Under which accounting practice must an insurer immediately recognize acquisition expenses?

The correct answer is that under accrual accounting, an insurer must immediately recognize acquisition expenses. Accrual accounting is a fundamental accounting method that records revenues and expenses when they are incurred, regardless of when the cash transactions occur. This means that when an insurer incurs expenses related to acquiring new business, such as commissions for agents or advertising costs, those expenses must be recorded in the financial statements in the period they are incurred. This approach provides a more accurate picture of the financial performance of the insurer during that time frame, aligning costs with the revenues they help to generate.

In contrast, deferral accounting would delay the expense recognition until a later date, earning accounting focuses on recognizing the earnings before the expenses, and pro forma accounting involves presenting financial results that are adjusted for nonrecurring or unusual transactions. These methods do not align with the principle of recognizing acquisition expenses immediately when they occur, as outlined in accrual accounting.