FINANCIAL
The need for openess on earnings
Jessica Wills audit manager with the broking team at accountants Littlejohn,
●
Brokerage is accounted for
looks at the issues surrounding revenue recognition and disclosure
at the point a policy is
sold.
●
Turnover is recognised
W
ith the FSA pushing ● At the earlier of inception surprising finding given the
when it falls due.
for increased date and when the trend towards increased fees,
●
Turnover comprises
transparency, brokers policy/debit note issued - particularly for smaller risks
earnings on insurance
should ensure they understand 4.3 per cent with this type of remuneration.
transactions recognised
the fundamentals of ● At the later of inception In accordance with FRS No. 5
when policies are
accounting policy. date and when the fees should be recognised as
established for insured
Littlejohn reviewed the policy/debit note issued - the service is performed.
parties and fees and
2008 financial statements of 4.3 per cent
Fee Revenue Recognition
commission raised in the
46 of the top 50 UK firms and ● At the later of inception
year.
compared their income date and when the policy
% of brokers
accounting policy disclosures placement is substantially
When the right to
Binding authority
to the relevant accounting complete - 34.8 per cent
consideration arising from
revenue recognition
standards applicable to UK
contractual performance is
●
When the policy placement disclosure
firms – IFRS (AS No. 18) and is substantially complete
earned - 14.3 per cent
Only five firms disclose
UK GAAP (FRS 5 – Application and incepted - 2.2 per
In the period they relate to
their policy in respect of
note G). During 2005 specific cent
and can be measured with
binding authority revenue
guidance for brokers was issued
reasonable certainty - 42.8 per
●
When the premium is
recognition. FRS No. 5
in the form of Technical closed to the underwriter
cent
requires this should be
Release, TECH; 5/04. in the companys books -
In accordance with the
recognised on the basis of the
2.2 per cent
performance of the terms of
inception of the underlying
Brokerage revenue
the contractual arrangements
attachments. Four firms●
No accounting policy
recognition disclosure
discussed - 4.3 per cent
with the client - 14.3 per cent
recognise the revenue on a
The main component of
On a periodic basis when
periodic basis when the
most firms income is
Fee revenue recognition
the consideration due is
consideration due is
commission income. As
disclosure
confirmed by the third parties -
confirmed by third parties,
expected, this showed the
Only seven firms make any
14.3 per cent
and one firm recognises the
greatest variance in the depth
distinction between brokerage
At the point of sale - 14.3
revenue when risks are
and clarity of policies. As a rule
and fee revenue recognition, a
per cent
declared as attaching to
these were broadly in line with relevant policies.
standards, however, there were
Examples of these are as
a number of policies that
follows:
Profit commission
showed ambiguity that
●
Credit is taken for earned
revenue recognition
prevented the reader fully
commissions and fees at
disclosure
understanding the exact point
the point of which the Only six firms disclosed
of recognition.
company becomes their policy on profit
contractually entitled to it. commission revenue
Brokerage Revenue ●
Commissions and recognition. FRS No. 5 states
Recognition % of
associated fees are profit commission revenue
brokers
recognised in the profit should be recognised when
●
When policy/debit note
and loss account at the the right to profit commission
issued -19.6 per cent
date of the transaction. is established (normally when
●
When the policy placement ●
Turnover represents the contract becomes
is substantially complete -
brokerage, fees and effective). However, profit
8.7 per cent
Jessica Wills
commissions which are commission should only be
●
On inception date -19.6
Audit Manager
recognised when the client recognised when a reliable
per cent
Littlejohn
is charged. estimate can be made.
26 Insurance Brokers’ Monthly
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