Statutory Accounting Principles Working Group s4

Ref #2015-46 Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A

Issue: SSAP No. 3 – Correction of an Error Clarification

Check (applicable entity): P/C Life Health Modification of existing SSAP New Issue or SSAP

Description of Issue: It has been identified that some entities are electing to not update their annual statements for discrepancies identified by the NAIC Quality Assurance Function. These discrepancies include, but are not limited to: formatting, completeness, consistency and data validation (collectively referred to as “reporting errors”). NAIC staff believes this election is due to an interpretation of the correction of error guidance in SSAP No. 3— Accounting Changes and Corrections of Errors, which requires approval of the domiciliary regulator for an entity to file amended financial statements when material errors are identified.

It is staff’s understanding that the correction of error guidance in SSAP No. 3, paragraphs 9-10 is intended to be applied to accounting errors (i.e. mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared), not discrepancies in the completion of the annual statement. Therefore, correction of discrepancies in the annual statement, particularly those identified by the Quality Assurance Function, does not require approval from the domiciliary regulator. This agenda item proposes revisions to SSAP No. 3 to clarify the correction of error guidance. Staff’s proposal is that the guidance in SSAP No. 3 be revised to clarify that the correction of an error guidance does not preclude companies from amending their annual and quarterly financial statement filings due to reporting errors.

Existing Authoritative Literature:

SSAP No. 3—Accounting Changes and Corrections of Errors:

Correction of an Error 9. Errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. In contrast, a change in accounting estimate results from new information, or subsequent developments and, accordingly, from better insight or improved judgment. Thus, an error is distinguished from a change in estimate.

10. Corrections of errors in previously issued financial statements shall be reported as adjustments to unassigned funds (surplus) in the period an error is detected. If a reporting entity becomes aware of a material error in a previously filed financial statement after it has been submitted to the appropriate regulatory agency, the entity shall file or be directed to file an amended financial statement if approved by its domiciliary regulator.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): None

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None

Staff Recommendation:

It is staff’s recommendation that the Working Group move this agenda item to the nonsubstantive active listing and expose nonsubstantive revisions to SSAP No. 3 to clarify that amended financial statements shall be filed for material accounting errors unless otherwise directed by the domiciliary regulator and for discrepancies identified within a submitted Annual Statement, particularly those identified by the NAIC through its quality assurance function.

Staff Note: The purpose of the NAIC Quality Assurance Function is to obtain and review entity’s annual statements for consistency and comparison purposes. The annual statements are used by several parties, including the NAIC, commissioners, examiners, analysts and other state regulators. This information is used for several purposes, including, but not limited to: regulatory discussions, testimony, entity analysis and compliance.

Proposed Revisions to SSAP No. 3

Correction of an Error

9. Accounting Errors errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. In contrast, a change in accounting estimate results from new information, or subsequent developments and, accordingly, from better insight or improved judgment. Thus, an error is distinguished from a change in estimate.

10. Corrections of accounting errors in previously issued financial statements shall be reported as adjustments to unassigned funds (surplus) in the period an error is detected. If a reporting entity becomes aware of a material accounting error in a previously filed financial statement after it has been submitted to the appropriate regulatory agency, the entity shall file or be directed to file an amended financial statement if approved unless otherwise directed by its the domiciliary regulator 2.

Footnote: This guidance is not intended to preclude companies from amending their annual or quarterly financial statement filings due to reporting errors.

Staff Review Completed by: Josh Arpin, NAIC Staff September 2015

Status: On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 3, as illustrated above, to clarify that amended financial statements shall be filed for material errors unless otherwise directed by the domiciliary regulator, and that the guidance in SSAP No. 3 shall not preclude companies from amending their annual or quarterly financial statement filings due to reporting errors.

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