STAT vs. GAAP Accounting

Stat is short for statutory accounting. This means following the Statutory Accounting Principles, or SAP, which is not a static document but a series of documents issued by the National Association of Insurance Commissioners, or NAIC. As well as amending or replacing existing rules, these documents can introduce rules for issues that the NAIC has not previously addressed. An example would be how to deal with a new type of intangible asset like an internet site. Insurance firms must use SAP when preparing filings for state regulators. The main focus of SAP is that financial statements should show the current liquidity of a company -- the contrast between its assets and liabilities. The aim is to show how well protected customer deposits are should a company experience financial difficulties.

Generally Accepted Accounting Principles, or GAAP, refers to the principles used in accounts throughout the U.S. The principles allow a fairer and simpler comparison between the financial positions of different companies. Several organizations contribute to the development of GAAP, most notably the Financial Accounting Standards Board. Though GAAP is not legally binding in itself, the Securities and Exchange Commission requires that all publicly-traded companies follow the principles.

The main focus of GAAP is for financial statements to show the financial performance of the company in a comparable manner. The key principles are to value assets based on the original purchase price rather than the current market value; to list revenue when the company receives it, not when the sale is agreed or goods delivered; to match specific expenses to specific related revenues; and to give as much detail in financial statements as is reasonable without incurring excessive expense.

The most fundamental difference between the two companies is the preparation of the accounts. GAAP works on the assumption that the business will continue trading past the period covered by the accounts. More emphasis is on the long-term profitability of the company -- if a company is consistently turning a profit, debt is not necessarily a problem. SAP assesses a company's financial position if it ceased trading and the effects this would have on customers. It is more of a snapshot with no future outlook.

The main practical effect of the different basis of SAP and GAAP comes in revenue matching. Under GAAP, a company can assign specific expenses to specific revenues, such as the purchase of raw materials and the relevant sale of the finished product. Using this system, the expense only has to appear in statements once the company receives the relevant sales revenue, even if this means holding it over for a future set of accounts. Because SAP works on the assumption of immediate trade ceasing, the company lists all expenses even when it has yet to receive the expected matching revenue.

In most cases, the GAAP methods will place a greater value on a company's assets than SAP. This is because the assumption of the business ceasing means some assets must be treated as less valuable than they actually are. Examples include intangible assets like the expertise of senior staff or a recognized brand name.