RELATIONSHIPS BETWEEN STATUTORY AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

In Volume XXXIV of the Transactions, Mr. Donald R. Sondergeld published an article entitled "Profitability As a Return on Total Capital [2]." This article demonstrated how returns on GAAP capital are related to the internal rate of return, which is calculated on a statutory basis. The purpose of this paper is to further develop this relationship. In particular, if statutory losses are viewed as an investment of corporate surplus and the subsequent statutory gains are viewed as a repayment of this investment with interest, then GAAP earnings represent the interest on this investment and GAAP surplus represents the principal amount of the investment outstanding at a particular point in time.