Tokyo AFM gradually widened the range of its products over time to become a more comprehensive property-casualty insurance group. The company was listed on the Tokyo Stock Exchange in 1963. Over the years, the company's profits had grown at a slow but steady pace until the casualty insurance industry was deregulated in the late 1990s. Soon after, the financial performance of Tokyo AFM deteriorated. Despite Tokyo AFM's desire to remain an independent insurer, the industry's deregulation proved challenging. In early 2001, The American Banking Group acquired a 23.04% stake in Tokyo AFM, and the German reinsurance group Bayern Re-acquired 20.54% of the company's shares. Soon after his appointment as CEO, Matsumoto became concerned that certain financial accounting polices of the company did not reflect the economic reality of the underlying transactions, particularly those related to revenue recognition, contract acquisition costs, reserves for contingent future losses, and investments in marketable securities.
Financial Accounting Concerns Matsumoto was concerned about the following Tokyo AFM accounting policies and wanted your recommendation on each: Be sure to identify the alternatives you rejected and your reasons for rejecting them. Do not dismiss an alternative or reach a decision on the grounds of "immateriality." If you make any assumptions, please state them.
1.Tokyo AFM recognized premium revenue at the time it received the policyholder's up-front cash payment. The company's accountants argued that since the level of up-front payments received from policyholders had been stable over the last few years, this method was an appropriate reflection of economic reality. For example, Fuji Computers entered into a five-year insurance contract with Tokyo AFM against earthquake damage to its headquarters building. As is customary, it paid the ¥100 million premium for the five-year coverage up front in cash. Question: How would you recognize revenues associated with this type of catastrophe insurance contract?
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