ASC

ASC 505-944

Financial Services—Insurance

505 Equity

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In brief

IntermediateDisclosureIndustry-specificDebt and equityFinancial statement presentation

This Subtopic sets the equity-related disclosure requirements for insurance entities, focusing on statutory capital and surplus and how statutory accounting practices constrain dividends. Entities must disclose statutory capital and surplus, the amount needed to meet regulatory requirements, and restrictions on retained earnings available for dividends (505-944-50-1). When state-prescribed or permitted statutory accounting practices differ from NAIC statutory accounting practices and produce a significantly different statutory surplus or risk-based capital, the entity must describe the practice and quantify its monetary effect on statutory surplus (505-944-50-2 through 50-3).

Key points (7)
  • Insurance entities must disclose the amount of statutory capital and surplus, the amount necessary to satisfy regulatory requirements if significant in relation to statutory capital and surplus, and the nature of statutory dividend restrictions plus retained earnings unavailable for dividends (505-944-50-1).
  • The prescribed/permitted practice disclosures apply to annual and complete sets of interim GAAP financial statements, and are triggered only if the practices cause a significant difference in reported statutory surplus or risk-based capital versus NAIC statutory accounting practices AND state-prescribed or permitted practices differ from NAIC (or state-prescribed) practices (505-944-50-2).
  • If triggered, the entity discloses at each financial statement date a description of the prescribed or permitted statutory accounting practice and the related monetary effect on statutory surplus (505-944-50-3).
  • These disclosures apply to a U.S. insurance entity, a U.S. entity with a U.S. insurance subsidiary, and a foreign entity with a U.S. insurance subsidiary that prepares U.S. GAAP financial statements (505-944-50-4).
  • A foreign insurance entity without a U.S. insurance subsidiary that prepares (or is included in a parent's consolidated) U.S. GAAP financial statements must disclose permitted regulatory accounting practices that significantly differ from its regulator's prescribed practices and their monetary effects (505-944-50-5).
  • If risk-based capital would have triggered a regulatory event but for a permitted practice, that fact must be disclosed (505-944-50-6).
  • Section 55 illustrates compliant note disclosures (e.g., immediate goodwill write-off as a prescribed practice and carrying home office property at fair value as a permitted practice, with quantified surplus effects) (505-944-55-1 through 55-2).

For students. Remember this is a disclosure-only subtopic: statutory accounting (SAP) is not GAAP, but GAAP financial statements of insurers must reveal SAP-based surplus and the dividend limits it imposes. The common misunderstanding is thinking the monetary-effect disclosure adjusts GAAP equity — it only quantifies the effect on statutory surplus, and only when the two-part trigger in 505-944-50-2 is met.

statutory capital and surplusprescribed statutory accounting practicespermitted statutory accounting practicesnaic statutory accounting practicesrisk-based capitaldividend restrictionsrestricted retained earningsinsurance regulatory disclosure

Machine-generated study aid for ASC 505-944. Check the source paragraphs below.

505-944-05Overview and Background

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505-944-05-1
This Subtopic provides guidance to insurance entities on disclosures about equity and related statutory accounting practices. For a background discussion of statutory accounting practices, see Section 944-20-05.

505-944-15Scope and Scope Exceptions

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Overall Guidance

505-944-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 944-10-15.

