Question 1: How would you recognize revenues associated with this type of catastrophe insurance contract? As with any accounting transaction the attempt is to capture the economic reality of the transaction. By recognizing all of the revenue up front upon the cash collection of the policy, it does not accurately portray the liability that Tokyo AFM has over the term of the policy. In order for a company to be able to recognize revenue it must be both earned and realized or realizable. Meaning that Tokyo AFM must fulfill the obligations of the contract of 5 years, and secondly that it has been paid for the services. Furthermore in SAB 101 4 basic conditions exist that help clarify revenue recognition: * Persuasive evidence of an arrangement exists- in the form of a contract with Fuji computers protecting it’s building against earthquake damage, over the term of 5 years. * Delivery has occurred or services have been rendered- the life of contract is 5 years, therefore Tokyo AFM is liable for the damages over the life of the policy. * The seller’s price to the buyer is fixed or determinable- Assumed at a price of ¥ 100 million up front in cash. * Collectability is reasonably assured-As stated; the premium was paid up front in cash.
With all previous information stated, Tokyo AFM should recognize the revenue of ¥ 100 million, evenly over the 5 year life of the contract.
Question 2: Would you capitalize any of the above acquisition cost, or would you expense them immediately? If you were to capitalize the costs, over what period would you amortize them? A. The commission fee paid to the agent of ¥50,000 should be capitalized, and amortized. The fee of ¥50,000 should be spread across the useful life of the contract, in this case, 2 years. My opinion would be to use a straight line method, amortizing ¥25,000 each year. This portrays the economic reality of the situation, and closely follows the principles laid out by GAAP. The...
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