Recharged third-party costs (legal, enforcement, valuation, payment-channel fees): principal or agent

Servicers routinely pay lawyers, enforcement agents, valuers, auctioneers and payment channels in the course of managing a portfolio, and recover these costs from the financier at cost or with a handling margin. Whether the recharges are revenue (gross) or simply reimbursements (net) depends on whether the servicer controls the third-party service before it is transferred to the financier. Presenting all recharges gross can inflate revenue materially in non-performing portfolios with heavy legal activity, while presenting genuinely integrated subcontracted services net understates the servicer's scale and misstates margins.

What exactly is the specified service the financier receives: the third party's service itself (for example legal representation in court where the financier is the client of record), or an integrated service of the servicer that uses the third party as an input (for example a collateral review deliverable that combines external valuations with the servicer's own analysis)? Who is primarily responsible to the financier for the quality and acceptability of the third-party work? Does the servicer bear inventory-like risk, such as committing to the third party before the financier agrees to reimburse, or absorbing costs the financier refuses? Does the servicer have discretion in setting the price charged to the financier, or is it cost plus a fixed handling fee?

1. Identify each type of third-party cost recharged under the mandate.
2. For each, identify the specified good or service provided to the financier.
3. Assess whether the servicer obtains control of that service before it is transferred, using the indicators: primary responsibility for fulfilment, risk before or after transfer, and pricing discretion; the indicators support, but do not replace, the control assessment.
4. If the servicer is principal (typically where it integrates the third-party input into its own service and bears the price risk), recognise the amount billed as revenue and the third-party cost as cost of services.
5. If the servicer is agent (typically where the financier selects or approves the provider, is the client of record and bears the cost risk), recognise only any handling fee or margin as revenue; record amounts paid on the financier's behalf as a recoverable balance and the reimbursement as its settlement.
6. Treat payment-channel or bank fees deducted from borrower payments according to who bears them under the mandate: they are the financier's costs if collections are passed through net of them, and the servicer's own costs if the mandate requires it to absorb them.
7. Apply the conclusion consistently across mandates with similar terms.

As principal, measure revenue at the gross amount the servicer is entitled to from the financier, and the cost at the amount owed to the third party. As agent, measure revenue at the handling fee or net margin, and carry costs paid on behalf at the amount recoverable, subject to expected credit loss assessment. If the financier may refuse reimbursement of some costs (for example costs incurred without approval), estimate the amount that will not be recovered and recognise it as an expense of the servicer.

Disclose: (1) the policy for recharged costs and the basis for principal or agent conclusions; (2) significant judgments where the conclusion differs between types of cost or between mandates; (3) recoverable balances for costs paid on behalf of financiers and their ageing or credit quality; (4) disaggregation of revenue that separates fee revenue from gross recharges where material.

• Presenting all recharges gross because the servicer pays the third party and issues the invoice
• presenting genuinely integrated subcontracted services net because they are recharged at cost
• treating handling margins as reductions of cost instead of revenue
• carrying legal costs paid on behalf of financiers as receivables without assessing recoverability when approvals were missing
• ignoring the mandate'
• s allocation of payment-channel fees
• confusing the accounting principal or agent conclusion with the separate tax treatment of disbursements.