28 TAC §§7.18 and 7.85
- Introduction: The Texas Department of Insurance proposes new §7.18 and amendments to §7.85 concerning examination and financial analysis. Proposed §7.18 will provide for the adoption by reference of statutory accounting principles which provide guidance to independent accountants, industry accountants and department analysts and examiners as to how to properly record business transactions for the purpose of accurate statutory reporting. This new section is necessary to provide independent accountants, insurance companies, and department examiners and analysts with more complete accounting guidance, to permit the use of a widely used regulatory tool, and to enhance regulatory efficiency. Simultaneously with this proposal the department is proposing the repeal of §7.18, which is published elsewhere in this issue of the Texas Register. According to information available to the department, all 50 states have or will propose adoption of the Accounting Practices and Procedures Manual (Manual) published by the National Association of Insurance Commissioners (NAIC). The Manual, previously known as "Codification," is designed to provide a nationwide standard method of accounting which most insurers, including health maintenance organizations, will be required to use for statutory financial reporting guidance, thus creating a more consistent regulatory environment. The principles in the Manual will be updated from time to time as accounting issues arise. When new versions of the Manual are made available by the NAIC, the Commissioner of the Texas Department of Insurance will consider the new version and, if he deems appropriate, propose for public comment adoption of the new version, with any necessary modifications, by rule. The Manual is a single source intended to replace three accounting manuals and accounting guidance contained in the NAIC examiner’s handbook which the department previously adopted by rule. The Manual contains a preamble, Statements of Statutory Accounting Principles (SSAPs), and Appendices. There are a total of 73 SSAPs, with each SSAP providing specific guidance on the accounting treatment to be afforded insurance transactions. The SSAPs are designed to capture the accounting concepts of conservatism, recognition, and consistency. Conservatism is a concept which mandates that when there is exposure to uncertainty and risk, a company’s accounting measurement and disclosure should be cautious and prudent until the given situation is more certain. The concept of recognition addresses the issue of when a transaction should be recorded; recognition generally takes place when the data is reliable, measurable, relevant and meets a definition for the purposes of classification. The concept of consistency means that the accounting procedure used should conform with the procedure that has been previously used to record that particular type of transaction. In addition, the Manual furthers the accounting concept of comparability in that it is a single source of statutory accounting guidance which will ensure that all insurers report their financial information in a format that allows for reconciliation between differing state requirements. The comparability of insurers' financial statements increases the usefulness of financial information to the public and the department and also eases the regulatory burden upon insurers doing business in more than one state. For instance, under the Manual, a foreign insurer, need only prepare one set of statutory documents in accordance with its domiciliary state requirements and limitations and then merely prepare a reconciliation indicating the impact resulting from differences between that domiciliary state's accounting requirements and limitations and the requirements of the Manual. Conversely, a Texas domestic insurer need only prepare one set of statutory documents for the department and prepare a reconciliation indicating the differences between Texas' accounting requirements and the Manual for other states. The Manual is not intended to preempt state legislative or regulatory authority, but is rather to serve as guidance for Texas' statutory accounting principles subject to the pronouncements of the Texas Legislature and the Commissioner of Insurance. To the extent the Manual conflicts with Texas law and regulations, Texas law and regulations prevail. Nothing in this proposal alters the investment or managerial decisions that an insurer may legally make under the Texas Insurance Code or applicable rules. If a transaction is not permitted by the Texas Insurance Code, the transaction continues to be prohibited even if the Manual provides a method to account for such transaction. If an item is not admitted as an asset by the Texas Insurance Code or by rule, it is still not admitted even if the Manual indicates otherwise. Also, if an item is admitted by the Texas Insurance Code or by rule, that asset will continue to be admitted notwithstanding the provisions of the Manual. Furthermore, any liabilities or reserves