External collection agency and legal firm commissions: cost of service, cost of obtaining a contract or recharged cost

Servicers pay several types of commission that look alike but are accounted for differently: commissions to subcontracted collection agencies or law firms for recovering amounts (a cost of delivering the service, or a recharged cost if the financier bears it), and success fees or sales commissions paid to win a new mandate (potentially an incremental cost of obtaining a contract to be capitalised). Mixing them up either defers operating costs that should be expensed or expenses acquisition costs that should be spread over the mandate.

Is the commission paid for recovering amounts from borrowers (a service activity) or for securing the mandate itself (an acquisition activity)? Would the commission have been incurred if the mandate had not been obtained? Who bears the commission under the mandate: the servicer out of its own fee, or the financier as a recharged cost? Is the servicer principal for the subcontracted collection service (responsible to the financier and setting the overall price), so that its full collection fee is revenue and the agency commission is cost? Is the expected amortisation period of any capitalised acquisition cost one year or less, so that the practical expedient to expense may be applied?

1. Classify each commission by purpose: fulfilment (collection and recovery activity), acquisition (winning or renewing a mandate) or pass-through (a cost the financier bears).
2. For fulfilment commissions relating to collections in the period, expense them as cost of services when incurred, because they relate to performance obligations already satisfied.
3. Where the financier bears the agency or legal commission and the servicer is agent, account for it as a recoverable cost (see the recharged costs issue).
4. Where the servicer is principal for collections and uses an agency as subcontractor, recognise its own collection fee gross as revenue and the agency commission as cost.
5. For commissions paid only because a mandate is signed (introducer success fees, sales commissions contingent on signing), capitalise them as incremental costs of obtaining a contract if expected to be recovered.
6. Expense costs that would have been incurred regardless of signing (tender preparation, legal review of draft terms, discretionary bonuses), unless explicitly chargeable to the financier.
7. Amortise capitalised acquisition costs over the expected mandate term, including anticipated renewals for which no similar commission is paid, and test them for impairment; apply the one-year practical expedient where relevant and disclose its use.

Fulfilment commissions are measured at the amounts payable for the period's activity. Capitalised acquisition costs are measured at the commission incurred and amortised on a systematic basis consistent with the transfer of servicing. Impairment of the acquisition cost asset compares its carrying amount with the remaining consideration less the costs still to be incurred directly.

Disclose: (1) the closing balance of capitalised costs to obtain contracts, amortisation and impairment for the period; (2) the method used to determine amortisation; (3) use of the practical expedient for acquisition costs with an amortisation period of one year or less; (4) the accounting policy for subcontracted collection costs, including principal or agent judgments.

• Capitalising collection agency commissions as contract costs because they relate to a specific mandate
• expensing an introducer success fee contingent on signing a multi-year mandate
• capitalising tender preparation costs and discretionary bonuses as costs of obtaining a contract
• presenting the servicer'
• s collection fee net of agency commissions where the servicer is principal
• failing to amortise acquisition costs over anticipated renewals or amortising beyond a realistic term
• ignoring impairment when the mandate economics deteriorate.