Insurance revenue recognition

Insurance revenue recognition

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Hi All,

Insurance business selling policies. Surely the correct way to recognise the income is based on when the policy was sold or the policy start date as that is when the customer is on risk. Cash basis is totally incorrect as it is not even a accepted accounting standard. 

I have a firm of chartered accountants telling me cash accounting is fine and its fine to recognise income when we receive the cash for a business of £5mil turnover. Often cash is received anything from 1 to 6 months after the policy was transacted.

Am i right or are the accountants?

Thanks

 

 

 

 

 

 

 

Replies (4)

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By Jdopus
18th Jul 2018 11:16

It's based on a number of factors, but without having any further information it would appear you're right. Revenue is recognized when:

(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction will flow
to the entity;
(c) the stage of completion of the transaction at the end of the reporting period can
be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the transaction
can be measured reliably.

When the insurance contract is established then unless anything is particularly unusual in the way the company operates you meet all four conditions. You can measure the sale's value, it's probable the established contract will be paid, you can judge how far the contract is completed and the costs associated with the insurance policy are measurable.

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By johngroganjga
18th Jul 2018 11:22

I am guessing that you are a broker - selling insurers’ policies - not an insurer yourself.

And are you a company? That is relevant to the cash basis question.

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Replying to johngroganjga:
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By Arsenal123
18th Jul 2018 18:25

Thanks for the replies all. Yes a ltd company and a broker as well. We currently take commission and recognise the revenue at the same point when premiums received. I would of thought we should recognise the income based on what policies actually sold in the month. At the moment in June for example there would be a mixture of policies sold in march to may as cash received in June.

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Caroline
By accountantccole
18th Jul 2018 11:27

I would have thought the broker point is important. If the insurance company is paying you commission and they say that you have a right to invoice based on when you collect cash for them, then it is possible for a cash basis to be reasonable?
There might be clawback provisions for any subsequent aborted transactions.
Or are you actually selling insurance rather than being a broker?

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