ssap no. 101: issues to consider - baker tilly no. 101: issues to consider . ... remember amt nol...
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Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.
SSAP No. 101: Issues to consider
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
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General observations
1) Labor intensive
2) Distinction between life and non-life companies important
3) Creates added complexity in surplus and dividend planning
Increased recordkeeping and detail
Analytical review
Template development
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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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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
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
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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 (i.e. affordable housing), foreign tax,
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 & regs 20
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 3 years >Under TSA, LifeCo paid its parent $350,000 for each of last 3 years >LifeCo reports a $3 mil loss for the current year >Holdco and subs reported consolidated losses in each of last 3
years and would not be able to 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 3 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 3 years >LifeCo reports a $3 mil loss for the current year >HoldCo can use LifeCo’s current NOL 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 24
RBC/Surplus limitations
Three-part comparison Lesser of: >Remaining gross DTA that is reversing within prescribed period >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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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.?
What would impact be if LifeCo’s policy were to net as 1 DTA/DTL?
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
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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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 >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 gross DTA related to statement of operations >Change in nonadmitted assets included in deferred inventory 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 – Before year end
1) Don’t rely solely on mechanical formulas
2) Build in cross-checks/proofs within template
3) Confirm expectations regarding exDTA ACL RBC percentages before quarter close
4) Confirm expectations regarding capital and surplus before quarter close
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Best practices – During provision
1) Use rate reconciliation to verify “total” tax - Not useful in assessing accuracy of current expense
2) Compare reversal patterns from year to year
3) Review draft financial statements before
calculation is final
4) Perform high-level analysis of tax footnote 44
Best practices – Planning
1) Be aware of changes expected in taxable income - Separate company and consolidated group
2) Be aware of amended returns, RARs, etc. that could change prior year taxes paid under paragraph 11.a. - Consider gross-up for temporary tax loss contingencies
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Best practices – Planning
3) Understand impact that affiliates entering or leaving group will have on taxes recoverable
4) 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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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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