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IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

SSAP 101: Issues to consider

Session 506

Panel members

Jeanine Kissinger, CPA

Nationwide Insurance

Aaron Maguire, CPA

Dixon Hughes Goodman LLP

Carrie Small, CPA

Baker Tilly Virchow Krause, LLP

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Agenda

1) General observations

2) Valuation allowance considerations

3) DTA admissibility – part 1

4) DTA admissibility – part 2

5) DTA admissibility – part 3

6) Tax loss contingencies

7) Other considerations

8) Best practices

9) Tax reform

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GENERAL OBSERVATIONS Section one

General observations

SSAP 101 Golden Rule

ASSUME NOTHING

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General observations

Labor intensive

Distinction between life and non-life companies important

Creates added complexity in surplus and dividend planning

Increased

recordkeeping

and detail

Analytical

review

Template

development

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VALUATION ALLOWANCE

CONSIDERATIONS

Section two

Valuation allowance considerations

Valuation allowance (VA)

• More-likely-than-not (MLTN) that some portion or all of DTA will not

be realized

» MLTN is a likelihood of more than 50 percent

• Based on weight of all available evidence

Separate company, reporting entity basis

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Valuation allowance considerations

VA utilized strictly to calculate the “adjusted gross DTA”

• Consider VA before DTA admissibility test

VA results in a reduction of the gross DTA

• Not a statutory valuation allowance reserve within the financial

statements

• Change in VA reflected in statutory rate reconciliation

Gross deferred tax asset

- Valuation allowance

= Adjusted gross deferred tax asset

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Valuation allowance considerations

Example:

• Consolidated group with $1 billion of taxable income per year

• Subsidiary has $(1) million of taxable losses each year

• Tax sharing agreement states that consolidated group pays for

subsidiary loss

• Subsidiary has $2 million of DTAs (does not include NOLs)

Is a valuation allowance necessary?

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DTA ADMISSIBILITY – PART 1 (PARAGRAPH 11.a.)

Section three

Life versus non-life

Important to distinguish between life and

non-life companies

• Different carryback periods

• How is life versus non-life determined?

• Annual statement versus tax return

Life companies Non-life companies

3 year ordinary carryback 2 year ordinary carryback

3 year capital carryback 3 year capital carryback

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Hypothetical NOLs

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Nonlife Reporting Entity 12/31/14 Reporting Year

Ordinary loss carryback

2012 2013 2014 2015 2016 2017

Taxes paid Taxes paid Estimated

taxes paid

One-year

reversals

(hypothetical

loss)

Two-year

reversals

(hypothetical

loss)

Three-year

reversals

(hypothetical

loss)

2012 2013 2014 2015 2016 2017

Capital loss carryback

Legend

= 2015 capital loss carrybacks = 2015 ordinary loss carrybacks

= 2016 capital loss carrybacks = 2016 ordinary loss carrybacks

= 2017 capital loss carrybacks

Tax character

Tax character is important

• A nonlife entity has $100 ordinary DTA that will reverse in 2015

• What can be admitted under 11.a?

» $65 ordinary taxes and $35 capital taxes can be recovered

•Remember:

» Ordinary DTAs can be admitted based on capital taxes recoverable

» Capital DTAs cannot be admitted based on ordinary taxes recoverable

Carryback years

Ordinary taxes

recoverable

Capital taxes

recoverable

2014 $30 $25

2013 $35 $10

Total $65 $35

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Reversal patterns

Review reversal

patterns annually Keep gross (not tax

effected)

Review impact of tax

planning strategies

Remember

nonadmitted assets

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Determination of reversal patterns

Loss reserve discounting

• Look at loss payment patterns

Unearned premium reserve

• Check annual statement to see if any UPR earned after 1 year

Credits

• General business, foreign tax, affordable housing, alternative

minimum tax (AMT)

• Determine when credits will be utilized

• Consider ordering rules

Supporting documentation and data

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Considerations

Avoid netting DTAs and DTLs

• Ex: Sec 807(f) adjustments

AMT considerations

• Taxes recoverable in carryback years can be limited if loss

carrybacks trigger AMT

Tax loss contingency considerations

• Impact of releases of tax loss contingencies

• RAR adjustments

Merger and acquisition considerations

• Pre- versus post-acquisition tax provision matters

• Recovery of prior taxes paid in accordance with IRS rules and

regulations 18

Taxes recoverable

Tax return basis, not taxes recorded on financial

statements

DTA admissibility under 11.a.