which are required by the Texas Insurance Code or by rule must still be established even if such reserves are not contemplated by the Manual. Again, this proposed adoption by reference of the Manual merely provides guidance as to the proper accounting methods to be used, in the absence of any statutory or regulatory mandate, to record transactions into which an insurer enters. To ensure that the Commissioner reserves the discretion necessary to direct companies that are placed in supervision or conservation, the directives of his appointed supervisor or conservator are placed in new §7.18 as a source of accounting guidance. Also, to further ensure the Commissioner reserves needed discretion, instructions, such as those contained in permitted practice letters, are listed as a source of accounting guidance that may be used to resolve statutory accounting issues as they may arise from time to time. The department has identified, as of the date of this publication, the following provisions of the Texas Insurance Code that preempt, in part, SSAPs contained in the Manual: Articles 2.10, 3.01, 3.33, 3.39, 3.40, 6.01, 6.08, 6.12, 8.07, 8.19, 9.18, and 21.49-1. The subsequent summaries highlight the portions of the SSAPs that are ineffective. The SSAPs are not applicable, in whole or in part, to the extent an article of the insurance code or section of the administrative code preempts them. However, preemption shall not affect the application of other portions of the SSAPs which can be given effect without the preempted provision. Texas Insurance Code Article 2.10 preempts SSAPs 37 and 48 insofar as SSAP 37 classifies investments in mortgage loans prohibited by Article 2.10 as admissible assets and SSAP 48 defines admitted assets to include investments in general partnerships. Texas Insurance Code Article 3.01 preempts SSAP 6 insofar as SSAP 6 requires any uncollectible receivable, including uncollected premiums, to be written off and charged to income in the period the insurer determines the item is uncollectible and insofar as the definition of an admitted asset differs from the article’s definition of "net asset." Article 3.01 preempts SSAP 16 insofar as SSAP 16 does not admit electronic machines and data processing systems to the extent that the total actual cash market value of such systems, among other items, exceeds $2000 and constitutes not more than 10% of the otherwise admitted assets of companies subject to Article 3.01. Article 3.01 also preempts SSAP 16 insofar as SSAP 16 admits electronic data processing systems in an amount that does not exceed $2000 of the total actual cash market value of such systems and/or constitutes more than 10% of the otherwise admitted assets of a company subject to Article 3.01. Article 3.01 also preempts SSAP 16 insofar as SSAP 16 admits electronic data processing systems in an amount that does not exceed $2000 and/or constitutes more than 10% of the otherwise admitted assets of the company subject to Article 3.01. Article 3.01 preempts SSAP 19 insofar as SSAP 19 would not admit office equipment, furniture, machines and labor-saving devices, along with the value of other items listed in Article 3.01 §10(b), to the extent that the total actual cash market value constitutes no more than 10% of the otherwise admitted assets of such company and does not exceed $2000. Article 3.33 preempts, in part, SSAPs 19, 30, 37, and 48 insofar as SSAP 19 would not admit as an asset leasehold estate improvements and fixtures thereon as permitted by law, SSAP 30 would admit as an asset an investment as a general partner, SSAP 37 would admit construction loans on residential property and ownership of residential property, except such property acquired through foreclosure, and SSAP 48 admits investments as a general partner. Article 3.33 and Article 3.40 preempt SSAP 40 insofar as SSAP 40 requires a building to be occupied by a company and an affiliate more than 50% before it is classified as an admitted asset, does not require the sale of real property within 10 years of acquisition for satisfaction of a debt if such acquisition causes the real estate investment to exceed 33-1/3 % of an insurer’s assets, and requires that, to be admitted as an asset, an insurer must occupy greater than 50% of a branch office. Article 3.33 also preempts SSAP 40 insofar as SSAP 40 does not provide that the admissible value of the property acquired pursuant to Article 3.33 is subject to the review and approval of the Commissioner. Article 3.39 preempts SSAP 38 insofar as SSAP 38 would admit construction loans on residential property. In addition to the aforementioned preemption, Article 3.40 also preempts SSAP 40 insofar as SSAP 40 does not permit, after the cost basis of real estate has been written down, an insurer to change the basis of real estate to recover subsequent increases in fair value without department approval. Article 6.01 preempts SSAP 53 insofar as SSAP 53 mandates that insurers compute the unearned premium reserve with either the daily pro-r ata method or the monthly