In preparing financial statements, every industry has got certain set of principles. The principles define the manner in which financial transactions need to be accounted for according to the regulations and rules of statutory bodies. GAAP and SAP are the two statutory bodies. SAP, an acronym of Statutory Accounting Principles, is used during the preparation of financial statements for insurance entities. Authorized insurers in the US are expected to prepare financial information in accordance to SAP. The principles are customized for insurance departments of various states in order to help them regulate the insurance companies’ solvency.

Generally Accepted Accounting Principles (GAAP) offers rules, procedures, common set of standards in accounting which are defined by the professional body of accountancy. Nearly all the companies that are traded publicly in the US have adopted the GAAP. These principles offer accounting standards that are authoritative as well as generally accepted methods of transactions reporting and recording. To build investor confidence in using the company’s financial information for investment purposes, companies are expected follow GAAP.

Differences

Industrial Difference

Every company in the US is required to use GAAP. On filing financial reports, SEC requires that they follow the Generally Accepted Accounting Principles. FASB is the body tasked with the responsibility of setting the uniform rules applicable throughout the US hence enabling investors to make a comparison of various companies with similar principles.

On the other hand, statutory accounting is for insurance companies only. The SAP framework was provided by National Association of Insurance Commissioners (NAIC) for purposes of recording financial transactions of the insurance companies. Under Statutory Accounting, filing is used in determining the performance of insurance companies.

Role of Accounting Principles

Insurance companies’ financial statements are normally prepared through the statutory accounting guidelines and this information is beneficial to investors to see if insurers can pay the insurance claims. Additionally, investors are allowed to assess an insurance company’s total worth if the entity discontinues with its operations.

In GAAP, a company is deemed to be a going concern and hence the financial statements will be prepared on the matching concept basis. Investors therefore are able to measure the business’ profitability. A company’s value is also assessed and its present and future value is assessed.

Asset’s Value

Financial statements prepared under SAP and GAAP have got different purposes. For SAP, the financial statements are intended to establish the company’s current value and hence do not include intangible and non-liquid assets. For instance, supplies, goodwill, furniture and tax credit are all not included under SAP’s financial statements. Under the GAAP rules however, these items are a part of the financial statements under the assets category which increases the asset’s overall value.

Matching Principle

When preparing a company’s financial statements, the matching concept is followed under GAAP. However, the matching concept is not followed under Statutory Accounting. Under the matching principle, a company is supposed to record the expenses relating to a product upon recording of sales in the financial statements. An example is when recording the quarterly sales of an entity, expenses relating to those sales needs to be apportioned on quarterly basis in order to match the corresponding quarterly earnings.

However, for Statutory Accounting, expenses are booked as they occur for insurance companies. As such, upon selling the insurance policy, expenses that relate to that policy are immediately accounted for despite of when related premiums are earned.

Value of Equity

Under GAAP, the entity’s value is recorded as stockholder equity. On the other hand, this is normally recorded as a surplus of statutory policyholder for the statutory accounting case. In both cases, the recorded value is different since statutory accounting rules are stricter in relation to recording the assets. Moreover, the calculation of the net income for an insurance company is done differently in comparison to calculating net income under GAAP.