Statement of Statutory Accounting Principles No. 101, Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (SSAP No. 101) was issued in August of 2011 and was effective January 1, 2012. SSAP No. 101 establishes statutory accounting principles for current and deferred federal and foreign income taxes and current state income taxes, and replaces SSAP No. 10R and SSAP No. 10. The main changes to SSAP No. 101 include:
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 retained, but slightly modified.
In order to provide additional clarification to the standards for accounting for income taxes under SSAP No. 101, the SSAP No. 101 Implementation Questions and Answers (Q&A) document was adopted at the National Association of Insurance Commissioners (NAIC) Summer National Meeting in August of 2012.
Tax loss contingencies
Pursuant to SSAP No. 101, SSAP No. 5R remains the standard for determining the amount of federal and foreign income tax loss contingencies, with a modification from the term probable to more-likely-than-not. State income tax loss contingencies continue to be accounted for under an unmodified, or probable, SSAP No. 5R standard. In determining the amount of a federal or foreign income tax loss contingency, it shall be assumed that the reporting entity will be examined by the relevant taxing authority that has full knowledge of all relevant information. Also, if the estimated tax loss contingency is greater than 50 percent of the tax benefit originally recognized, the tax loss contingency recorded shall be equal to 100 percent of the original tax benefit recognized.
SSAP No. 101 tackles the "gross-up" issue regarding the recording of income tax loss contingencies associated with temporary differences. Under both SSAP No. 10R and SSAP No. 101, the recording of interest and penalties related to tax loss contingencies of temporary differences is required. However, a reporting entity is not required to "gross-up" its current and deferred taxes until such time as an event has occurred that would cause a re-evaluation of the contingency and its probability of assessment. Examples of such events include the receipt of a Form 5701, Notice of Proposed Adjustment, upon IRS audit, or even the earlier receipt of an Information Document Request. At such time, the company must reassess the probability of an adjustment, reasonably re-estimate the amount of tax contingency under SSAP No. 5R, make any necessary adjustments to deferred taxes, and re-determine the admissibility of any adjusted gross deferred tax assets as provided for in the admissibility calculation. It is possible that the gross-up of current and deferred taxes could result in a surplus reduction if a reporting entity is not able to admit the additional deferred tax asset under the admissibility calculation.
Upon receipt of a Form 5701, a company determines, in accordance with SSAP No. 5R, a tax loss contingency is required to be established for a $100 temporary deduction claimed on a prior year federal income tax return. Assuming a 35% tax rate, the company would establish a current tax liability in the amount of $35, increasing its current income tax expense by $35.
|Dr.||Current income tax expense||$35|
|Cr.||Liability for current income tax||$35|
Because the $100 deduction relates to a temporary difference, the company would make a corresponding adjustment to deferred taxes. The company would increase its gross deferred tax asset by $35 to reflect the future tax benefit associated with the temporary deduction.
|Dr.||Gross deferred tax asset||$35|
|Cr.||Change in net deferred tax||$35|
It is important to note that the increase in the gross deferred tax asset is subject to the admissibility calculation. A decrease to surplus results if the increase to the gross deferred tax asset is nonadmitted.
The Q&A reiterates the fact that Financial Accounting Standards Board Interpretation No. 48 (FIN 48) is rejected for statutory accounting pursuant to paragraph 31 of SSAP No. 101. However, the modification from probable to more-likely-than-not is expected to result in an earlier recording of income tax loss contingencies and produce a result similar to FIN 48. The Q&A also provides further clarification that interest and penalties related to federal or foreign income tax must be included in income taxes, unlike FIN 48 that gives entities the option of reporting interest and penalties either above or below the line.