverable is not settled within 90 days of the filing of a consolidated income tax return, or when a refund is due to the insurance company's parent within 90 days of the receipt of the refund from the tax authorities.

FROM KEVIN OWENS, WASHINGTON, DC