pro-rata method. Article 6.08 preempts SSAP 40 insofar as SSAP 40 does not require that real estate purchases shall be appraised by two disinterested citizens of Texas and does not limit such investment to no more than 33-1/3% of an insurer’s admitted assets. Article 6.12 preempts SSAP 16 insofar as SSAP 16 does not admit, as an asset, electronic data processing equipment to the extent the total actual cash value of all such systems, along with the value of other items listed in Article 6.12 §5, exceeds $2000 and constitutes less than 5.0% of the otherwise admitted assets of companies subject to Article 6.12. Article 6.12 also preempts SSAP 16 insofar as SSAP 16 does admit as an asset, electronic data processing equipment that does not exceed $2000 and/or constitutes more than 5.0% of the otherwise admitted assets of companies subject to Article 6.12. Article 8.07 preempts SSAP 16 insofar as it classifies the value of electronic data processing equipment as an admitted asset, up to 3.0% of adjusted capital and surplus, and contradicts the limitation on such admission as contained in Article 8.07. Article 8.19 preempts SSAP 40 insofar as SSAP 40 does not require that real estate purchases shall be appraised by two disinterested citizens of Texas and does not limit such investment to no more than 33 1/3% of a company’s admitted assets. Article 9.18 preempts SSAP 57 insofar as SSAP 57 does not classify title plants which exceed the lessor of 20% of admitted assets or 40% of surplus to policyholders as an admitted asset. Article 21.49-1 preempts SSAP 46 insofar as SSAP 46 includes an official position or corporate office in the definition of "control," does not permit the use of methods of subsidiary valuation expressly authorized by Article 21.49-1, and mandates that investments for noninsurance subsidiary, controlled, and affiliated entities that have no significant ongoing operations other than to hold assets that are primarily for the direct or indirect benefit or use of the reporting entity or its affiliates and that do not qualify for the market valuation approach, as defined in SSAP 46, must be recorded based on their underlying equity adjusted to a statutory basis of accounting. Article 21.49-1 also preempts SSAP 25 and SSAP 68 insofar as SSAP 25 requires commissioner approval of all loans or advances regardless of amount and SSAP 68 limits goodwill to being calculated only under the methods of subsidiary valuation permitted by SSAP 46. The department has identified several provisions of Title 28 of the Texas Administrative Code (TAC) which conflict with the Manual. The department proposes to amend §7.85 concerning audited financial statements to harmonize the section with the Manual. Elsewhere in this issue of the Texas Register the department proposes to amend §11.803, concerning investments, loans and other assets of HMO to bring the section into harmony with the Manual. The department also proposes to amend §§3.1605-3.1609, which state the general requirements for actuarial opinions, to harmonize the section with the manual. Sections 7.10, 7.12, 7.16, 7.17, 7.18, 7.21, 7.615, and 7.1101-1105 are simultaneously proposed for repeal and are published elsewhere in this issue of the Texas Register. However, §7.7 is not proposed for repeal or modification and preempts SSAP 41, paragraphs 9 and 10, in their entirety. Sections 3.1501 - 3.1505, among other things, permit the use of the 1983 Group Annuity Mortality Table and are not proposed for repeal or modification and will preempt any contrary provisions of the Manual. Section 3.1606(c)(6), which exempts certain stipulated premium companies from the requirement to perform an asset adequacy analysis, is not proposed for repeal or modification and will preempt any such requirements in the Manual. Section 3.7004, which relates to required contract reserves for individual and group accident and health insurance, is not proposed for repeal or modification and will preempt any contrary requirements in the Manual. Statement of Statutory Accounting Principles 7 mandates the recognition of liabilities for an Asset Valuation Reserve (AVR) and an Interest Maintenance Reserve (IMR). Some Texas domestic companies historically have not been required to establish such reserves. To ease the burden on such Texas domestic companies this proposal will only require Texas domestic companies to establish an IMR for those investments disposed of after December 31, 2000. Furthermore, this proposal will only require such Texas domestic companies to establish an AVR on investments held as of January 1, 2001, and acquired thereafter. The Manual, in SSAP 26, would require companies to obtain a Committee on Uniform Securities Identification Procedures number for certificates of deposit with a maturity of greater than one year and also require a company to submit the certificate of deposit to the Securities Valuation Office of the NAIC for valuation purposes. This has not previously been required in Texas and this proposal does not impose any such requirements.
