Accounting Entry for Cheque receipt and deposit
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The statement is effective for financial statements for fiscal years beginning after June 15, 1999.
It applies to all insurance and noninsurance entities and to both the insured and the insurer.
Underwriting risk is the risk the entity will have to pay a claim.
Timing risk is the risk the entity will have to pay a claim at a time when it does not have sufficient liquidity.
Contracts that transfer those risks have specialized accounting treatment.
In such cases, the accounting treatment would follow that for contracts that transfer only timing risk.
For contracts that transfer indeterminate risk, entities should use the open-year method how to get money in paypal is found in SOP 92-5, Accounting for Foreign Property and Liability Reinsurance.
He is a member of the AICPA, the Canadian Institute of Chartered Accountants and the Institute of Chartered Accountants in Pakistan.
The accounting consequences of transferring insurance or reinsurance risk have posed a dilemma to both companies and their CPAs for many years.
While previous guidance said an entity should use deposit accounting when it no deposit pokies aus into a contract that did not transfer a sufficient amount of risk, the guidance did not define deposit accounting or indicate how to implement it.
Companies that enter into insurance and no deposit pokies aus contracts need to know precisely how such arrangements will affect their financial statements.
Because there source no guidance on the methodology of deposit accounting, this was not always possible.
To address the problem, AcSEC issued a position statement.
In October 1998 AcSEC issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.
However, the SOP solves only part of the problem.
While it offers deposits accounting to entities that have determined that deposit accounting is warranted, it unfortunately does not provide guidance on when an entity should account for an insurance or reinsurance contract using the deposit method.
SOP 98-7 applies to contracts that appear to be insurance or reinsurance arrangements but that may not meet the transfer-of-risk requirements in FASB Statement no.
Previous pronouncements about the accounting treatments for such situations were not definitive.
No authoritative guidance on risk transfer rules for insurance contracts is provided in this or any subsequent standard.
Insurance risk has two aspects: underwriting risk and timing risk.
For example, a medical practitioner has two motives when she purchases insurance 1 to transfer the risk that she will have to pay a malpractice claim underwriting risk and 2 to remove the risk that she will have to pay claims at a time when she does not have sufficient liquidity timing risk.
SOP 98-7 addresses insurance and reinsurance contracts that transfer significant underwriting or timing risk, contracts that transfer neither of these risks and contracts with indeterminate risk.
It applies to all insurance and noninsurance entities and to both the insured and the insurer.
The SOP does not provide entities with guidance on the risk transfer rules for insurance contracts.
Authoritative accounting literature does not yet address this issue.
A MATTER OF TIMING If an insurance company covering workers compensation risks wants to eliminate the uncertainty of when it will need cash to pay claims, it can enter into a contract whereby it pays a deposit to a reinsurance company that will then reimburse the insurance company when it pays a claim.
At an agreed-upon date, the insurance company will pay the reinsurer a sum equal to total claims paid less the deposit.
If the claims paid are less than the deposit, the reinsurer will return the excess.
This arrangement does not affect the total workers compensation claims the insurance company must pay.
The following example illustrates the resulting accounting for such contracts.
Although the exact timing of these payments is uncertain, AIC expects to pay the claims in equal amounts over a 10-year period.
To mitigate its timing risk, AIC enters into a 10-year reinsurance contract with Environmental Reinsurance Co.
After 10 years, ERC will repay AIC for any portion of the initial deposit that it has not already reimbursed less the premium.
This rate usually will be less than the prevailing risk-free rate because of the uncertain timing of the cash flows.
Exhibit 1: Atom Insurance Co.
ERC will record a corresponding liability on its books for the same amount along with deferred income for the premium to be retained.
If the timing of the payments is as originally expected, the interest income and deposit asset appearing on AIC's financial statements at the end of each year will look like.
If, however, the timing of the reimbursement changes because of a change in the timing of the claims payments, both companies will have to recalculate the asset or liability.
According to SOP 98-7, the effective yield should use the actual or estimated cash flows under the interest method detailed in APB Opinion no.
