Statement of Statutory Accounting Principles No. 101, Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (SSAP No. 101) was adopted by the National Association of Insurance Commissioners (NAIC) on November 6, 2011. The effective date of adoption is January 1, 2012.
With its adoption, SSAP No. 101 supersedes SSAP No. 10R and SSAP No. 10. The change resulting from the adoption of SSAP No. 101 shall be accounted for as a change in accounting principles in accordance with SSAP No. 3 – Accounting Changes and Corrections of Errors.
The two main objectives of SSAP No. 101 are:
- To recognize the estimated amount of taxes payable or refundable for the current year as a tax liability or asset, and
- To recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in a reporting entity’s statutory financial statements or tax returns.
SSAP No. 101 differs from SSAP No. 10R in these key areas:
- Tax-loss contingency model is based on SSAP No. 5R, Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R) using a more-likely-than-not and reasonably estimated criterion,
- Three-component admissibility calculation is modified, and
- Additional tax planning strategy language is included within the guidance.
Tax-loss contingency model
Similar to SSAP No. 10R, SSAP No. 101 bases tax-loss contingencies on a SSAP No. 5R model. However, rather than using a probable and reasonably estimated criterion as in SSAP No. 10R, SSAP No. 101 uses a more-likely-than-not and reasonably estimated criterion. A tax benefit is recognized with a liability recorded if the related tax-loss contingency is more-likely-than-not and can be reasonably estimated. A presumption is made that the reporting entity will be examined by the relevant taxing authority who is assumed to have full knowledge of all relevant information.
If the estimated tax-loss contingency is greater than 50% of the tax benefit originally recognized, then the tax-loss contingency recorded shall be equal to 100% of the original tax benefit recognized.
Three-component admissibility calculation
- Under the first component of the admissibility calculation, SSAP No. 101 allows admissibility of deferred tax assets (DTAs). This is up to the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse during a timeframe corresponding with Internal Revenue Service (IRS) tax-loss carryback provisions, not to exceed three years. SSAP No. 101 also includes accruals for tax-loss contingencies in the definition of federal income taxes paid.
- Under the second admissibility component, SSAP No. 101 limits admissibility to either zero years and zero percent, one year and ten percent, or three years and fifteen percent based on Realization Threshold Limitation Tables. A reporting entity that is subject to risk-based capital requirements or is required to file a Risk-Based Capital Report with the domiciliary state shall use the Realization Threshold Limitation Table – RBC Reporting Entities in this component of the admissibility calculation. Non-RBC reporting entities and mortgage or financial guaranty insurers are provided with special tables for determining admissibility. SSAP No. 101 uses the entity’s current reporting period capital and surplus for the second part of this component rather than the entity’s capital and surplus from its most recently filed statement as under SSAP No. 10R.
- Under the third component of the admissibility calculation, SSAP No. 101 adds consideration of the reversal pattern of deferred tax assets and deferred tax liabilities. Additionally, the third component provides guidance similar to U.S. GAAP on the level of detail required on scheduling deferred tax assets and liabilities.
Tax planning strategies
SSAP No. 101 explicitly requires the consideration of tax planning strategies when determining statutory valuation allowances and when considering the realization of deferred tax assets under the admissibility calculation. Tax planning strategies under consideration in the realization of deferred tax assets must be prudent and feasible and require the application of the tax-loss contingency guidance based on SSAP No. 5R to any tax-loss contingencies that would be created as part of the tax planning strategy.
Additional disclosure requirements are contained in SSAP No. 101 relating to tax-loss contingencies and tax planning strategies, and are as follows:
- Disclose tax-loss contingencies for which it is reasonably possible that the total liability will significantly increase within 12 months of the reporting date,
- Disclose an estimate of the range of the reasonably possible increase or state that an estimate of the range cannot be made, and
- Disclose whether reinsurance related tax planning strategies are used.
The footnote disclosure for the admissibility calculation is also modified. It reflects the change from the sum of components 10.a., 10.b., and 10.c. (or 10.e. if the entity elected expanded admissibility under 10.d.) under SSAP 10R, to the sum of components 11.a., 11.b., and 11.c. under SSAP No. 101.
The NAIC has indicated that Appendix A – Implementation Questions and Answers (Q&A) will be updated to reflect the guidance included in SSAP No. 101. An exposure draft of the Q&A is expected to be released within the next month with the hopes of adopting a final Q&A by December 31, 2011.