The department will consider proposed new §7.18 and the proposed amendments to §7.85 in a public hearing under Docket No. 2466, scheduled for 10:00 a.m. on November 7, 2000 in Room 100 of the William P. Hobby Jr. State Office Building, 333 Guadalupe Street in Austin, Texas. Copies of the documents proposed for adoption by reference are available for inspection in the Financial Division and Chief Clerk’s Office of the Texas Department of Insurance, William P. Hobby Jr. State Office Building, 333 Guadalupe, Austin, Texas.
2. FISCAL NOTE. Ms. Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, has determined that, for the first five years the proposed sections are in effect, there will be no fiscal implications for state or local government as a result of this proposal, and there will be no effect on local employment or the local economy.
3. PUBLIC BENEFIT/COST NOTE. Ms. Patterson has also determined that, for each year of the first five years the proposed sections are in effect, the public benefit will be the more efficient regulation of insurance and a decrease in costs to insurers that are currently required to file multiple financial statements in multiple states. The proposed adoption of the Manual will provide for a more consistent regulatory environment and will become a single source for accounting guidance replacing three accounting practice and procedures manuals previously adopted by the department. The March 2000 Manual is available from the NAIC at a cost of $200 for a soft cover manual and $395 on CD-ROM. The cost to comply with the provisions of the Manual will vary from insurer to insurer. Based upon the department’s experience, each company will have to ensure that at least one employee familiar with the company’s accounting practices is instructed in the provisions of the Manual. This instruction will either be accomplished through self-study, attendance at a seminar, or a combination of the two methods. The NAIC offers a self-study course at a cost of $175 per copy. Seminars which offer instruction on the Manual cost approximately $850 per attendee for a two day course. The number of employees sent to training is largely dependent on the size and expertise of the company’s accounting staff, but is not dependent on the overall size of the company. As the size of the accounting staff increases, so does the likelihood that the company will choose to send more than one employee to a seminar for training. The department estimates that companies with five or fewer accounting employees will either require the use of self-study training or send one employee to a seminar. Those companies with six to ten employees on the accounting staff will likely send one to three employees to seminars for instruction and supplement that training with self-study materials. Those companies with eleven or more employees on the accounting staff will likely send three or more employees to seminars and supplement with self-study materials. Each employee is estimated to be compensated at a rate of $17 to $30 an hour. These estimates are based upon the department’s discussions with industry representatives. Implementation of the Manual may also require changes to a company’s electronic accounting system. The cost of changes to accounting systems is dependent on the company’s line of insurance, the complexity of the company’s transactions, and whether the system is proprietary or created by third party vendors. Costs due to system changes increase with the complexity of transactions and the percentage of proprietary computer code in the system. In the department’s experience, small companies do not usually rely upon internally created proprietary systems and do not generally enter complex transactions on a regular basis. Large companies are more likely to have an internally created proprietary system and enter into complex transactions. Accordingly, system change costs will be greater for large companies. As an example a large insurer with assets greater than $400 million dollars has estimated that its approximate internal implementation costs will be $250,000. Furthermore, implementation of the Manual may lead to increased consultation with outside accounting firms. The cost of the consultation will vary from insurer to insurer and will cost from $100 to $350 per hour. It also appears that a smaller company will incur a lower cost. Also, as the complexity of the transactions a company enters into is reduced, so does the cost of consultation. A large company, for instance, may incur approximately $150,000 in costs from consultations with outside accounting firms. Thus, based upon all of the foregoing, it is the department’s position that the adoption of the Manual will have no adverse economic effect on small and micro businesses. Farm mutual insurance companies, mutual assessment companies, mutual aid associations, and mutual burial associations will incur no costs from the adoption of the Manual, as they are specifically excepted from the requirements of the Manual. Such companies have traditionally accounted for their business on a cash basis and the department has determined that compliance with the provisions of the Manual is not necessary for these types of companies. Regardless of the fiscal effect, the requirements of this rule are mandated by the underlying state statutes, and considering the statute's purposes, it is neither legal nor feasible to waive or modify the requirements of these sections for small and micro businesses, as doing so would result in a disparate effect on enrollees, policyholders, and other persons affected by these rules.
