Lending and FinanceGeneral Insurance

Recognising Broker Commissions

13 March 2019
3 min read

Mortgage Brokers and Insurance Brokers are likely to see significant changes in their revenue recognition when IFRS 15 Revenue from Contracts with Customers is adopted.

The 5 Step Revenue Model requires an entity to identify the performance obligations in a contract. In simple terms, what service is the Broker actually providing to the customer? Where the broker’s service to the customer is limited to assisting the customer to choose an applicable policy and preparing the agreement, there is likely to be only one performance obligation. However, the commissions received by brokers are likely to extend to the life of the policy including renewals.

In many instances, Brokers receive trail commissions for the entire period of the policy. Under the current revenue guidance, the majority of entities recognise these commissions as revenue when received. IFRS 15 requires revenue to be recognised when the performance obligation is to be satisfied, or in simple terms, when the service is provided to the customer.

If a broker has only one performance obligation, i.e. writing the policy, the commissions associated with that policy will be recognised at the time the policy is written.

In practice, this means entities will be required to estimate the life of a policy in order to calculate the expected consideration to be received on the policy. Such calculations will require considerable work from management to make an appropriate estimate. Such estimates will need to be supportable as auditors will be required to assess management’s estimate. While the accounting standard allows the use of a portfolio approach to account for contracts of the same nature in the same way, Brokers will need to be mindful of different types of insurance policies, different loan types and different Insurance/Finance companies because subtle differences can change the accounting treatment. For example, an Insurance broker might find a different renewal rate on home and contents insurance than motor vehicle insurance policies.

Restructuring an agreement may not change the accounting outcome. Revenue recognition under IFRS 15 revolves around performance obligations, so irrespective of how fees may be structured in an agreement, if the service to the customer doesn’t change, the accounting will not change.

It is worthwhile mentioning that not all broker arrangements are the same and entities performing these services should seek advice, especially where the broker provides an on-going service.

If that’s not complicated enough, Broker arrangements can often include a service agreement with variable bonus payments, marketing allowances or other variable payments. Entities will need to consider which agreements should be combined, how many separate performance obligations exist and how variable consideration is to be accounted for in accordance with IFRS 15.

If you’re interested in receiving additional information regarding the new accounting standards, please contact your financial adviser to discuss further.