Question 1

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 2

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

The answer of Where an insurer reinsures some or its...

Question 3

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

The appropriate accounting treatment in the books of the insurer is to treat the levies paid as a prepayment because the revenue that they relate to remains unearned. This ensures that the expenses are only recognized when the related revenue is earned.

Question 4

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 5

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

Accepted Answer

All of the given answers are required disclosures in AASB 1023 in relation to liabilities for outstanding claims. These include the percentage margin adopted in determining the outstanding claims liability, the component related to the risk margin, the central estimate of the expected present value of future payments for claims incurred, and the process used to determine the risk margin, including the way in which diversification of risks has been allowed for.

Question 6

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 to discount the outstanding claims liability. This is because the outstanding claims liability represents an estimate of future payments that will be made, and as such, the discount rate used to calculate the present value of these payments should reflect the risk associated with the timing and amounts of these payments. Using a risk-free rate ensures that the liability is appropriately discounted for the time value of money without introducing additional risk.

Question 7

Unclosed business can be described as:

Accepted Answer

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

Question 8

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 9

Items to be disclosed under AASB 1023 include.

Accepted Answer

The answer of Items to be disclosed under AASB 1023...

Question 10

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

Accepted Answer

AASB 1023 requires disclosure of deferred acquisition costs and unearned premiums in the balance sheet. Inwards reinsurance revenue is a revenue item and is therefore disclosed in the income statement, not the balance sheet.

Question 11

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...

Question 12

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 investments integral to general insurance activities to be measured at net market value, with any changes treated as revenue or expense of the period. This means that any gains or losses on these investments would be recognized in the income statement in the current period. Choice A is incorrect because changes would not be adjusted through reserves, but rather recognized in the income statement. Choice B is incorrect because current replacement cost is not the appropriate measurement for these investments. Choice D is incorrect because the lower of cost and recoverable amount is not the measurement required by the superseded version of AASB 1023. Choice E is incorrect because there is a correct answer.

Question 13

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

Accepted Answer

AASB 1023 requires that deferred acquisition costs, such as commission or brokerage paid to agents to attract business, should be deferred as an asset and systematically amortised over the period of expected benefit. Option B refers to deferred costs related to the purchase of land, which should be included in the cost of the land, and option C refers to the purchase of client lists and policy details, which should be capitalised as an intangible asset and revalued at balance date. Option D includes both options B and C, which are not entirely accurate in terms of AASB 1023. Therefore, the best choice is option A.

Question 14

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

According to AASB 1023, revenue should be recognized when it is probable that the economic benefits associated with the transaction will flow to the entity and the amount of revenue can be measured reliably. In this scenario, the risk of storms is 25 times greater in the months between December and March than in the other months of the year. Therefore, it is probable that the economic benefits associated with these policies will flow to Warning Ltd during this period. 
Using the time proportion method, the revenue recognition pattern would be as follows:
- $3,296 per month from April to November ($26,368 for 8 months)
- $82,407 per month from December to March ($329,628 for 4 months)
Total revenue recognized over the year would be $355,996, which is calculated as:
($26,368 x 8/12) + ($329,628 x 4/12) = $355,996
Therefore, the closest option to this calculation is option B.

Question 15

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 also settled in that period, and used to reduce the liability for claims settled in previous periods. This is because the payment does not represent an expense until the obligation to pay the claim has been fulfilled. Additionally, if the claim was settled in a previous period but the payment was made in the current period, the liability for that claim should be reduced to reflect the payment made.

Question 16

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

According to AASB 1023, revenue should be recognized when it is probable that economic benefits will flow to the entity and the amount of revenue can be measured reliably. As the premiums are evenly distributed over the year, the revenue recognition pattern should be based on the estimated fire risk. As the fire risk is eight times greater in January, February and March, the revenue for these months should be eight times higher than the revenue for other months. Therefore, the revenue recognition pattern should be $12,121 in January, February and March; $1,515 in each other month.

Question 17

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

Accepted Answer

The answer of Government charges should be included as part...

Question 18

An unearned premium liability is:

Accepted Answer

An unearned premium liability refers to the premium that an insurer has received in advance but has not yet earned. This liability is recognized in the balance sheet as it represents an obligation of the insurer to provide coverage for the time period for which the premium has been paid. The unearned premium liability is also used to meet costs, including claims handling costs, which is why option D is the best choice. Options A, B, and C do not fully capture the nature of unearned premium liability.

Question 19

The pattern of revenue recognition required by AASB 1023 is:

Accepted Answer

The answer of The pattern of revenue recognition required by...

Question 20

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.

Quiz 22: Accounting for General Insurance Contracts