Question 7b
what is the reason behind the statement: "A significant financing component is recognized because the policy premium is received by the entity more than a year prior to (part of) the service being provided."? is it because the term of policy is 3 years?
Comments
Yes, they are paying the entire premium for 3 years up front. Technically, this means you can earn substantial investment income before your premium is "earned" for the latter years (2-3). This leads to the significant financing component
This means that there is a significant financing component anytime a policy is greater than 1 year in length, right? Assuming premium will be received at inception and then service will be provided for more than 1 year. It would also apply if premium is received prior to the start of a policy and the length is 1 year, right?
There COULD be a significant financing component for both your scenarios. But it would need to be tested. If the premiums are received and service is provided within one year then there is no financing component period