Tokyo Afm free essay sample

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. We will write a custom essay sample on Tokyo Afm or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 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 straight line method allocates the cost equally over the expected life of the asset 2 years. By immediately expensing the costs of the commission paid to the agent, Tokyo AFM is not accurately portraying the economic reality of the situation. The basis of accrual accounting is to record transactions in the period in which the events occur, and not necessarily when the cash is paid or received. B. The marketing efforts over the past 6 months to promote the Home Umbrella offerings should not be amortized and expensed immediately. Under GAAP, it is a general rule that advertising and marketing costs are expensed when they are incurred. The main reason is because it is nearly impossible to tell when or if marketing efforts will results in an increase of sales. If there is a point in time which you can attribute a growth in sales to marketing efforts, how much of the increase, would be attributed to the new marketing campaign would be nearly impossible to predict. For these reasons, GAAP recommends that marketing and advertising costs are reconciled against operating income in the time period in which they occurred. Thus, removing any ability to capitalize an expense in which you can not specifically determine how much of, or during what time period it would be appropriate to capitalize certain costs. Please note, that under GAAP this is a recommendation, and not a requirement. There are several examples of companies using â€Å"deferred customer acquisition costs† in order to prop up their overall financial standing. As with many companies that attempt to misrepresent their financial performance, this leads to a slippery slope and often ends in the demise of said companies. It is important to continue to portray the best financial picture possible of Tokyo AFM; therefore I would recommend expensing these marketing and advertising costs immediately. Question 3: 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? A. In an attempt to accurately represent the amount of liability owed in automobile claims Tokyo AFM should show a line item of a liability. Because these claims can be reasonably estimated, and paid out within the current fiscal year reporting. Based on historical information Tokyo can estimate it’s liabilities within a 10 percent ratio, as stated in exhibit 1. The company must be cognizant of economic reality, and estimates that 70% of claims made will be payable due to automobile claims. Under or overstating its liabilities due to automobile premiums could result in misstating financial information and depict a financial environment that in fact is not reality. B. In dealing with a situation like a catastrophe, or trying to accurately represent this economic event on a balance sheet, I would think you would treat it as an item disclosed in the financial statement notes, but not accrued as a liability. There is no level of certainty in which this event can be predicted, from a time perspective, nor from a cost or liability stand point. Based upon historical information provided, there is no accurate predictor of these type claims. In order to accurately represent the event, and premiums paid to Tokyo AFM, they must show some type of claim over the life of the insurance premium contract. In the 20 years of historical information, there is not a pattern, and attempting to associate a fixed cost, to this type of insurance policy would be misrepresenting the reality of the type of claim associated. Catastrophic events cannot be predicted, nor can the amount of liability, or damage incurred by such events. From the shareholder’s perspective, I would feel as though this would be an area in which you would feel as though the company should be fairly conservative in their estimates. Although Tokyo AFM could misstate liabilities, if it grossly under estimated its total liabilities it could certainly mislead investors, one way or another. GAAP and other guidelines that shape decision making in accounting must always as accurately as possible depict the financial position These are typically valued at market value on a balance sheet, and unrealized gains and losses are included as a component of shareholder’s equity shown on the balance sheet. These marketable securities can be written up or down determined by market value. As with all items on a balance sheet accuracy and reality are the most important aspects in dealing with a company’s financial standing. The liquidity of Tokyo AFM must be accurately portrayed, and when looking at the investments made, it is imperative to show its ability to pay claims, and sustain profitability.