• Footnote 2, SSAP 101

• Taxes paid is maximum amount that can be admitted under 11.a.

• May not exceed the amount that the entity could reasonably expect to

have refunded by its parent.

Consolidated return issues

• Hypothetical NOL calculations

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Tax sharing agreement

Tax sharing agreement (TSA)

• Benefits of loss versus separate entity

• Systematic, rational and consistent approach required

• 12.c. – taxes recoverable may not exceed amount the reporting entity

could reasonably expect to have refunded by parent

• Q&A 8.2 – taxes paid by reporting entity represent maximum

admissible DTAs; amount can be reduced pursuant to TSA

• Must settle taxes timely

• TSA can hurt or be neutral for admissibility calculation

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Tax sharing agreement

Example 1:

• LifeCo is a member of HoldCo’s consolidated group

• LifeCo reported taxable income of $1 mil in each of last three years

• Under TSA, LifeCo paid its parent $350,000 for each of last three

years

• LifeCo reports a $3 mil loss for the current year

• Holdco and subs reported consolidated losses in each of last three

years and would not be able to file obtain tax refunds by filing

carryback claims to any of those years(Forms 1139)

• TSA provides that tax refunds are allocated to the entities that had

losses which resulted in the claim

• LifeCo would not be able to admit DTAs under 11.a. based on the

taxes it paid to HoldCo in prior three years

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Tax sharing agreement

Example 2:

• LifeCo is a member of HoldCo’s consolidated group

• LifeCo reported taxable loss of $1 mil in each of last three years

• LifeCo reports a $3 mil loss for the current year

• HoldCo can use LifeCo’s current NOL against to offset income of

other subsidiaries.

• Under TSA, LifeCo gets paid by parent if the consolidated group can

utilize LifeCo’s losses

• LifeCo has a current year benefit / receivable for its $3 mil loss

• No impact on DTAs / Admissibility from TSA

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DTA ADMISSIBILITY – PART 2 (PARAGRAPH 11.b.)

Section four

RBC/Surplus limitations

Three-part comparison – Lesser of:

• Remaining gross DTA

• Amount “expected to be realized”

• Stated percentage of adjusted capital and surplus

Know which Realization Threshold Limitation applies

• Contingent upon ExDTA RBC ACL ratio

• 0 yrs / 0% or 1 yr / 10% or 3 yrs / 15%

• Full 3-yr / 15% requires ratio of more than 300%

• Adjusted capital and surplus determined as of current period

• Know ExDTA ACL RBC percentage

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Expected to be realized

Expected to be realized (with and without calculations)

• Inherently subjective

• Consolidated groups that don’t forecast on a separate entity basis

• Reversal patterns consistent with 11.a.

Projections

• Consistency with other projections (i.e. board, ratings agencies,

regulators)

• Explanation of differences – tax planning strategies

• History of strong forecasting?

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Capital and surplus

Current year capital and surplus difficulties

Draft capital

and surplus

calculation

Changes

between

threshold

limitations

Audit

adjustments

not accounted

for in annual

statements

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DTA ADMISSIBILITY – PART 3 (PARAGRAPH 11.c.)

Section five

Considerations

Practical

considerations

related to scheduling

Relationship

between valuation

allowance and 11.c.

Character

considerations

Consistency from

year to year

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Indefinite lived intangible

Example: Mis-matched DTA / DTL

• LifeCo has DTA for tax intangible related to state licenses that

reverses over next 15 years

• LifeCo can admit DTA for intangible that reverses over the next 3

years under 11.a.

• LifeCo’s only DTL is for book basis of these state licenses. However,

this DTL is not expected to reverse in the foreseeable future.

• Can LifeCo admit the DTA for tax-basis intangible that reverses

beyond 3 years under 11.c.?

• If LifeCo has large NOLs and determines a valuation allowance is

necessary, does the valuation allowance bring the net DTA balance

to $0?

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TAX LOSS CONTINGENCIES Section six

Tax loss contingencies

SSAP 101 Paragraph 3.a.

