Question 1

The treatment of deferred acquisition costs is inconsistent with AASB 138 because.

Accepted Answer

The answer of The treatment of deferred acquisition costs is...

Question 2

Payments made on claims should be:

Accepted Answer

Payments made on claims should only be treated as an expense in the period if the claim is settled in that period and used to reduce the liability for claims settled in previous periods. This is because the payment represents a reduction in the company's liabilities for claims made in earlier periods, and is therefore not a true expense for the current period. Only if the payment is made in the same period as the claim is settled should it be treated as an expense for that period, as it represents an actual cost to the company.

Question 3

Items to be disclosed under AASB 1023 include.

Accepted Answer

AASB 1023 requires disclosure of inwards reinsurance revenue as it pertains to insurance contracts, which is relevant to the standard's focus on insurance activities.

Question 4

Government charges should be included as part of the premium revenue if:

Accepted Answer

If government charges are levied on the insurer and incorporated into the insurance premium, they should be included as part of the premium revenue.

Question 5

What is an example of deferred acquisition costs and how does AASB 1023 require them to be treated?

Accepted Answer

AASB 1023 requires deferred acquisition costs, which include commission or brokerage paid to agents to attract business, to be deferred as an asset and systematically amortised over the period of expected benefit. The other options are not correct as they do not fully meet the requirements under AASB 1023.

Question 6

Unclosed business can be described as:

Accepted Answer

The answer of Unclosed business can be described as:
...

Question 7

Hazard Ltd writes insurance policies to cover the risk of fire in northern New South Wales.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Hazard Ltd is aware that the fire risk is eight times greater in January,February and March than it is the rest of the year.The appropriate discount rate for Hazard Ltd is 12 per cent.If the total amount of insurance premiums to be received is $50,000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

Accepted Answer

AASB 1023 requires revenue recognition to be done based on the pattern of risks and rewards, which is determined by the timing and value of the insurance premiums. As the fire risk is eight times greater in January, February and March than the rest of the year, the revenue recognition should be higher during these months. Therefore, $12,121 should be recognized in each of these months, and $1,515 in each other month, which totals to $50,000 in a year.

Question 8

Danger Ltd writes insurance policies to cover the risk of theft in Central Brisbane.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Danger Ltd is aware that the risk of theft is 20 times higher in March and 15 times higher in July than in the other months of the year.The appropriate discount rate for Danger Ltd is 15 per cent.If the total amount of insurance premiums to be received is $1,000,000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

Accepted Answer

The answer of Danger Ltd writes insurance policies to cover...

Question 9

The superseded version of AASB 1023 required that investments that are integral to the entity's general insurance activities should be:

Accepted Answer

The superseded version of AASB 1023 required that investments integral to general insurance activities be measured at net market value, with changes recognized as revenue or expense.

Question 10

Where an insurer reinsures some or its entire insurance portfolio,AASB 1023 requires that,with respect to the revenue received relating to the reinsured policies and the premiums ceded to the reinsurer:

Accepted Answer

AASB 1023 requires that the full amount of revenue received by the direct insurer be recognized, and the portion of the premiums ceded to the reinsurer should be treated as an expense. This approach ensures that the financial statements reflect the gross revenue and the cost of reinsurance separately.

Question 11

The disclosures required in AASB 1023 in relation to liabilities for outstanding claims include.

Accepted Answer

All of the given options are disclosures required in AASB 1023 in relation to liabilities for outstanding claims. The percentage margin adopted in determining the liability (A), the component related to the risk margin (B), the central estimate of expected future payments (C), and the process used to determine the risk margin, including diversification of risks (D) are all necessary information to be disclosed.

Question 12

Government charges levied on the insurer may be required to be paid while the revenue that they relate to remains unearned.In this case the appropriate accounting treatment in the books of the insurer is to treat the levies paid as:

Accepted Answer

Since the revenue related to the levies is unearned, the levies paid are considered a prepayment and should be treated as an asset until the related revenue is earned. Once the revenue is earned, the prepayment can be recognized as an expense.

Question 13

AASB 1023 specifies how classes of assets are to be measured.These requirements include that:

Accepted Answer

AASB 1023 requires financial assets within the scope of AASB 139 to be measured at fair value through profit and loss, while deferred acquisition costs should be measured at cost and amortized. Recoveries receivable are not specifically mentioned, but would typically be recorded at their nominal amount. Historical cost measurement is not required for any asset class according to AASB 1023. Discounted present value measurement is also not mentioned.

Question 14

In undertaking a liquidity adequacy test,if the present value of future claims exceeds the unearned premium liability:

Accepted Answer

If the present value of future claims exceeds the unearned premium liability, a further liability should be recorded to 'make up' the deficiency. In addition, an expense should be recorded by initially writing down any related intangible assets. This is because the insurer will not be able to collect the full amount of the premiums due to the excess claims, hence there is a reduction in the value of intangible assets. Therefore, both options B and C are necessary. Option A is incorrect because the difference should be recorded as a liability, not an asset. Option E is incorrect because there must be adjustments made to the financial statements.

Question 15

Property,plant and equipment that is within the scope of AASB 116 and backs general insurance liabilities,should be measured at:

Accepted Answer

The answer of Property,plant and equipment that is within the...

Question 16

AASB 1023 requires which discount rate to be applied to an outstanding claims liability?

Accepted Answer

AASB 1023 requires the use of risk-free discount rates based on current observable and objective rates. This is because outstanding claims liabilities represent the present value of expected future cash outflows that are largely free of credit risk, and thus the risk-free rate is appropriate for discounting these future cash flows.

Question 17

Warning Ltd writes insurance policies to cover the risk of storms in Northern Australia.The policy premiums are expected to be received evenly over the year as they have evenly distributed due dates.Warning Ltd is aware that the risk of storms is 25 times greater in the months between December and March than in the other months of the year.The appropriate discount rate for Warning Ltd is 11 per cent.If the total amount of insurance premiums to be received is $400,000,what is the pattern of revenue recognition in accordance with AASB 1023 (round amounts to the nearest dollar)?

Accepted Answer

AASB 1023 requires revenue to be recognised when it is probable that economic benefits will flow to the entity and the amount of revenue can be reliably measured. In this case, while premiums are expected to be received evenly over the year, the higher risk of storms between December and March means that revenue should be recognised accordingly. The $400,000 premium income should be allocated based on the probability of economic benefits flowing to the entity. Therefore, $3,296 per month will be recognised, except for December to March where $82,407 will be recognised in each of those months.

Question 18

The pattern of revenue recognition required by AASB 1023 is:

Accepted Answer

AASB 1023 requires revenue recognition based on the pattern of risk to which the insurer is exposed, aligning revenue with the insurance coverage provided over time.

Question 19

An unearned premium liability is:

Accepted Answer

An unearned premium liability represents the portion of premiums that have been collected in advance, but the insurer has not yet earned by providing coverage for the entire period. This liability is recognized in the balance sheet and is used to meet costs, including the claims handling costs. Therefore, option D is the correct answer.

Question 20

AASB 1023's disclosure requirements relating to the balance sheet include.

Accepted Answer

AASB 1023 requires the disclosure of both deferred acquisition costs and unearned premiums on the balance sheet. Inwards reinsurance revenue is not specifically mentioned as a required disclosure.

Quiz 22: Accounting for General Insurance Contracts