How should AmTrust have accounted for the sales of its extended warranty plans to avoid restating three years of financial statements? Original blog posting (July 25, 2017)

AmTrust Financial Services, Inc. Headquartered in New York Multinational property and casualty insurance company Sells extended-service plans (extended warranties) for automobiles and other consumer goods These extended-service plans (ESP) cover multiple years

AmTrust Financial Services, Inc. During 2014 – 2016, many times when AmTrust sold an ESP, it would account for the entire amount as revenue at the time of sale AmTrust restated its 2014, 2015, and 2016 financial statements for this accounting error and others

Question 1 During 2012 – 2015, how did AmTrust erroneously account for the sale of a four-year ESP for cash?

Question 2 If AmTrust sold a four-year ESP and received cash for it at the time of sale, how should AmTrust have accounted for the sale of that ESP?

Question 3 Assume that AmTrust sold a four- year $1,000 ESP at the beginning of 2012 for cash and recognized the revenue immediately. What would the impact on the balance sheet and income statements for each of the four years from 2012 – 2015? Be specific.

Question Recap During 2012 – 2015, how did AmTrust erroneously account for the sale of a four-year ESP for cash? If AmTrust sold a four-year ESP and received cash for it at the time of sale, how should AmTrust have accounted for the sale of that ESP? Assume that AmTrust sold a four-year $1,000 ESP at the beginning of 2012 for cash and recognized the revenue immediately. What would the impact on the balance sheet and income statements for each of the four years from 2012 – 2015? Be specific.

For additional news stories to use in the accounting classroom, see the Accounting in the Headlines blog at http://accountingintheheadlines.com/ Questions or comments? Contact Dr. Wendy Tietz at wtietz@kent.edu