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      Question

      Acquisition costs (commissions, underwriting) are high

      and incurred upfront on 1 Oct. Policies are expected to persist on average 9 months (lapse experience). Which approach best reflects recognition of acquisition costs under prudential accounting aligned with matching?
      A Expense all acquisition costs immediately since policies are short-term. Correct Answer Incorrect Answer
      B Defer acquisition costs and amortize over expected policy term matched to premium revenue (subject to recoverability test). Correct Answer Incorrect Answer
      C Capitalise as intangible assets and amortise over 5 years. Correct Answer Incorrect Answer
      D Recognise as prepayment and amortise only if claims exceed a threshold. Correct Answer Incorrect Answer
      E Charge to equity as a reserve adjustment. Correct Answer Incorrect Answer

      Solution

      Acquisition costs that vary with and are directly attributable to securing insurance contracts are typically deferred (DAC) and amortised over the coverage period, aligned with premium recognition, subject to recoverability. Immediate expensing may distort matching.

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