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AGA GAFRB Exam - Topic 1 Question 6 Discussion

Using the cost recovery method of recognizing revenue, premiums are recognized as revenue
B) throughout the duration of the policy when claim costs are incurred.
A) once the ultimate premium can be reasonably estimated.
C) when received.
D) when 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

AGA GAFRB Exam - Topic 1 Question 6 Discussion

Actual exam question for AGA's GAFRB exam
Question #: 6
Topic #: 1
[All GAFRB Questions]

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

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Suggested Answer: B

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

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Kanisha
7 months ago
This aligns perfectly with the matching principle in accounting.
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Thaddeus
7 months ago
Wait, is it really only when costs are incurred? Sounds odd.
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Kerry
7 months ago
Totally agree, it makes sense to match revenue with costs!
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Keshia
7 months ago
So, does that mean no profit until claims are settled?
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Cordie
8 months ago
Premiums are recognized as revenue over the policy duration.
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Stacey
8 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.
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Lauryn
8 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.
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Terrilyn
8 months ago
I remember something about recognizing premiums when received, but that seems more like cash basis accounting, right?
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Catarina
8 months ago
I think the cost recovery method means we recognize revenue as we incur costs, so I’m leaning towards B.
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Melynda
9 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.
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Jeannine
9 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.
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Mitzie
9 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.
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Luisa
9 months ago
This seems straightforward - the cost recovery method means revenue is recognized as costs are incurred, so B is the correct answer.
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Wade
11 months 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.
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Bette
11 months ago
That could lead to recognizing profit before related obligations are met, which goes against the principles of the cost recovery method.
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Margart
11 months ago
Haha, I can just imagine someone trying to claim all the revenue upfront. Nice try, but B is the way to go!
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Yan
10 months ago
Agreed, following the cost recovery method ensures no profit is recognized before obligations are met.
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Diane
10 months ago
Definitely, it's important to recognize revenue as claim costs are incurred to align with expenses.
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Barbra
11 months ago
I know right, trying to claim all the revenue upfront would be a risky move.
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Mary
11 months ago
Definitely B. Recognizing premiums as revenue when they're received seems too simplistic for insurance accounting.
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Helene
10 months ago
That's true, it's important to match revenue with the costs incurred to fulfill obligations.
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Merissa
11 months ago
It ensures that revenue aligns with expenses and no profit is recognized prematurely.
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Alisha
11 months ago
I agree, recognizing revenue throughout the duration of the policy makes more sense.
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Elouise
12 months 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
12 months ago
I agree with you, Bette. It makes sense to recognize revenue as costs are recovered.
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Bette
1 year ago
I think the answer is B, throughout the duration of the policy when claim costs are incurred.
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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.
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Leoma
12 months 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
1 year 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
1 year ago
Option A may seem logical, but option B is the correct choice to align revenue with expenses.
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