4. REQUEST FOR PUBLIC COMMENT. To be considered, all comments on the proposal must be received in writing no later than 5:00 p.m. on November 13, 2000. All comments should be submitted to Lynda H. Nesenholtz, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments should be submitted simultaneously to Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, P. O. Box 149104, Austin, Texas 78714-9104.
5. STATUTORY AUTHORITY. The sections are proposed under the Texas Insurance Code Articles 1.11, 1.15, 1.32, 3.01, 3.33, 5.61, 6.12, 8.07, 20A.22, 21.28-A, 21.39, 21.49-1, and §§32.041 and 36.001. Article 1.15 mandates that the department of insurance examine the financial condition of each carrier organized under the laws of Texas or authorized to transact the business of insurance in Texas and, by rule, adopt procedures for the filing and adoption of examination reports. Article 1.11 and §32.041 authorize the Commissioner to provide required financial statement forms. Article 21.39 authorizes the Commissioner to adopt rules for establishing reserves applicable to each line of insurance recommended by the NAIC. Article 1.32 authorizes the Commissioner to establish standards for evaluating the financial condition of an insurer. Article 20A.22 authorizes the Commissioner to promulgate rules as are necessary to carryout the provisions of the Texas Health Maintenance Organization Act. Article 5.61 provides that reserves shall be computed in accordance with rules adopted by the Commissioner for the purpose of adequately protecting insureds. Article 21.28-A authorizes the Commissioner to adopt rules necessary to accomplish the purposes of the act. Articles 6.12, 8.07 and 3.01 authorize the Commissioner to adopt rules defining electronic machines and systems, office equipment, furniture, machines and labor saving devices and the maximum period for which each such class may be amortized. Article 3.33 authorizes the Commissioner to adopt such rules, minimum standards, or limitations as may be appropriate for the implementation of the article. Article 21.49-1 authorizes the Commissioner to issue rules, and orders necessary to implement the provisions of the article. Section 36.001 authorizes the Commissioner to adopt rules for the conduct and execution of the powers and duties of the department only as authorized by statute.
6. CROSS REFERENCE TO STATUTE. The following articles of the Texas Insurance Code are affected by this proposal: Articles 1.11(b), 1.15, 3.01, 6.12, 8.07, 21.39 and §32.041.
§7.18 NAIC Accounting Practices and Procedures Manual.
(a) The purpose of this section is to adopt statutory accounting principles, which will provide independent accountants, industry accountants and department analysts and examiners guidance as to how to properly record business transactions for the purpose of accurate statutory reporting. The March 2000 version of the National Association of Insurance Commissioners Accounting Practices and Procedures Manual (Manual) will be utilized as the guideline for statutory accounting principles in Texas to the extent the Manual does not conflict with provisions of the Texas Insurance Code or rules of the department. The Commissioner reserves all authority and discretion to resolve any accounting issues in Texas. When making a determination on the proper accounting treatment for an insurance or health plan transaction the Commissioner shall refer to the sources in paragraphs (1)-(6) of this subsection in the respective order of priority listed. Furthermore, §§ 3.1501-3.1505, 3.1605, 3.1606, 3.7004, 7.7, 7.85 and 11.803of this title (relating to Annuity Mortality Tables, General Requirements, Required Opinions, Contract Reserves, Subordinated Indebtedness, Audited Financial Reports and Investments, Loans and Other Assets), preempt any contrary provisions in the Manual.
