How should AmTrust have accounted for the sales of its extended warranty plans to avoid restating three years of financial statements?

AmTrust Financial Services, Inc., (NASDAQ: AFSI) is a multinational property and casualty insurance company headquartered in New York.  In 2017, the company had to restate three years of financial statements due to several accounting errors, the key one being how it accounted for extended warranties.

AmTrust provides extended-service plans (ESP) for automobiles and other consumer goods. A customer purchasing an ESP will pay for the plan at the point of automobile or consumer good purchase and then the customer will be protected from unexpected repairs for the life of the contract. These ESP plans can, and frequently do, span multiple years. An ESP plan is a warranty (insurance coverage) sold by AmTrust, even though the company itself does not sell the automobile or other product that the ESP covers.

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.

Discussion Questions

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

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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