Essay About Type Of Catastrophe Insurance Contract And Shareholder Concern

How Would You Recognize Revenues Associated with This Type of Catastrophe Insurance Contract?
Essay Preview: How Would You Recognize Revenues Associated with This Type of Catastrophe Insurance Contract?
Report this essay
Question: How would you recognize revenues associated with this type of catastrophe insurance contract? Since it’s a short-term contract with a protected price it also allows the insurer to cancel the contract and adjust should it be needed. If the contracts were classified as a long-term contract it’s generally not subject to adjustments therefore revenue would be stable depending upon the terms of the contract. I think that the revenue recognition under IFRS, would be when the commitment is made to provide the goods or services in the future at a fixed price. The revenue and the costs can be reliably measured and the significant risk and reward are transferred to the owner. In this case, the risk of the company going under are very unlikely and the payoff to the owner of the insurance policy would be able to seek payment in the event that they need. Since the insurance contract is guaranteed for years, and the contract was purchased upfront revenue can be recognized when payment is received. The company would still have a liability in case anything should happen on the policyholder’s side.  Additionally under IFRS it does not permit the use of the completed contract method. Tokyo AFM should recognize the 100 million yen over the course of the 5 years for the given contract. Question: Would you capitalize any of the above acquisition costs, or would you expense them immediately? If you were to capitalize the costs, over what period would you amortize them? I would capitalize the costs since they were directly target towards existing customers as a part of a cross selling strategy.  If you were to capitalize the costs, they would be amortized over the period of the contract that you secured for those costs. The 50,000 commission fee would be capitalized and spread across the two years of the contract in which the policyholder entered into. In this example, the policyholder was already using Tokyo AFM. They additional contract was for a period of two years so the amortization associated with that contract would span a period of two years. I would capitalize the advertising if the additional contract was a direct response from the marketing campaign. Sometimes it’s hard to track but customer surveys are most reliable for this. Additionally, most companies have the ability to measure average cost per net gain, or in this instance, average cost per additional contract. Using historical data they could figure the average price and the length that those individuals added to contracts, in this example 2 years. The amortization of that investment would be spread out through the 2 year time period. For a direct response advertising campaign should result in a direct response probably purchase of goods or services and the primary purchase of the advertising would be to drive sales to customers that have shown to respond to the specific advertising. Another example of this would be a targeted email blast through your mobile provide when you are about to reach the end of your two year contract and are available to upgrade. Half of the advertising cost (10,000) should be capitalized since that the method in which the consumer responded to and the other half of the campaign (10,000) should be expensed. Again this would be over the life of the additional contract. What accounting treatment would you choose for expected losses (a) associated with automobile contracts and (b) associated with catastrophes? From a shareholder’s perspective, what concerns do you think could arise with respect to the accounting treatment of expected losses? Expected losses should be a reserve fund. In the balance sheet it would an estimated liability for future payments of insurance claims, or something similar. The automotive policy should keep enough in reserve to cover expected loss of vehicles to pay policyholders should something happen. I think for catastrophes, the highest reasonable amount should be kept on hand. According to the reading 70% is the highest reasonable amount that Tokyo AFM should expect to keep on hand based on the expected losses. This will allow the policyholder to be paid immediately should something happen. In respected to catastrophes 12% of premiums should be kept liquid In the event of catastrophes happening. 12% is also the highest reasonable amount. Additionally, on the occasion the government will step in an issue a reimbursement to qualified individuals. Reimbursement costs can be taken into consideration when available. From a shareholder concern the there are three main fears that they could face. In the unlikely event that the company should go under should always be taken into consideration. Additionally shareholders would/ should be concerned about less profit and less dividends paid.