Question

Define the concept of “Admitted Assets” in Statutory Accounting and differentiate between the accounting for assets under GAAP.

Answer 1

Admitted assets :-

Insurance companies typically classify their assets into one of three categories: admitted assets, invested assets, and non-admitted or other assets. In contrast with most companies that follow GAAP accounting principles, they use statutory accounting (STAT) set by the National Association of Insurance Commissioners (NAIC) to report financial data.

Under STAT accounting, some assets have no value. Admitted assets are assets of an insurance company permitted by state law to be included in the company's financial statements, usually the balance sheet. Although each state has discretion over its insurance laws, there is a consensus over which assets are suitable to use when determining the insurance company's solvency. Admitted assets often include mortgages, accounts receivable, stocks, and bonds. The assets must be liquid and available to pay claims when necessary.

Admitted assets generally include assets that are liquid and whose value can be assessed or receivables that can reasonably be expected to be paid. Since admitted assets are a critical component for computing capital adequacy to state insurance regulators, they have a much narrower definition than might be applied under Generally Accepted Accounting Principles (GAAP), which assigns value to most assets and uses all assets in determining the value of a company. Admitted assets help determine the solvency of a company, especially when evaluating the ability to pay an abnormally large amount of claims at once.

Admitted Assets vs. Non-admitted Assets
As the name suggests, non-admitted assets are assets prohibited by law from being admitted in the evaluation of the financial condition of a company. In short, they are not included in the annual financial statements as they have little to no value in statutory reporting.

Non-admitted assets are assets with economic values that cannot fulfill policyholder obligations. Also, they are either difficult to sell or are not easily converted to cash (it takes one or more years to convert non-admitted assets to cash) because of encumbrances—such as liens—or third-party interests (e.g., reinsurance companies).

Non-admitted assets are more useful than what they are immediately purposed for. They can also be looked at as a source of collateral or used to calculate a company's leverage. Common examples of non-admitted assets include office furniture, prepaid expenses, and fixtures. Most intangible assets (e.g., trade names, trademarks, and patents), non-bankable checks, and stock held as collateral for loans are non-admitted assets. However, each state determines what qualifies as an admitted or non-admitted asset.

Insurers are primarily concerned with whether they are financially capable of paying out their claims. Excluding non-admitted assets and including admitted assets give them a clearer picture as to whether this responsibility is compromised or possible.

Accounting for Assets under Generally accepted accounting principles :-

1. Recording of assets at cost or value of consideration given for the asset.

2. Classification of asset in to current assets or fixed assets

3. Providing depreciation to the asset by following proper accounting policy which was stated in applicable financial reporting framework. Applying this policies consistently for future years

4. Making revaluation of assets at a regular point of time intervals

5. Recording loss or gain at the time of sale or retirement of the asset.

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