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questions :What is the principle of matching cost and income
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[Visitor (120.204.*.*)]answers [Chinese ]Time :2021-10-21
The principle of matching the cost of income of enterprise accounting standards
The matching principle means that the income earned by an accounting period or an accounting object shall match the expenses and costs incurred to obtain that income in order to correctly calculate the net profit or loss obtained by the accounting period and the accounting. The matching principle is an important accounting principle under the concept of profit episomic accounting. The so-called profit appearance requires accounting policy makers to consider the direct recognition and measurement of income and expenses related to certain types of transactions in the formulation of accounting system. On the profit table, the Balance Sheet is only intended to confirm the cross-period allocation matching intermediary with reasonable measurement of income and become an affiliate of the Profit Statement. Cost refers to the various expenses incurred by insurance companies to sell an insurance product.Expense refers to the outflow of economic benefits caused by insurance companies for the daily activities of selling policies and providing services. It can be seen that the insurance cost is based on the insurance products or insurance types as the collection object, and the insurance cost is the collection object of the accounting period, the cost is the objectified cost...
As mentioned earlier, the premium income of non-life insurance companies is only the income realized in the current period after adjusting the income that does not belong to the current period to "extract the unexpired liability reserve" to "gross premium earned" (or "earned premium"), and should be "gross premium earned" as sales revenue and on this basis to collect costs and match expenses.

The underwriting profit formula for non-life insurance companies is:

Underwriting profit - Premium income - Cost of compensation - Reinsuring costs - Expenses of sales - Overhead (Formula 1)
Among them, the sales expense includes the fee expense, sales tax and surcharge, the underwriting fee, the insurance guarantee fund and the amortized sub-insurance fee, the underwriting expense consists of the exhibition expense and the sales staff performance salary.
Sales expenses are essentially direct costs related to insurance contracts incurred by insurance companies during the signing or renewal of policies, equivalent to the cost of policy acquisition as defined in the new accounting standards.

For policy acquisition costs, the new accounting standards provide that they are included in the current profit and loss, such a treatment in the non-life insurance company continued to operate and evenly grow the underwriting profit is basically correct.

However, at a time of rapid business growth and early start-up, profits will be faced with a sharp decline with the rapid growth of business volume, when business volume growth leveled off or fell sharply, profits increased significantly. The most typical example is the controversial cross-border risk loss issue of 2007:
According to domestic accounting standards accounting, the first year of financial reports of the exchange of strong insurance summary book losses of 3.9 billion yuan, but according to international accounting standards accounting for small profits.

The principle of matching the cost of income of enterprise accounting standards

The reason lies in the cost-effective processing of policy acquisition, the sales expenses linked to premium income are all used as period costs to reduce the current year's profit, while the premium income as the source of profit for the current year is calculated by deducting the unrecognized premium by 1/365, which creates the problem of income and cost mismatch.
The accounting policy of cost acquisition of policy does not conform to the principle of cost cost matching and can not provide correct accounting information, so it will affect the decision of operator or investor. This is because uneven distribution of the business has an impact on profits:
When the insurance business start date is concentrated in the second half of the year, due to the contribution of "gross premium earned" limited, can not support higher policy acquisition costs, which may cause business units in the first half of the year regardless of cost expansion business, regardless of business quality, all limit development, resulting in the choice of business behavior ignore the creation of value.

Paragraph 28 of Announcement No. 60 of the United States Financial Accounting Standards defines this:
Policy acquisition costs are commissions and other costs (e.g. wages and policyholder medical examination fees for policyholders) initially associated with obtaining new and renewed policies.

The confirmation of the cost of policy acquisition should match the relevant benefits. When signing a policy, the cost assets are obtained by recording the deferred policy at the amount of the related fees, and as the entire policy term expires, the unrealized premium income is gradually earned, and the DPAC assets are amortized as expenses.

To sum up, the author thinks that the policy acquisition cost (sales cost) should be capitalized, matching the corresponding earned premium. Here's how:
The current policy acquisition cost is distributed between the current "earned gross premium" and "unrecovered premium" and the policy acquisition cost of the current period "unrecovered premium" is included in the "policy acquisition cost amortization" account (asset class account) into the next period, and the policy acquisition cost of the current "earned gross premium" policy acquisition cost and the policy acquisition cost of the policy with the current period's unproried premium earned in the current period are included in the current period.

The collection and amortization of the acquisition cost of the policy shall be calculated by type of insurance.

The formula is as follows:

Amortization of policy acquisition costs for the current year - Policy acquisition costs for the current year× Gross premium earned in premium income for the current year / Premium income for the current year (Formula 2)
Amortization of the acquisition cost of the previous year's unamosted policy this year - The end of the previous year's unamosted policy acquisition cost× the previous year's unrecognized premium earned in the current year/ the previous year's unrecognized premium balance (Formula 3)

Amortization of policy acquisition costs for the current year - Amortization of policy acquisition costs for the current year and amortization of unamosted policy acquisition costs for the previous year (Formula 4)

Policy Acquisition Cost End Number - Policy Acquisition Cost for the Current Year - Previous Year's Unamosted Policy Acquisition Cost Last Year - Policy Acquisition Cost Amortization for the Year (Formula 5)

The cost calculation of reinsertion business also involves the cross - term amortization of expenses.
When the reinsurance business occurs, the insurance company must pay the reinsurance recipient to pay the fee that is to distribute the premium, at the same time, according to the reinsurance contract agreement from the reinsurance recipient to a certain proportion of the sub-insurance fees and sub-insurance premiums (based on the distribution of premiums), called "amortized sub-insurance costs".

Policy acquisition costs , fees and expenses , sales tax and additional insurance protection funds , underwriting costs - amortized sub-insurance costs ( Formula 6 )
It can be found from the profit statement of non-life insurance companies that, in addition to the administrative expenses in the expense category should be current, other costs related to policy sales, i.e. policy acquisition costs should be matched with the corresponding earned premiums to the costs of different periods.
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