AGA Exam GAFRB Topic 1 Question 6 Discussion

Actual exam question for AGA's GAFRB exam

Question #: 6
Topic #: 1

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

Show Suggested Answer

Suggested Answer: B

by Dominga at Jul 09, 2025, 01:28 AM

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Elouise

3 days ago

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

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Mirta

5 days ago

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

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Bette

7 days ago

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

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Elbert

16 days ago

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

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Leoma

4 days ago

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

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Leatha

7 days ago

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

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Reiko

10 days ago

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

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