Discuss AGA GAFRB Exam Topic 1 Question 6

Using the cost recovery method of recognizing revenue, premiums are recognized as revenue

Aonce the ultimate premium can be reasonably estimated.

Bthroughout the duration of the policy when claim costs are incurred.

Cwhen received.

Dwhen the policy takes effect.
Under the cost recovery method, revenue is recognized only as costs are recovered. In the context of insurance or risk-financing activities (such as self-insurance), GASB and FASAB require that premium revenues be recognized over the term of the policy, in proportion to the recognition of related costs (e.g., claims incurred).
This aligns revenue with expenses and ensures no profit is recognized before related obligations are met.
Relevant Reference:
FASAB SFFAS No. 7 -- Revenue and Other Financing Sources
GASB Statement No. 10 -- Accounting for Risk Financing and Related Insurance Issues
GFOA Risk Management and Insurance Practices
Answer : B. throughout the duration of the policy when claim costs are incurred

Suggested Answer: B

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30 comments · newest first

Kanisha 10 months ago

This aligns perfectly with the matching principle in accounting.

Thaddeus 10 months ago

Wait, is it really only when costs are incurred? Sounds odd.

Kerry 10 months ago

Totally agree, it makes sense to match revenue with costs!

Keshia 10 months ago

So, does that mean no profit until claims are settled?

Cordie 11 months ago

Premiums are recognized as revenue over the policy duration.

Stacey 11 months ago

I practiced a similar question, and it was about recognizing revenue when the policy takes effect, but that doesn’t sound right for this method.

Lauryn 11 months ago

I’m not entirely sure, but I feel like the answer has to do with matching revenue to expenses over time. B seems to fit that.

Terrilyn 11 months ago

I remember something about recognizing premiums when received, but that seems more like cash basis accounting, right?

Catarina 11 months ago

I think the cost recovery method means we recognize revenue as we incur costs, so I’m leaning towards B.

Melynda 12 months ago

Nice, this is a good application of the cost recovery principle. I'm feeling confident about this one - the wording of the answers makes it pretty clear that B is the correct response.

Jeannine 12 months ago

Okay, I think I've got it now. The key is that under the cost recovery method, revenue is recognized over the policy term, in proportion to the related costs like claims. So B is the right choice.

Mitzie 12 months ago

Hmm, I'm a bit confused. I thought the cost recovery method meant revenue was only recognized once the full premium amount could be reasonably estimated. Let me re-read the question carefully.

Luisa 1 year ago

This seems straightforward - the cost recovery method means revenue is recognized as costs are incurred, so B is the correct answer.

Wade 1 year ago

Ah, the age-old dilemma of revenue recognition. B is the clear winner here - can't be recognizing profit before the work is done.

Bette 1 year ago

That could lead to recognizing profit before related obligations are met, which goes against the principles of the cost recovery method.

Margart 1 year ago

Haha, I can just imagine someone trying to claim all the revenue upfront. Nice try, but B is the way to go!

Yan 1 year ago

↳ replying to Margart

Agreed, following the cost recovery method ensures no profit is recognized before obligations are met.

Diane 1 year ago

↳ replying to Margart

Definitely, it's important to recognize revenue as claim costs are incurred to align with expenses.

Barbra 1 year ago

↳ replying to Margart

I know right, trying to claim all the revenue upfront would be a risky move.

Mary 1 year ago

Definitely B. Recognizing premiums as revenue when they're received seems too simplistic for insurance accounting.

Helene 1 year ago

↳ replying to Mary

That's true, it's important to match revenue with the costs incurred to fulfill obligations.

Merissa 1 year ago

↳ replying to Mary

It ensures that revenue aligns with expenses and no profit is recognized prematurely.

Alisha 1 year ago

↳ replying to Mary

I agree, recognizing revenue throughout the duration of the policy makes more sense.

Elouise 1 year ago

I'm not sure about this. Wouldn't it be better to recognize revenue when the premium is received?

Mirta 1 year ago

I agree with you, Bette. It makes sense to recognize revenue as costs are recovered.

Bette 1 year ago

I think the answer is B, throughout the duration of the policy when claim costs are incurred.

Elbert 1 year ago

Hmm, I was leaning towards option A, but B makes more sense since revenue should align with expenses under the cost recovery method.

Leoma 1 year ago

↳ replying to Elbert

Yes, option B ensures that revenue is recognized throughout the duration of the policy in proportion to related costs.

Leatha 1 year ago

↳ replying to Elbert

It's important to recognize revenue as claim costs are incurred to ensure no profit is recognized before obligations are met.

Reiko 1 year ago

↳ replying to Elbert

Option A may seem logical, but option B is the correct choice to align revenue with expenses.

AGA GAFRB Exam - Topic 1 Question 6 Discussion