NAIC.SSAP-5R

Reading: Statement of Statutory Accounting Principles 5R, “Liabilities, Contingencies and Impairment of Assets,” paragraphs 1-12, 30-33, and 37-38

Author: National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

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BA Quick-Summary: Accounting Principles - Liabilities, Contingencies and Impairment of Assets Paragraphs 1 - 12: This section defines statutory accounting principles for liabilities, contingencies, and impairments of assets. A liability is characterized by a present duty to transfer assets or provide services due to past transactions, and it must be recorded in financial statements when incurred. For joint and several liabilities, the total obligation should be reported as the sum of agreed payments and any additional expected amounts, while loss contingencies and impairments must be recorded if the loss is probable and can be reasonably estimated. Paragraphs 30 - 33: This section mandates disclosures for joint and several liability arrangements, loss contingencies, and guarantees, even if the possibility of loss is remote. These disclosures must include the nature, terms, amounts, and potential recoveries related to these liabilities to ensure transparency in financial statements. Paragraphs 37 - 38: This very short section mentions the requirement for financial statements to disclose the nature of any gain contingency while avoiding misleading implications about the likelihood of realization.

Study Tips

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

• 2022-Fall: There was 1 very minor update that is noted further down.

This is a reading where your best strategy is to play the odds. In other words, skip it unless you've already learned the high-ranked readings very, very well. It contains definitions for several terms that seem important, but none has ever been asked. If I were studying for this exam, I would blow it off. Worst case scenario: there's a 1.0-point question and you take an educated guess.

BattleTable

• this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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In Plain English!

Basic Facts

Question: identify the components of a liability

• responsibility to transfer assets upon occurrence of a specified event
• responsibility cannot be avoided
• event has occurred

Question: define loss contingency or asset impairment and identify the 3 levels

• a condition involving uncertainty as to a possible loss
• resolved when future event occurs or fails to occur
• levels:

   - probable (likely to occur)

   - reasonably possible (between probably and remote)

   - remote (slight chance of occurring)

Side Note: The above comments apply to both a loss contingency and an asset impairment but those 2 terms are not quite the same thing: Loss contingency = “I might owe.” (and shows up on the liability side of the balance sheet) Asset impairment = “This asset isn’t worth what I booked.” (and shows up on the asset side of the balance sheet)

Question (new for 2022-Fall): if a financial instrument has characteristics of both liabilities and equity then how should it be reported in financial statements

• as a liability, to the extent the instrument embodies an unconditional obligation of the issuer

That's about it. Here's the quiz...

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Lower Probability Exam Items

If you want to go into a little more depth in this article, Ian-the-Intern pulled out 5 exam-type questions from various paragraphs within the reading. You should only cover these if you've already studied all the high-value topics thoroughly.

• These 5 questions are ranked in order of importance (according to Ian!)

These questions and answers aren’t included in the BattleCards because they’re unlikely to appear on the exam, and including them might suggest they’re required study. Think of them as optional extras rather than core material.

Paragraph(s)	Exam-Type Question	Answer	Comment / Why It Matters
12	If a loss contingency is probable and reasonably estimable as a range, but no amount within the range is a better estimate than another, what amount should be accrued?	Accrue the midpoint (mean) of the estimated range. If the high end of the range cannot be quantified, then no range exists and management’s best estimate is used.	Very testable measurement rule. Easy to miss under pressure.
11	When is a judgment considered “rendered” for purposes of recognizing a liability, and do appeals affect recognition?	A judgment is rendered when the court enters a verdict. The ability to appeal does not delay accrual. The liability includes anticipated settlement amounts, legal costs, and related recoveries.	Creates an automatic presumption of accrual.
32	When must a loss contingency be disclosed even if it is not accrued, and what must be disclosed?	Disclosure is required when there is at least a reasonable possibility of loss. The disclosure must describe the nature of the contingency and provide an estimate of the loss or range, or state that it cannot be estimated.	Tests recognition vs disclosure distinction.
5–6	How should a reporting entity measure its obligation under a joint and several liability arrangement when the total obligation is fixed but payments for co-obligors are uncertain?	Record the sum of (1) the entity’s agreed share and (2) any additional amount it expects to pay on behalf of co-obligors, using the best estimate or midpoint if no estimate is better.	Measurement detail for Joint & Several Liability.
38	How should gain contingencies be treated in statutory financial statements?	Gain contingencies are not accrued. The nature may be disclosed, but care must be taken to avoid misleading implications about the likelihood of realization.	Low probability topic, but easy points if tested.

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