What are the differences between Statutory Accounting Principles and GAAP?

The Statutory Accounting Principles (SAP) form the basis for preparing the financial statements of insurance companies. GAAP is the set of accounting rules required to be followed by all companies, irrespective of the industry. Broadly, SAP differs from GAAP in terms of the accounting principles used to prepare the financial statements, governing agencies, the purpose for which the financial statements are used, and valuation methods.


SAP is specific to the insurance industry, while all companies must follow GAAP rules. Statutory Accounting Principles are accounting rules that are specific to insurance companies in the United States as outlined by the National Association of Insurance Commissioners (NAIC). They provide the framework to prepare the financial statements of insurance companies. Because the insurance industry falls under state regulation, actual rules vary by state. The SAP filings are used to determine the health of the insurance company. Generally Accepted Accounting Principles (GAAP), on the other hand, are a set of accounting rules and standards that are required to be followed by all companies. The GAAP rules in the UK are set and monitored by the Financial Reporting Council one element of the UK GAAP is the Statement of Standard Accounting Practice. This is abbreviated to SSAP and is sometimes confused with the Americal SAP. Insurance companies have to file their financial statements using SAP for state filings, and GAAP for SEC filings.


SAP and GAAP operate on different accounting principles to provide information that is used for different purposes. SAP guidelines are used to prepare financial statements that allow investors to determine the ability of the insurance company to pay its future claims. In other words, if all customers of the insurance company had a claim at present, SAP helps to determine if the company would be able to pay those insurance claims. It allows investors to know the worth of the company if it ceased operations immediately. GAAP guidelines, however, treat a business as a going concern -- as if the business would remain in operation indefinitely. Therefore, the focus is on preparing the financial statements by matching revenues with expenses, so an investor can gauge the underlying profitability of the business. This allows investors to answer the question about the worth of a company in its future versus its actual present value.

Asset valuation

The value of assets using SAP is lower than when using GAAP. This difference stems from the fundamental difference in the purpose of creating financial statements under SAP and GAAP. Because SAP statements are used to find the value of the company at the immediate present, the statements don't include many intangible and non-liquid assets. This includes items such as furniture, supplies, tax credit and goodwill. GAAP, on the other hand, allows companies to list these items under the assets category, which translates to a higher value in terms of assets.


The matching principle used by GAAP that matches revenues and expenses isn't followed in SAP filings. Thus, the net income ratios as calculated by using the data from SAP and GAAP filings are different for the same company and the same financial year. So when a product is sold apart from recording the sales revenue, the company has to also record the cost of making the product as an expense. Though in actuality the expense may have occurred before the sale of the product, the matching principle allows a company to record this expense only when the sale is made. In the case of insurance, an insurance company can record the expense over the life of the policy using GAAP. So if the premium is due quarterly, the expense related to the sale of the policy is divided to match the quarterly earned premiums. In the case of SAP, this principle is broken. So the insurance company has to record its expenses as they occur, irrespective of when the revenue is earned. So the entire expense related to the policy is recorded when the sale is made, even though the premium may still be unearned. For a growing company, the initial statements may thus show more expenses than revenue, thus lowering its net income.


The equity values for the same company differ, using data from SAP and GAAP filing for the same financial year. The value of an enterprise is recorded differently using GAAP and SAP. GAAP records it as stockholder equity; SAP records this under statutory policyholder surplus. Because SAP records assets more conservatively and also has different standards for calculating the net income of an insurance company than GAAP, it naturally follows that the values recorded under statutory policyholder surplus aren't the same as stockholder equity. Generally, the valuation under SAP will tend to be lower than that of GAAP because of the more conservative method of accounting used.

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About the Author

Subha Varadan has a bachelor's degree in architecture from India and an M.B.A in finance and supply chain management from California State University East Bay (CSUEB). Varadan won the "Outstanding Graduate Achievement Award " for her M.B.A. She has primarily written on financial topics for Demand Studios from 2008 and has been published on eHow.

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