United States

Insurance statutory accounting vs. GAAP

Guidance on accounting for business combinations

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The state of the economy contributed to a noticeable decline in merger and acquisition (M&A) activity over the last several years. Although acquisitions in the insurance space are on the rise, especially with increased interest from the private equity space, we continue to find that a majority of those who are entering the M&A arena are doing so for the first time in several years. When accounting for an acquisition, insurers must consider both Topic 805, Business Combinations, of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC 805) and Statutory Statement of Accounting Principles (SSAP) No. 68, Business Combinations & Goodwill (SSAP 68). Due to the vast differences in the accounting treatments under ASC 805 and SSAP 68, the easiest way to present the differences is to lay a foundation by presenting an overview of SSAP 68 and then comparing it to the major issues pertinent to ASC 805.

SSAP 68 outlines the statutory guidance for the accounting for purchases of a subsidiary and controlled and affiliated investments; accounting for purchases of partnerships, joint ventures and limited liability companies; accounting for goodwill; and accounting for mergers. The statutory guidance allows for business combinations to be accounted for as either a statutory purchase or a statutory merger. A statutory purchase is a business combination in which one entity acquires another. A statutory merger occurs when the equity of one entity is issued in exchange for the equity of another entity, which is then canceled, and prospectively only one entity exists. 

For statutory purchases, the acquiring entity must record its investment at “cost,” where “cost” is defined as the sum of any cash payment, the fair value of other assets distributed, the fair value of any liabilities assumed and any direct costs of the acquisition.

The table that follows this discussion highlights some of the major business combination matters that must be considered and the differences in treatment between ASC 805 and SSAP 68. This table is not meant to represent all possible differences, but rather to provide some perspective and consideration as it relates to some of the more frequently discussed differences.

As always, it is important to remember that each transaction is different. A review of your preliminary purchase agreement(s) with your finance team, as well as your professional advisor, always helps in identifying potential issues before the acquisition is finalized. 

For more information, please contact your local RSM professional. In addition, more information about ASC 805 can be found in our A Guide to Accounting for Business Combinations – Second Edition.

Issue

ASC 805

SSAP 68

Definition of a business

Must have inputs and processes and be capable of producing outputs

Applied to acquisition of “entities” in total
Other guidance applies to other transactions

Definition of a business combination

A transaction or other event in which an entity obtains control of one or more businesses

One entity obtains control of another entity

Direct external transaction costs

Expensed as incurred

Capitalized and generally considered as part of goodwill

Future restructuring and exit costs 

Recognized as a liability and expense after the business combination occurs when certain conditions are met

Post-combination expense

Subsequent adjustments to certain income tax balances

Generally recognized as an income tax expense or benefit

Balances remain in the acquired entity

In-process research and development (IPR&D)

Recognize as an indefinite-lived intangible asset measured at fair value

Recorded based on the book value of the asset

Contingencies

Recognize at fair value if it can be reliably determined; otherwise, recognize if probable and reasonably estimable

Apply SSAP No. 5, Liabilities, Contingencies and Impairments of Assets

Indemnification assets

Recognize and measure consistent with the related indemnified item, subject to certain limitations

Not considered in statutory accounting

Reacquired rights

Recognized at fair value over the remaining term of the contract (i.e., ignore future renewals)

Not considered in statutory accounting

Contingent consideration

Record based on fair value at the acquisition date 
Contingent consideration classified as an asset or liability must be remeasured to fair value at each subsequent reporting date with the changes in fair value generally reported in the income statement

Accounted for in the acquired entity in accordance with the statutory guidance

Positive goodwill

Not amortized, but tested for impairment at least annually (Note 1)

Admitted subject to certain limitations
Amortized to unrealized gains and losses on investments over the period in which the acquiring entity benefits economically, not to exceed 10 years

Negative goodwill

Recognized as a bargain purchase gain

Recorded as a contra-asset
Amortized to unrealized gains and losses on investments over the period in which the acquiring entity benefits economically, not to exceed 10 years

Measurement period adjustment

Retrospective application back to the acquisition date is required

Not considered in statutory accounting as investment is recorded at “cost”

Noncontrolling interest

Recognized and measured at fair value

Not considered in statutory accounting

 

Note 1: Qualifying private companies may elect an accounting alternative that requires amortization over a maximum of 10 years and impairment testing when triggering events occur. For additional information, refer to our summary, Simplified accounting for private companies: Goodwill.

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