Retention

Moobag

Help please

I have a limited company who deals in insurances. He pays his insurance writers commission on a weekly basis and then holds back 5% for retention as some people cancel there policies.

He moves the retention into another bank account as per FSA rules.

I have prepared his accounts for him as net commission paid and then just moved his retention from bank account to bank account. This is making his profit higher than he is expecting.

I just wanted to make sure I was correct in what I have done.

Any help greatly appreciated.

Bluewednesday

Not sure I am understanding this correctly, how can putting retentions from one bank to another bank make the profit higher?

Monsoon

Bluewednesday wrote: »

Not sure I am understanding this correctly, how can putting retentions from one bank to another bank make the profit higher?

Agreed.

Surely the retention is a creditor, to be paid as commission once its sure the policy won't get cancelled?

reader

I think what Moobag is saying is that instead of showing 100% of commission payable in the commission expense account, Moobag is only showing 95% of commission payable in the commission expense account and the other 5% in the retention bank account on the balance sheet (hence higher profit because less money is being written off to the expense account).

I think this treatment is correct because the 5% retention is techinically the limited company's money until a certain amount of time has passed (you'll have to check the agreement in order to figure out how long the limited company is allowed to hold onto the money for before passing it on the insurance writers).

Bluewednesday

FRS12 deals with contingent liabilities etc which you need to look at carefully and go through with the knowledge you have as this will state whether the treatment is correct or not. Unfortunately it is best for you to do it yourself as you are in full possession of all the facts relating to the retentions.

My feeling is that the expense should be recognised with a corresponding liability but as we are not sure of the likelihood of repaying then it you need to check through the standard.

I have assumed you are reporting under UK standards rather than International, if not the corresponding international standard is IAS37

reader

Interesting, it seems as if the 5% may have to be accounted for in the expense account after all, i.e.

DR commission expense with 100% and
CR creditors with 100%

And then when the commission is paid:
DR Creditors with 95%
DR Retention bank a/c with 5%, and
CR Current a/c with 100%

And then when the policy has not been cancelled:
DR Creditors with 5%, and
CR Retention bank a/c with 5%

These forums are great! I learn so much!