GIM2120 | Accounting framework: annual accounting: Deferred Acquisition Costs (DAC)

Acquisition costs related with and in proportion to the unearned premium provision are deferred. These are costs related to the acquisition of new business, such as brokers’ commission. Deferred Acquisition Costs (DAC) are calculated separately for each class of business by applying the ratio of unearned premiums to written premiums (those receivable for the whole period of cover provided by the policies entered into during the period of account) applicable to that class. Historically it was common for insurers to treat 40% of written premiums as unearned at the year-end on the basis that this approximated to a net figure for unearned premiums less deferred acquisition costs. This was the treatment adopted by the company in its published accounts in the case of Sun Insurance v Clark 6TC59. The practice was held to be acceptable for tax purposes provided it was reasonably in accordance with the actual facts. However, this netting off approach is now incompatible with the Insurance Accounts Directive (GIM2030).