505-944-50Disclosure

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505-944-50-1
Insurance entities shall disclose in their financial statements all of the following information relating to stockholders' equity, statutory capital and surplus, and the effects of statutory accounting practices on the entity's ability to pay dividends to stockholders:
  1. a
    The amount of statutory capital and surplus
  2. b
    The amount of statutory capital and surplus necessary to satisfy regulatory requirements (based on the entity's current operations) if significant in relation to the entity's statutory capital and surplus
  3. c
    The nature of statutory restrictions on the payment of dividends and the amount of retained earnings that is not available for the payment of dividends to stockholders.
505-944-50-2
The disclosure requirements beginning in the following paragraph apply to annual and complete sets of interim financial statements prepared in conformity with generally accepted accounting principles (GAAP). The disclosures in the following paragraph shall be made if both of the following conditions are met:
  1. a
    The use of prescribed or permitted statutory accounting practices (individually or in the aggregate) results in reported statutory surplus or risk-based capital that is significantly different from the statutory surplus or risk-based capital that would have been reported had National Association of Insurance Commissioners' statutory accounting practices been followed.
  2. b
    Either of the following conditions is met:
    1. 1
      State-prescribed statutory accounting practices differ from National Association of Insurance Commissioners' statutory accounting practices.
    2. 2
      Permitted state statutory accounting practices differ from either state-prescribed statutory accounting practices or National Association of Insurance Commissioners' statutory accounting practices.
505-944-50-3
If the criteria in the preceding paragraph are met, insurance entities shall disclose both of the following at the date each financial statement is presented:
  1. a
    A description of the prescribed or permitted statutory accounting practice
  2. b
    The related monetary effect on statutory surplus of using an accounting practice that differs from either state-prescribed statutory accounting practices or National Association of Insurance Commissioners' statutory accounting practices.
505-944-50-4
The disclosures in the preceding paragraph shall be applied by all of the following entities if the entity prepares U.S. GAAP financial statements:
  1. a
    A U.S. insurance entity
  2. b
    A U.S. entity with a U.S. insurance subsidiary
  3. c
    A foreign entity with a U.S. insurance subsidiary.
505-944-50-5
If a foreign insurance entity that does not have a U.S. insurance subsidiary prepares U.S. GAAP financial statements or is included in its parent's consolidated U.S. GAAP financial statements, the notes to financial statements shall disclose permitted regulatory accounting practices that significantly differ from the prescribed regulatory accounting practices of its respective regulatory authority and their monetary effects.
505-944-50-6
If an insurance entity's risk-based capital would have triggered a regulatory event had it not used a permitted practice, that fact shall be disclosed in the financial statements.

505-944-55Implementation Guidance and Illustrations

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Illustrations

505-944-55-1
This Example illustrates disclosures that an insurance entity could make to meet the requirements of paragraphs
944-505-50-2 through 50-6
.
  • Note X. Statutory Accounting Practices
  • The Entity's statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the [state of domicile] Insurance Department. [State of domicile] has adopted the National Association of Insurance Commissioners' statutory accounting practices as the basis of its statutory accounting practices, except that it has retained the prescribed practice of writing off goodwill immediately to statutory surplus in the year of acquisition.
  • In addition, the commissioner of [state of domicile] Insurance Department has the right to permit other specific practices that may deviate from prescribed practices. The commissioner has permitted the Entity to record its home office property at estimated fair value instead of at depreciated cost, as required by National Association of Insurance Commissioners' statutory accounting practices. This accounting practice increased statutory capital and surplus by $2.5 million and $2.3 million at December 31, 20X2 and 20X1, respectively, over what it would have been had the permitted practice not been allowed. The Entity's statutory capital and surplus, including the effects of the permitted practice, was $30.0 million and $27.9 million at December 31, 20X2 and 20X1, respectively.
  • Had the Entity amortized its goodwill over 10 years and recorded its home office property at depreciated cost, in accordance with National Association of Insurance Commissioners' statutory accounting practices, the Entity's capital and surplus would have been $29.9 million and $27.7 million at December 31, 20X2, and 20X1, respectively.
505-944-55-2
This Example illustrates alternative disclosures that an insurance entity could make to meet the requirements of paragraphs
944-505-50-2 through 50-6
.
  • Note X. Statutory Accounting Practices
  • The Entity's statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the [state of domicile] Insurance Department. [State of domicile] has adopted the National Association of Insurance Commissioners' statutory accounting practices as the basis of its statutory accounting practices, except that it has retained the prescribed practice of writing off goodwill immediately to statutory surplus in the year of acquisition.
  • In addition, the commissioner of the [state of domicile] Insurance Department has the right to permit other specific practices that may deviate from prescribed practices. The commissioner has permitted the Entity to record its home office property at estimated fair value instead of at depreciated cost, as required by National Association of Insurance Commissioners' statutory accounting practices.
  • The monetary effect on statutory capital and surplus of using accounting practices prescribed or permitted by the [state of domicile] Insurance Department is as follows.
    • December 31 20X2 20X1 $m $m Statutory capital and surplus per statutory financial statements $30.0 $27.9 Effect of permitted practice of recording home office property at estimated fair value (2.5) (2.3) Effect of [state of domicile's] prescribed practice of immediate write-off of goodwill(a) 2.4 2.1 Statutory capital and surplus in accordance with the NAIC statutory accounting practices $29.9 $27.7 (a) This amount compared to the prior year reflects the net impact of an additional year's amortization and the fact that admitted goodwill is based on the level of statutory capital and surplus and thus can fluctuate.

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