Ref #2015-14
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Agenda Item 2015-14: SSAP No. 68 – Paragraph 7 Clarification on Goodwill Limitation
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Questions have been presented to staff regarding the goodwill limitation test in paragraph 7 of SSAP No.
68—Business Combinations and Goodwill. Based on the information received, it appears, some
companies are broadly interpreting the phrase “acquiring entity’s capital and surplus” to complete
acquisitions at a holding company or “ultimate” parent level, and then using the capital and surplus from
the “acquiring” entity to determine the amount of goodwill admitted at each reporting entity. Staff
believes this is contrary to the original intent, and the approach to calculate the goodwill limitation test at
the reporting-entity’s capital and surplus.
Example:

Insurance Company A (which has a $15 million in capital and surplus) “acquires” SCA for $3
million. This purchase price reflects $500K in GAAP book value and $2.5 million in Goodwill. If
Insurance Company A retained the investment they would be permitted under SSAP No. 68 to
reflect a goodwill admitted asset on their books of $1.5 million.

However, Insurance Company A allocates 50% of the SCA to their 100% owned Insurance Entity
B, which has capital and surplus of $300K. Insurance Entity B reports an “Investment in SCA”
and uses the “acquiring” entities capital and surplus of $15 million to admit $1.25 of goodwill. If
Insurance Entity B had completed the goodwill limitation test on their own capital and surplus,
they would have only been able to admit $30K in goodwill.
The issue of companies using the consolidated position for the goodwill limitation test was previously
considered by the Statutory Accounting Principles (E) Working Group, and the Working Group revised
SSAP No. 68 pursuant to agenda item 2001-03. As noted in those revisions, the Working Group removed
the phrase “parent reporting entity’s capital and surplus” and replaced with “acquiring entity’s capital and
surplus” with the intent to clarify that the goodwill limitation test is done at the individual reporting
company level and not the consolidated level.
Existing Authoritative Literature:
SSAP No. 68 – Business Combinations and Goodwill
1.
Positive goodwill recorded under the statutory purchase method of accounting shall be
admitted subject to the following limitation: Positive goodwill from all sources, including life,
accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10%
of the acquiring entity’s capital and surplus as required to be shown on the statutory balance
sheet of the reporting entity for its most recently filed statement with the domiciliary state
commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating
system software, and net deferred tax assets. When negative goodwill exists, it shall be recorded
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as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint
venture, partnership or limited liability company shall be amortized to unrealized capital gains and
losses on investments over the period in which the acquiring entity benefits economically, not to
exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and
deposit-type assumption reinsurance shall be amortized to operations as a component of general
insurance expenses over the period in which the assuming entity benefits economically, not to
exceed 10 years. Goodwill shall be evaluated separately for each transaction. (INT 01-18)
INT 01-18: Consolidated or Legal Entity Level – Limitations on EDP Equipment, Goodwill and
Deferred Tax Assets Admissibility
INT 01-18 Issue
1.
Case Number 1: The reporting entity has several wholly-owned insurance company
subsidiaries. The reporting entity will account for its investment in these subsidiaries at their
underlying statutory equity in accordance with SSAP No. 97—Investments in Subsidiary,
Controlled and Affiliated Entities, A Replacement of SSAP No. 88 (SSAP No. 97).
2.
Case Number 2: A reporting entity has deferred tax assets (DTAs) in excess of those that
are allowed to be admitted in accordance with the guidance in SSAP No. 101, paragraph 11. The
reporting entity files a consolidated tax return with one or more affiliates. Those affiliates have
deferred tax liabilities (DTLs) that exceed the remaining DTAs available for admission after
application of paragraphs 11.a. and 11.b. of SSAP No. 101 at the affiliates’ legal entity level.
3.
The accounting issues are:
Case Number 1:
When applying the limitations described in paragraph 11.b.ii of SSAP No. 101, paragraph
4 of SSAP No. 16R, and paragraph 7 of SSAP No. 68 to the parent reporting entity's
adjusted capital and surplus, is the reporting entity required to exclude any net deferred
tax assets, EDP equipment and operating system software, and net positive goodwill
included in its insurance subsidiaries’ valuation? Or, is the limitation calculated solely
based on the legal entity's adjusted capital and surplus?
The effect of looking solely at the legal entity is to allow for the "stacking" of intangibles,
so that the parent reporting entity may effectively have more than the defined limitations
“invested” in deferred tax assets, EDP equipment and operating system software and
goodwill. These assets are limited at each subsidiary legal entity level.
Case Number 2:
Can the reporting entity offset its DTAs against existing gross DTLs of an affiliated entity?
This offset would be pursuant to the allowance of an offset against existing DTLs under
SSAP No. 101 paragraph 11.c. This offset would occur only after application of
paragraphs 11.a. and 11.b. for both the reporting entity and the affiliate. The premise for
the offset is that both entities file a consolidated federal income tax return and that future
deductible items of the reporting entity are, by current tax law, able to offset future
income items of the affiliate. The affiliates for this purpose would have to have a tax
sharing agreement that required payment from one affiliate to another for loss usage.
INT 01-18 Discussion
4.
The Working Group reached a consensus as follows:
Case Number 1:
The Working Group reached a consensus that in applying the limitations described in
paragraph 11.b.ii. of SSAP No. 101, paragraph 4 of SSAP No. 16R, and paragraph 7 of
SSAP No. 68 to the parent reporting entity's adjusted capital and surplus, the reporting
entity shall not exclude any net deferred tax assets, EDP equipment, and operating
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system software, and net positive goodwill included in its insurance subsidiaries
valuation.
Case Number 2:
The Working Group reached a consensus that the reporting entity shall not offset it's
DTAs against existing gross DTLs of an affiliated entity.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): Agenda Item 2001-03: SSAP
No. 68 – Paragraph 7 Clarification of Goodwill Limitation.
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Staff recommends that the Working Group move this item to the nonsubstantive active listing and
expose nonsubstantive revisions to SSAP No. 68 to further clarify that the goodwill limitation test is
done at the individual reporting company level and not at the consolidated level. This is also
consistent with INT 01-18: Consolidated or Legal Entity Level – Limitations on EDP Equipment,
Goodwill and Deferred Tax Assets Admissibility.
Proposed Revisions to SSAP No. 68
7.
Positive goodwill recorded under the statutory purchase method of accounting shall be
admitted subject to the following limitation: Positive goodwill from all sources, including life,
accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10%
of the acquiring1 entity’s capital and surplus as required to be shown on the statutory balance
sheet of the reporting entity for its most recently filed statement with the domiciliary state
commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating
system software, and net deferred tax assets. When negative goodwill exists, it shall be recorded
as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint
venture, partnership or limited liability company shall be amortized to unrealized capital gains and
losses on investments over the period in which the acquiring entity benefits economically, not to
exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and
deposit-type assumption reinsurance shall be amortized to operations as a component of general
insurance expenses over the period in which the assuming entity benefits economically, not to
exceed 10 years. Goodwill shall be evaluated separately for each transaction.(INT 01-18)
Footnote 1: The “acquiring” entity is intended to reflect the insurance reporting entity that reports
the investment resulting in goodwill. The goodwill limitation test shall be completed at the
individual reporting company level and not at the consolidated level.
Staff Review Completed by:
Josh Arpin - April 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 68, as illustrated above,
to provide a consistency clarification that the goodwill limitation test is completed at the individual
reporting company level.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\June 17 SAPWG\A - Exposed Items\15-14 SSAP 68
Clarification on Goodwill Limitation Test.docx
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