Tokyo Afm Case
Tokyo AFM
Question 1:
There are two questions that I ask when it comes to revenue recognition. Has the revenue been earned? And is the receipt of the payment realizable? With those questions in mind we turn to Tokyo AFM and see if there current methods of revenue recognition satisfy our questions. Tokyo AFM has to types of revenue
Insurance Premiums
Investment Income
The recognition of investment income will be based on the type of investments they have. From what it looks like they have mostly keep to maturity securities which means that revenue on these investments will be recorded when it is received. Revenue recognition as it relates to the sale of insurance premiums does need some change. In the text I learned that Tokyo AFM recognized its revenue when it receives its up-front cash payment from the customer. Let’s ask the two revenue recognition questions and see if this makes sense.
Has the revenue been earned? NO, the coverage that the policy holder has paid for has not been levied.
Is the receipt of payment realizable? YES, the money is paid up front and so therefor is not in question
Tokyo AFM claims that because the level of up-front payments received from policyholders had been stable over the last few years that this method of revenue recognition was closest to reality. I disagree with this statement. The stability of customer payments over a given amount of time is not something that can be used as a measure of when to recognize revenue. My recommendation to Tokyo AFM is that if they want to mirror reality, then they should recognize revenue after any given amount of time during which the company provided coverage. I would use months. At the end of each month, Tokyo AFM should recognize that amount of revenue that they earned by providing coverage that month. If business X pays Tokyo AFM $1,000,000.00 for a two year insurance plan then each month after contract initiation Tokyo AFM can record $41,666.66 of revenue. This does mirror reality and reflects that actual operations of the company. Another alternative is to wait until all of the coverage has been levied and then record the revenue. I do not suggest this method because of two reasons. One, the periods of coverage are long and due to this Tokyo AFM would be waiting to recognize current business revenue for a considerable amount of time if they waited till the end of each contract. Two, this doesn’t mirror reality. Services are provided monthly, so why wait till the end of the contract to recognize that.
Question 2:
In this case I completely agree with the accountants when they told Tokyo AFM that they needed to expense the acquisition costs up front due to their