Portfolio and asset management fees based on assets under management, and performance fees

When a financing support company manages portfolios or assets for an investor, its management fee usually moves with assets under management and its performance fee depends on returns measured over a long period; both are variable consideration, but they behave very differently: the management fee resolves each period, while a performance fee can swing on collections, valuations and disposals outside the manager's control until it crystallises, so accruing it on a running formula overstates revenue and invites later reversals.

Is the management service a series of distinct periods of service (for example each day or quarter) so that a fee based on average assets under management can be allocated entirely to the period in which it is earned? How is the performance fee calculated: over what measurement period, against what hurdle, with what high-water mark, and is any amount subject to clawback or deferral? Which inputs to the fee (portfolio collections, property valuations, disposal prices, investor distributions) are outside the manager's influence, and how volatile are they? Is any part of the performance fee already locked in (for example a crystallised tranche that cannot be reversed), and are there constraints in the mandate such as fee caps or offset against other fees?

1. Identify the promise to the investor: managing the portfolio or assets over the mandate term, normally a series of distinct service periods that is satisfied over time because the investor simultaneously receives and consumes the management activity.
2. Treat the management fee based on assets under management as variable consideration; where the fee relates specifically to the service in a given period and allocating it to that period meets the allocation objective, recognise it in that period rather than estimating the fee for the whole mandate.
3. Treat the performance fee as variable consideration and estimate it using the expected value or most likely amount, then apply the constraint: include it in revenue only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved.
4. Consider the constraint factors: susceptibility to market and collection outcomes, the length of the remaining measurement period, the range of possible outcomes and any clawback; for long-horizon performance fees this often means little or nothing is recognised before crystallisation, but the constraint limits the amount rather than operating as all or nothing: a minimum amount that is highly probable not to reverse, even in plausible downside scenarios, is recognised.
5. Recognise the performance fee (or a tranche of it) when the amount crystallises or when, before that point, a portion becomes highly probable not to reverse (for example after the hurdle is irreversibly met for a closed part of the portfolio).
6. Reassess the estimate and the constraint at each reporting date and recognise any change as a cumulative catch-up in the period of change.

Measure the management fee for each period at the contractual rate applied to the fee base for that period (for example average assets under management, outstanding balances or invested capital), net of any fee rebates, caps or offsets agreed with the investor. Measure the performance fee at the constrained estimate: the amount for which a significant cumulative reversal is highly probable not to occur, which is often zero until crystallisation; amounts received in advance or subject to clawback are recognised as a contract or refund liability until the uncertainty ends. Do not discount a performance fee for the time it takes to crystallise unless a significant financing component exists.

Disclose: (1) the revenue recognition policy for management and performance fees, including when performance fees are recognised and how the constraint is applied; (2) disaggregation of revenue between management fees, performance fees and other services; (3) significant judgements in estimating and constraining performance fees; (4) performance fees not yet recognised but that could be earned if current conditions persist, where useful to users, with clear wording that they are not assured; (5) contract balances and, separately, any refund liabilities for fees subject to clawback.

• Accruing the performance fee each period using a hypothetical liquidation of the portfolio at reporting date values without applying the constraint
• recognising the full performance fee when a hurdle is met for a period that is still open to reversal
• estimating the management fee for the full mandate term instead of allocating each period'
• s fee to that period
• ignoring clawback clauses and recognising fees received in advance as revenue
• presenting fee rebates or offsets granted to the investor as expenses instead of as a reduction of revenue
• treating the constraint as all or nothing, either recognising the full running amount or assuming nothing can ever be recognised before crystallisation even when a minimum amount is highly probable.