(1) Texas statutes;
(2) department rules;
(3) directives, instructions and orders of the Commissioner;
(4) the Manual;
(5) other NAIC handbooks, manuals, and instructions, adopted by the department; and
(6) Generally Accepted Accounting Principles.
(b) The Commissioner adopts by reference the March 2000 version of the Accounting Practices and Procedures Manual published by the NAIC, with the exceptions and additions set forth in subsections (c) and (d) of this section, as the source of accounting principles for the department when examining financial reports and for conducting statutory examinations and rehabilitations of insurers and health maintenance organizations licensed in Texas, except where otherwise provided by law. This adoption by reference shall be applied to examinations conducted as of January 1, 2001 and thereafter and also shall be used to prepare all financial statements filed with the department for periods after January 1, 2001.
(c) The Commissioner adopts the following exceptions and additions to the Manual:
(1) Unless a Texas domestic insurer is licensed in a state that requires an Interest Maintenance Reserve (IMR), a Texas domestic insurer need only establish an IMR, as would be required by Statement of Statutory Accounting Principles number 7, for applicable investments disposed of after December 31, 2000.
(2) Unless a Texas domestic insurer is licensed in a state that requires an Asset Valuation Reserve (AVR), a Texas domestic insurer need only establish an AVR, as would be required by Statement of Statutory Accounting Principles number 7, on investments held as of January 1, 2001, and acquired thereafter.
(3) Electronic machines, constituting a data processing system or systems and operating systems software used in connection with the business of an insurance company acquired after December 31, 2000, may be an admitted asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law and shall be amortized as provided by the Manual . All such property acquired prior to January 1, 2001, may be an admitted asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law, and shall be amortized in full over a period not to exceed ten years.
(4) Furniture, labor-saving devices, machines, and all other office equipment may be admitted as an asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law and, for such property acquired after December 31, 2000, depreciated in full over a period not to exceed five years. All such property acquired prior to January 1, 2001, may be an admitted asset as permitted by Texas Insurance Code Articles 3.01, 6.12, 8.07, and any other applicable law, and shall be depreciated in full over a period not to exceed ten years.
(5) Written premiums for all property and casualty contracts, other than contracts for workers' compensation, shall be recorded as of the effective date of the contract rather than on the effective date of the contract as stated in Statement of Statutory Accounting Principles number 53.
(6) Goodwill, as reported on a regulated entity’s statutory financial statements as of December 31, 2000, and any additional goodwill acquired thereafter, beginning January 1, 2001, shall be admitted as an asset and accounted for as permitted by Statements of Statutory Accounting Principles numbers 61 and 68. All other amounts of goodwill, including, but not limited to, such amounts that may have been previously expensed, shall not be allowed as an admitted asset. However, notwithstanding the provisions of Statements of Statutory Accounting Principles numbers 61 and 68, all methods of non-insurer subsidiary and affiliate valuation permitted by Article 21.49-1 §6A may be used for the purposes of goodwill calculation.
(7) All certificates of deposit, of any maturity, may be classified as cash and are subject to the accounting treatment contained in Statement of Statutory Accounting Principles number 2, notwithstanding the provisions of Statement of Statutory Accounting Principles number 26.
(d) A farm mutual insurance company, statewide mutual assessment company, local mutual aid association, or mutual burial association that has less than $5 million in annual direct written premiums need not comply with the Manual .
(e) This section shall not be construed to either broaden or restrict the authority provided under the Texas Insurance Code to insurers, including health maintenance organizations.
§7.85. Audited Financial Reports.
(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) - (10) (No change.)
