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)?

Question

Quizplus · 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.

Warning Ltd Writes Insurance Policies to Cover the Risk of Storms