999 Words4 Pages
Financial Accounting Concerns

1. Tokyo AFM recognized premium revenue at the time it received the policyholder’s up-front cash payment. The company’s accountants argued that since the level of up-front payments received from policyholders had been stable over the last few years, this method was an appropriate reflection of economic reality.

For example, Fuji Computers entered into a five-year insurance contract with Tokyo AFM against earthquake damage to its headquarters building. As is customary, it paid the 100 million premiums for the five-year coverage up front in cash.

Question: How would you recognize revenues associated with this type of catastrophe insurance contract?

This case can be considered as premiums from
…show more content…
2 years.

Another expense that can be considered for capitalization is advertising costs. Only advertising costs that are direct-response advertising can be capitalized. Direct-response advertising is advertising for which the primary purpose is to stimulate sales to customers or potential customers that have specifically responded to the advertising and it results in probable future benefits. Hence $20,000 cost of marketing efforts incurred over the past six months to promote Home Umbrella which is direct response advertising cost should be capitalized and amortized over the period of contract.

3. Broadly speaking, two major types of insured events could give rise to losses covered by insurance contracts:

* Events that actuarial analysis could assess and predict with a high level of accuracy across a large number of contracts (for example, events covered by automobile insurance). * Catastrophes, which were generally adverse natural events such as earthquakes and hurricanes, but which could also be human-induced events such as terrorist attacks. Catastrophes were considered “low probability-high consequence” events. They were uncertain and very difficult to predict in terms of timing and extent of damage. For the coming year, the company had estimated that expected losses across all its automobile insurance contracts would amount to 70% of
Get Access