(11) Material-- As defined in the NAIC Accounting Practices and Procedures Manual adopted in §7.18 of this title (relating to NAIC Accounting Practices and Procedures Manual.) [An item of information that should be reported if it is significant enough to have an effect on the decision maker. Materiality is dependent upon the relative size of an item, the precision with which the item can be estimated, the nature of the item, and the dollar amount above which the auditor's perspective of the item will be influenced. An item is material for accounting purposes if the omission or misstatement of it, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatements].
(b) Priority of Accounting Guidance [ Hierarchy of Authority]. The priority for determination of accounting standards is set out in §7.18 of this title [ paragraphs (1)-(3) of this subsection. For guidance on matters not specifically addressed by the resources set out in paragraphs (1)-(3) of this subsection, the Department shall first rely upon other NAIC handbooks, manuals, and instructions, and if further direction is needed, shall rely upon GAAP. GAAP is prescribed to the extent not conflicting with the hierarchy of authority set out in this subsection].
[ (1) Texas statutes.]
[ (2) Department rules and regulations.]
[ (3) Directives and orders of the Commissioner, and any examiner's handbooks, manuals, bulletins, and/or instructions adopted by the Department.]
(c) - (d) (No change.)
(e) Conduct of audit. The annual audit required by the Insurance Code, Article 1.15A, shall be conducted in accordance with GAAS. It is not the department's intent to expand audit testing beyond the requirements of GAAS. To the extent not inconsistent with GAAS, consideration shall be given to the procedures and conventions set out in paragraphs (1)-(4) of this subsection, as follows:
(1) audit procedures and format contained in the NAIC Examiners Handbook;
(2) accounting treatments for the particular line(s) of insurance contained in §7.18 of this title [ the NAIC Accounting Practices and Procedures manuals] and the NAIC Annual Statement Instructions adopted by the Commissioner;
(3) valuation procedures contained in the NAIC Purposes and Procedures of the Securities Valuation Office manual; and
(4) any order(s) of the Commissioner issued to a particular company.
(f) Contents of audited financial reports. In addition to the contents specified in the Insurance Code, Article 1.15A, §10(a)-(c), audited financial reports shall contain the statements and reports set out in paragraphs (1)-(3) of this subsection.
(1) (No change.)
(2) The statement of gain or loss from operations, statement of changes in capital and surplus, and the statement of cash flow prepared in accordance with the Texas Administrative Code and the NAIC Annual Statement Instructions adopted by the Commissioner.
(3) In addition to the items that must be recorded in the notes to the financial statements as required by the Insurance Code, Article 1.15A, §10(c), any exceptions to compliance with the financial, investment, and holding company provisions of the Insurance Code or the Texas Administrative Code noted during the audit and a schedule and explanation of material non-admitted assets shall also be recorded in notes. The notes shall also include those items required by the appropriate NAIC Annual Statement Instructions and the NAIC Accounting Practices and Procedures Manual. Furthermore, the notes shall include a reconciliation of any differences, if any, between the audited statutory financial statements and the Annual Statement filed with the department, with written description of the nature of these differences.
(g) Contents of work papers.
(1) For those items subjected to detailed tests by the accountant during the course of the audit, the work papers shall contain notation of whether any material exceptions exist for each of the items set out in subparagraphs (A) and (B) of this paragraph.
(A) For invested assets:
(i) compliance as an authorized investment has been determined and does not exceed statutory limitations;
(ii) ownership and possession have been verified; and
(iii) securities are valued in accordance with the instructions of the NAIC Purposes and Procedures of the Securities Valuation Office manual.
(B) For assets other than invested assets:
(i) such assets are admitted in accordance with the appropriate provision of the Insurance Code or Texas Administrative Code; and
(ii) such assets are valued in accordance with the Texas Administrative Code and §7.18 of this title [the appropriate section of the NAIC Accounting Practices and Procedures manual].
(2)-(4) (No change.)
(h)-(i) (No change.)