• Establishes more-likely-than-not and reasonably estimated criterion

• State income tax loss contingencies accounted for under an

unmodified, or probable and reasonably estimated criterion

Tax loss contingencies

• Presumed that the reporting entity will be examined by the relevant

taxing authority that has full knowledge of all relevant information

• If the estimated tax loss contingency is greater than 50% of the tax

benefit originally recognized, the tax loss contingency recorded equal

to 100% of the original benefit recognized

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Tax loss contingencies

“Gross-up” considerations

• Tax loss contingencies related to temporary differences

• Triggering event

• Notice of proposed adjustment

• Information document request

• Possible surplus impact

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OTHER CONSIDERATIONS Section seven

Surplus considerations

Review surplus for:

• Items that affect tax return

• Prior period adjustments

Deferred components adjusted through surplus:

• Change in net deferred tax asset

• Change in nonadmitted asset

• Change in unrealized gain/(loss)

• Prior period adjustments

• Foreign exchange gain/(loss)

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AMT considerations

Current calculation

• When coming out of NOLs, remember AMT NOL limited to 90% of

AMTI (possible 2008 / 2009 exception)

• Creates AMT credit carryforward

Admissibility calculation

• Effect of AMT on carryback potential

• Reversals of AMT credit carryforwards

• Utilization of AMT credit in with and without calculation

May be more than current / deferred flip

• DTA may not be admissible

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Effective tax rate reconciliation

Performed on total basis, not just current

Current taxes include both ordinary and capital taxes

Includes –

• Change in deferred tax assets related to statement of operations

• Change in nonadmitted assets included in deferred inventory

Nonpublic ASC 740 disclosures

Final check to make sure tax provision works

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Current tax receivable

Verify components of ending balance

• Not just a rollforward of prior year end balance

Analyze all components for admissibility

• Check current receivable for admissibility

• Not just deferred tax asset

Example:

• Under TSA, entity projected tax benefit in 2013 at provision

• Set up current tax receivable from parent

• 2013 tax return filed 9/15/2014

• At 12/31/2014, receivable from parent still outstanding

• Should the receivable be nonadmitted?

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BEST PRACTICES Section eight

Best practices – Before year end

Don’t rely solely on mechanical formulas

Build in cross-checks/proofs within template

Confirm expectations regarding exDTA ACL RBC

percentages before quarter close

Confirm expectations regarding capital and surplus before

quarter close

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Best practices – During provision

Use rate reconciliation to verify “total” tax

• Not useful in assessing accuracy of current expense

Compare reversal patterns from year to year

Review draft financial statements before calculation is final

Perform high-level analysis of tax footnote

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Best practices – Planning

Be aware of changes expected in taxable income

• Separate company and consolidated group

Be aware of amended returns, RARs, etc. that could

change prior year taxes paid under paragraph 11.a.

Understand impact that affiliates entering or leaving group

will have on taxes recoverable

Analyze potential changes in admissibility in future quarters

• Determine if significant increases or decreases are anticipated in

capital and surplus, and RBC percentages

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TAX REFORM Section nine

Tax reform – Implications for SSAP 101

Tax Reform Act of 2014

• Presented by Rep. Camp (R – MI) on 2/21/14

• Significant insurance-related provisions

Decrease in corporate tax rates over a number of years

• Calculation of DTAs and DTLs – scheduling?

• Mismatch between current and deferred impact

• Surplus impact for companies with net admitted DTA

Life company NOL carryback period reduced from three to

two years

• Limits ability to admit DTAs under 11.a.

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Tax reform – Implications for SSAP 101

Increase to DAC capitalization percentages

• Increases current tax expense without equal increase in DTA

Accounting method changes for reserves (Sec. 807(f))

• Accelerates DTA reversal for reserve strengthening from 10 years to

one year.

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Disclosure

Pursuant to the rules of professional conduct set forth in Circular 230, as

promulgated by the United States Department of the Treasury, nothing

contained in this communication was intended or written to be used by

any taxpayer for the purpose of avoiding penalties that may be imposed

on the taxpayer by the Internal Revenue Service, and it cannot be used

by any taxpayer for such purpose. No one, without our express prior

written permission, may use or refer to any tax advice in this

communication in promoting, marketing, or recommending a partnership

or other entity, investment plan, or arrangement to any other party.

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and

managed member of Baker Tilly International. The information provided here is of a general

nature and is not intended to address specific circumstances of any individual or entity. In

specific circumstances, the services of a professional should be sought.

© 2014 Baker Tilly Virchow Krause, LLP

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Contact information

Jeanine Kissinger, CPA, MT, Director, Tax Nationwide Insurance

614 677 2781

kissij1@nationwide.com

Aaron Maguire, CPA, Partner Dixon Hughes Goodman LLP

404 575 8960

aaron.maguire@dhgllp.com

Carrie Small, CPA, Director, Tax Baker Tilly Virchow Krause LLP

414 777 5451

carrie.small@bakertilly.com

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