SAP vs. GAAP Reinsurance
For SAP, liabilities are shown net of reinsurance on the balance sheet while GAAP shows them gross. Isn't this a contradiction with the philosophy of SAP (conservative)? If liabilities are shown net of reinsurance, that means the company's reserve liability figure would be lower since it's net of ceded reinsurance - unless I'm understanding incorrectly.
Comments
You're correct. The treatment of reinsurance does not seem to align with purpose of SAP and GAAP. This question came up in this exam problem on the differences between SAP and GAAP:
If you look at the answer to part (c), they list the differences in treatment of reinsurance. Then in part (d), they ask you how this treatment either supports or doesn't support the purpose of SAP and GAAP. Interestingly, the examiner's report doesn't not provide any specific answer to this regarding reinsurance, but they do leave open the possibility that the accounting treatment does not always align with the stated purpose of SAP and GAAP.
I think the conservative aspect of SAP is intended as a general rule of thumb, but these accounting rules evolved over time for various different reasons so the rule of thumb doesn't always work.
Separate question, but putting here since it is on retroactive reinsurance.
The notes state that surplus is unchanged for GAAP for retroactive reinsurance. Is this because the liability established offsets the asset for reinsurance recoverables? The notes state that the liability is used to offset income deferral but it feels like it is actually offsetting the asset created to keep surplus consistent (since surplus = assets - liabilities).
I think the wiki note means that a liability is established to offset the established asset, so as to defer the gain in income. It essentially means what you say.