Difference between SAP and GAAP treatment of structured settlements when the claimant is the owner and payee, but has not released the insurer?

• A. GAAP: the gain from the purchase of the annuity needs to be deferred
• B. SAP: recognizes gain immediately
• C. GAAP: recognizes gain immediately
• D. SAP: gain is deferred

Answer: (A)

When a structured settlement is funded by purchasing an annuity and the claimant is the owner and payee but has not released the insurer, the transaction is viewed as funding a liability rather than a straightforward sale of an asset. Under GAAP, the gain from the purchase of the annuity is not recognized upfront. Instead, it is deferred and recognized over the period the annuity makes payments to the claimant. This deferral aligns the accounting of the gain with the actual cash flows that satisfy the existing liability—the insurer’s obligation to pay the settlement—so earnings are not inflated by a front-end gain that isn’t yet realized through payments.

Brief context: GAAP emphasizes matching and the relationship between the liability and the funding instrument. Since the insurer remains liable to continue making payments, the financial benefit from acquiring the annuity should be recognized as the payments are made, not immediately at purchase.

For contrast, under SAP the gain would be recognized immediately in many cases, reflecting regulatory view on the funded liability, but the scenario given points to GAAP deferral as the correct treatment.