The new implicit rate will be 5.
Under the new scenario, AIC will record income every year as shown in the interest income column.
The increase in the assets value is reasonable, because receipts have accelerated, increasing the assets present value.
At the end of year four, AIC will put the following disclosure in the notes to its financial statements: The company has entered into a contract whereby Environmental Reinsurance Co.
The timing of the costs and the corresponding reimbursements are uncertain.
The contract will not have an impact on the total claims to be paid by the company; it merely will change the timing of such payments.
The accounting treatment for the insurance company will parallel that shown in.
Exhibit 2: Atom Insurance Co.
GETTING OUT FROM UNDER UNDERWRITING RISK To get insurance at a lower cost, an entity may enter into a contract that transfers only underwriting risk.
If the company is confident it has sufficient liquidity to pay here claims as they arise, it may retain the timing risk to lower its premiums.
A malpractice claims insurer, for example, may contract with a reinsurance company to reinsure future malpractice claims.
The policy might specify that at the end of the contract the reinsurer will pay a lump-sum reimbursement to the malpractice insurer for all claims incurred.
This is a delayed reimbursement clause.
The insurer will, however, recover its losses at the specified date.
The valuation of the asset or liability in such contracts has two components.
For the company purchasing the insurance or reinsurancepart of the asset consists of the unexpired portion of the coverage.
The other component is the present value of the expected recoveries related to the actual losses incurred to date.
Marine Insurance Partners MIP insures marine vessels.
The company wants to purchase reinsurance to cover catastrophic losses, but it also wants to reduce the cost of the coverage.
MIP has a large amount of cash and is confident it can pay claims as they occur without facing liquidity deposits accounting />To mitigate its underwriting risk, MIP enters into a three-year contract with Ocean Reinsurance.
MIP also reduces recorded losses by the same amount.
In effect, expense is reduced as a result of the implicit interest income on the recoverable.
Under the terms of this contract, which spans years one through three, the company pays losses as they are incurred and Ocean Deposits accounting is required to reimburse the company for covered losses incurred at the end of year three.
Timing risk is not transferred in this arrangement the company still has to pay claims when they are incurred and receives reimbursement at a later date.
This contract, therefore, is recorded using the deposit accounting method as described above.
The accounting treatment for Ocean Reinsurance parallels that in exhibit 3, except that changes in the asset other than the unexpired portion of the coverage provided are recorded as an incurred loss.
In case such a risk exists, the discount rate used to calculate the deposit asset should be adjusted to reflect the default deposits accounting />The deposit liability on the reinsurers balance sheet should be calculated using the U.
OTHER KINDS OF CONTRACTS Under SOP 98-7, insurance contracts that transfer neither significant timing risk nor significant underwriting risk are expected to be rare.
The accounting treatment for such contracts would follow that for contracts that transfer only significant timing risk.
For contracts that transfer indeterminate risk, the prescribed accounting treatment is the open-year method which can be found in SOP 92-5, Accounting for Foreign Property and Liability Bonuses account new best betting />Under that method, a company aggregates underwriting results in the balance sheet and does not include them in the income statement until sufficient information becomes available to reasonably estimate and allocate premiums.
When this happens, the contract is reclassified as one of the three types of insurance contracts mentioned previously.
UNANSWERED QUESTIONS SOP 98-7 will standardize financial reporting practices in cases when it is clear that risk has not been transferred in an insurance or reinsurance contract.
However, further guidance is needed to answer questions related to circumstances when risk is, or is not, transferred in insurance contracts.
The SOP is effective for financial statements for fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
Previously issued financial statements should not be restated.
Entities should report the effect of the initial adoption as a cumulative effect of a change in accounting principle in accordance with APB No deposit pokies aus no.
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Quickbooks 15: Receiving Payments, Paying Bills, Cash Deposits
A customer deposit sounds like a simple item, yet this is one of the most common areas where accounting can go wrong. What is a customer deposit exactly? While a customer deposit sounds like straight income, it is in fact a liability to the business.
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