Due diligence, valuation support and onboarding services for portfolio purchases and sales

Before a financier or investor buys or sells a portfolio, a financing support company is often hired to review data tapes and loan files, model collections, support valuation and plan onboarding; these engagements mix fixed fees, milestone fees and success fees that depend on whether the deal closes, and the timing question (over time or at a point in time) and the constraint on success fees decide whether revenue is reported in the quarter the work is done or the quarter the transaction completes.

What exactly is promised: a due diligence report, a valuation model, a data cleansing exercise, onboarding readiness, or several of these, and are they distinct or a single integrated deliverable? If the client terminates early, does the contract give an enforceable right to payment for work performed to date, including a reasonable margin? Is the success fee payable only on completion of the client's transaction, and is completion within the entity's influence? Is onboarding of the portfolio after completion covered by this contract or by a separate servicing mandate that should be assessed for combination?

1. Identify the performance obligations: assess whether the report, model and readiness work are distinct or integrated into one deliverable; a separate servicing mandate signed at or near the same time with the same client should be assessed for contract combination.
2. Determine whether each obligation is satisfied over time: a report tailored to the client usually has no alternative use, so it is over time only if the contract gives an enforceable right to payment for performance to date; otherwise recognise at the point of delivery and acceptance.
3. For over-time obligations, measure progress with an input method such as hours incurred against total expected hours, excluding inefficiencies.
4. Treat the success fee as variable consideration: because completion depends on the client's decision, financing and regulatory approvals, it is usually fully constrained until the transaction completes.
5. When the transaction completes, recognise the success fee immediately to the extent it relates to obligations already satisfied.
6. Recognise any amount billed in advance of performance as a contract liability and work performed but not yet billable as a contract asset.

Measure the transaction price as the fixed fee plus the constrained estimate of variable fees; allocate it to distinct obligations by relative stand-alone selling price where there is more than one. Measure progress for over-time obligations by the proportion of expected effort completed. Recognise the success fee at the contractual amount when the constraint lifts; do not accrue it on a probability-weighted basis before completion unless it is highly probable a significant reversal will not occur.

Disclose: (1) the nature of advisory and due diligence services and whether revenue is recognised over time or at a point in time; (2) the method used to measure progress; (3) significant judgements on the constraint applied to success fees; (4) disaggregation of advisory revenue from recurring servicing revenue; (5) contract assets and liabilities arising from these engagements.

• Recognising a report-based fee over time without checking for an enforceable right to payment for work to date
• accruing success fees on deals the team considers likely to close
• treating the success fee as earned when the client signs a purchase agreement rather than when the condition in the engagement letter is met
• failing to combine a due diligence engagement with a servicing mandate negotiated as a package, which can misallocate value between the two
• capitalising bid costs that would have been incurred whether or not the contract was obtained.