SAP v GAPP asset recognition

mimilau5858

The battlecard answer for this question sounds very similar to me - recognition that match with expense. Could you explain a bit more?

Staff-T1

Basically means you just recognize your expense as you earn revenue (i.e. as you earn your premium) rather than recognizing the full expense amount immediately

AndrewL

Hello, could you please clarify the CAS solution "GAAP has recognized certain assets such as deferred policy acquisition costs, while SAP treats it as expense when incurred"

My understanding is that if we acquire a policy, we incur a cost. Instead of instantly recognizing it as an expense, we recognize it as an asset and "amortize" the cost over the lifetime of the policy as an expense. This is SAP or GAAP?

Can you please explain the other situation?

Thanks,
Andrew

graham

You're on the right track with your understanding of deferred policy acquisition costs. In the context of GAAP (Generally Accepted Accounting Principles), when an insurance company acquires a new policy, costs like commissions, underwriting, and advertising can be deferred. Essentially, these costs are capitalized as an asset and then amortized over the life of the policy.

In contrast, SAP (Statutory Accounting Principles), which are more conservative and focused on solvency, treats these costs as expenses when they are incurred. The rationale is to provide a more immediate snapshot of the company's financial position, making sure it has enough liquid assets to cover claims.

So, to recap:

• GAAP: Deferred and amortized over time
• SAP: Expensed when incurred (company takes the hit all at once)

Both approaches have their pros and cons, depending on what you're looking to assess in the company's financials.