Citizens Insurance Ltd is an Australian insurance company with offices in Australia, New Zealand, Indonesia, Hong Kong,
Question:
Citizens Insurance Ltd is an Australian insurance company with offices in Australia, New Zealand, Indonesia, Hong Kong, Malaysia, Singapore and Thailand. These offices are in buildings owned by Citizens Insurance as part of its investment portfolio. In 2018, Citizens' board of directors decided to discontinue building and contents insurance because the insurance premiums exceeded the losses from damage buildings and contents over the previous 10 years. At the time of discontinuing the building and contents insurance policies, Citizens' board adopted an accounting policy of recognising an expense for possible future losses attributable to damage to buildings and contents and a corresponding liability Losses attributable to damage to buildings and/or contents were accounted for by reducing the relevant asset accounts as appropriate and reducing the liability for possible future losses account. For the financial year ended 30 September 2018, Citizens Insurance provided $2 million for possible future losses from damage to buildings and/or contents. As at 30 September 2018, the balance of the liability for possible future losses account was $5428327.
Required- The board of directors of Citizens Insurance has asked you to comment on the following matters
(a) Should Citizens Insurance recognise an expense for possible future losses from damage to buildings and/or contents of $2 million for the year ended 30 September 2018?
(b) If it is decided that it is inappropriate to recognise an expense in (a), outline a policy for dealing with the balance in the liability for possible future losses account of $5428327. Give reasons.
A Survey of Mathematics with Applications
ISBN: 978-0134112107
10th edition
Authors: Allen R. Angel, Christine D. Abbott, Dennis Runde