Hi, I understand how DAC works I.e. Similar to the accounting concept of UPR but why is it considered an asset? My thinking is that if I were to write a policy on 1/10/11 with Acq costs of £100 then at 1/1/12 the DAC is £75. Surely this means I still have to pay £75 of Acq costs. So is it the case that the £75 is an asset before 1/1/12 & then becomes a liability afterwards as it is "earned"?
Dear Dangerous Dave, Yes, you still have to pay £75, and in fact you will have already paid this at the outset of the policy, because it is an initial expense. However, the accountants let us say that some of these acquisition costs relate to business that is not yet earned. So we are allowed to say that some of it will be counted as an expense next year instead of this year. It feels a bit artificial, but the accountants let us do it. Hence, if we are "deferring an expense" (albeit artificially), we are increasing this year's profit. In other words, DAC is an asset. Correct! Kind regards, Katherine.
The DAC asset is a kind of Prepaid Expenses. It is just like other prepaid expenses before the services are provided. So the money still belongs to you (as an asset) although it has been out of your pocket.
