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New Requirements Under Ssap 10 R May Cause Significant Alterations To Your Companys Deferred Tax Cal

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New Requirements under SSAP 10R May Cause Significant Alterations to your Companys Deferred Tax Cal

by

Brandy Vannoy

The NAIC approved SSAP 10R, a revised, temporary replacement of the income tax standard under SSAP 10. The revised standard is effective for year-end 2009 and year-end and interim 2010.

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The NAIC revised this standard in order to be more in line with the Statutory Statement of Concepts of conservatism and transparency. The revisions are considered a change in accounting principle and will be accounted for as a cumulative effect adjustment to unassigned surplus as of December 31, 2009. If applicable and elected by company, these changes will require significant alterations to the companys deferred tax calculation under statutory accounting. The main differences as a result of SSAP 10R are the concept of GAAP valuation allowance, reversal and carryback periods, increase in surplus limitation and additional disclosures. GAAP Valuation Allowance Concept – The addition of the valuation allowance concept applies to all companies. As under FAS 109 for GAAP reporting, the Company must consider if their gross deferred tax assets (DTA) will more likely than not (greater than 50 percent chance) be able to be realized. This concept must now be applied under statutory prior to the admissibility calculations. Admissibility Changes The most significant changes under SSAP 10R in admissibility are the following: Eligibility If the company is subject to Risk Based Capital (RBC) requirements or files a RBC report then they may be allowed additional admitted DTA if their RBC level is above the following thresholds laid out in the new paragraph 10.d: 1. The risk based capital trend test (if subject to risk-based capital trend test); or 2. If not subject to risk-based capital trend test, the maximum risk-based capital level where an action level could occur as a result of a trend test (i.e. 250% for life/fraternal and 300% for P&C/health). Reversal/Carryback Periods If the company is subject to RBC and meets one of the above thresholds, they may elect to follow paragraph 10.e to calculate additional admitted DTA. The calculation under 10.e starts with the net DTA from original SSAP 10 less any valuation allowance. The reversal periods now correspond with the IRS tax loss carryback provisions, not to exceed three years, based on the tax character of the temporary difference. For example, life companies are allowed to carryback tax losses three years so a life company would follow a three year reversal under paragraph 10.e.i (increased from the current one year reversal). Whereas a non-life company would follow a two year reversal. Capital tax items would use a three year reversal period since that is consistent with the capital loss carryback provisions. For purposes of the realization calculation and the with and without test, a three year period would apply regardless of character of temporary differences but can still only apply as the law allows (i.e. capital loss cannot offset non-capital income). Surplus Limitation Increased The DTA admitted under 10.e.ii is limited to 15% of adjusted statutory capital and surplus, an increase from 10% under 10.b.ii. Disclosure SSAP 10R also requires several additional disclosures for all companies, regardless of whether the additional DTA admissibility applies. The following are some of the additional disclosures required: DTA must now be broken out by gross, adjusted gross, admitted and non-admitted; DTA and DTL shown by tax character; Statement as to if the company has elected to admit DTAs under 10.e; Increased amount and change in amount of admitted adjusted DTA as a result of 10.e, by tax character; Amount of admitted DTA, by tax character, calculated under each 10.a, 10.b.i, 10.b.ii, 10.c, 10.e.ii.a, 10.e.ii.b and 10.e.iii and the risk-based capital level used to determine if the company meet the required threshold; and Amount of admitted DTA, admitted assets, statutory surplus and total adjusted capital used in the RBC calculation resulting from the calculation under 10.a, 10.b and 10.c and the increased amount of DTA, admitted assets, and surplus resulting from use of 10.e, if any.

Brandy Vannoy, CPA is affiliated with Johnson Lambert & Co. LLP, a CPA firm formed in 1986. Johnson Lambert is a US based

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New Requirements under SSAP 10R May Cause Significant Alterations to your Companys Deferred Tax Cal