What Are the Differences Between Statutory Accounting Principles and GAAP?

Accountants have rules and principles that guide the way they work, such as producing financial statements in a similar way regardless of the business or industry for which they work. This allows for a level of apples-to-apples comparison, even when businesses are as diverse as a heavy manufacturer and a small cafe. In the insurance industry, there are special rules that, while based on general accounting principles, are in place to protect the people holding insurance.

In the U.S., the framework of standards, rules and principles followed by professional accounts is referred to as GAAP. It is updated and administered by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board. These principles govern how financial statements such as balance sheets, income statements, 10-Q filings and annual reports are generated and reported. Some accounting activities, such as measures of gross and net earnings and cash positions, do not fall under GAAP purview.

As the word "statutory" suggests, the rules and procedures behind statutory accounting principles are based in federal and state laws governing the insurance industry. The ability of insurance companies to do business has much to do with their financial strength and security, and standards for the industry are written into law to protect policyholders. Statutory accounting principles illustrate how insurance companies comply with these laws. Legislation at the state level may alter or vary accounting principles, either by prescribed practices -- those directly incorporated in state law -- or permitted practices, which are departures from standard SAP allowed and approved by state regulators.

SAP uses the GAAP framework as its basis, so there are few radical differences between the two principles when it comes to practice. However, the intention of each set of principles is quite different. GAAP is designed to provide useful information to shareholders and investors for researching the financial health of a company. SAP, on the other hand, targets accounting methods that focus on the solvency of companies providing insurance. Laws protect those who purchase insurance, so SAP is designed to improve the transparency of the assets and liquidity reported by insurance providers.

One difference between GAAP and statutory accounting principles is that the former can be adapted to any business, while the latter are specific to the insurance industry. Statutory accounting principles serve as guidelines for financial ethics in the insurance industry. Since insurance companies are, by law, required to demonstrate the ability to meet current and future obligations to policyholders, SAP establishes reporting methods that help determine whether an insurer can meet its obligations.

Since GAAP provides the SAP framework, changes and updates to GAAP are reviewed by the Statutory Accounting Principles Working Group. These changes are either adopted as-is, adopted with modifications or rejected for statutory accounting purposes.