I have an Accounts Receivable stemming from a contract dispute and settlement. The Settlement agreement has been fully executed and resulted in the termination of the business relationship in its entirety, a payment upon signing the settlement agreement and monthly payments for the next 15-18 months. Estimating the amount of the monthly payments gets tricky as the amount of each payment equals a fixed % of insurance premiums paid to the other party on the run-out of inforce insurance policies. There are no concerns regarding collection of such monthly payments and the amounts can be estimated with a reasonable degree of accuracy. I believe I can estimate and record the estimated value of the monthly payments in my year-end financial statements but need the GAAP documentation to support the recording of such AR. Can you help with this technical question?
USA Estimating AR
- Thread starter MLawlor
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bklynboy
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Need a little more information here. What was the contract dispute and why are payments a % of premium? Was a closed block of business sold? Is this a reinsurance arrangement? What type of premium is this (life, A&H, P&C, etc).
I work for an insurer and have dealt with many technical items with strange clauses. Like to help but given the technical nature of yoru question, please provide more detail so an informed answer can be provided.
I work for an insurer and have dealt with many technical items with strange clauses. Like to help but given the technical nature of yoru question, please provide more detail so an informed answer can be provided.
Thanks for the feedback. The company had provided services on behalf of an insurance company and was paid a % of the gross premiums collected. Insurance products were group life and AD&D along with stop loss. The settlement terminated all services but the company continued to collect fees for the runout of the policies it managed prior to the settlement. While the % was fixed the amount of gross premium collected for the runout was not fixed as premiums flucuated month to month; however, the total gross premiums for the runout of the book of business could be estimated with a fair degree of accuracy. Hope this additional information is helpful in understanding the accounting issue. Thanks for your help!
bklynboy
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Ok - I think I get it.
I am not sure what service you provided but likely you are the TPA that administers the group contract for this company and the insurer either lost the contract to another insurer or exited the group voluntarily (bad experience, not a strategic business, etc). As an insurer, we record the expense paid to a TPA at the point its incurred which is when the premiums are actually collected.
It seems to me that the "receivable" you have is a contingency payment that is triggered when the premiums are paid in. My reaction is you cant set up a receivable until the premiums are paid so I would not estimate the receivable but instead accrue it as you earn that fee.
As an insurer, we recognize premium when its due and not assume future collectibility. On single pay contracts we defer the premium and recognize over the benefit period. In all cases we are not permitted to recognize a receivable for future premium until its actually due. I would apply the same rule for you as you are not due any payment day 1 but instead are earning it over a period time that depends on the premiums collected.
Take a look at SAB 104 and see if this helps. Its says "revenue should not be recognized until it is realized or realizable and earned; and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues". SAB 104 lays out the conditions to meet this criteria and also has some fairly good examples. On page 74 it describes a medial arrangement where they collect a fixed fee and are not permitted to recognize the revenue before the underlying collection has occurred even though it can be reliably estimated - this is similar to your case and I say you need to wait for the premium to be paid before you recognize your service fee. Nothing as specific as yours but similar in the facts. I dont believe you have completed the revenue process to entitle you to recognize revenue day 1. I cant upload the file but here is the link
http://www.sec.gov/interps/account/sab104rev.pdf
If I have the facts wrong PM me and we can take this offline.
I am not sure what service you provided but likely you are the TPA that administers the group contract for this company and the insurer either lost the contract to another insurer or exited the group voluntarily (bad experience, not a strategic business, etc). As an insurer, we record the expense paid to a TPA at the point its incurred which is when the premiums are actually collected.
It seems to me that the "receivable" you have is a contingency payment that is triggered when the premiums are paid in. My reaction is you cant set up a receivable until the premiums are paid so I would not estimate the receivable but instead accrue it as you earn that fee.
As an insurer, we recognize premium when its due and not assume future collectibility. On single pay contracts we defer the premium and recognize over the benefit period. In all cases we are not permitted to recognize a receivable for future premium until its actually due. I would apply the same rule for you as you are not due any payment day 1 but instead are earning it over a period time that depends on the premiums collected.
Take a look at SAB 104 and see if this helps. Its says "revenue should not be recognized until it is realized or realizable and earned; and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues". SAB 104 lays out the conditions to meet this criteria and also has some fairly good examples. On page 74 it describes a medial arrangement where they collect a fixed fee and are not permitted to recognize the revenue before the underlying collection has occurred even though it can be reliably estimated - this is similar to your case and I say you need to wait for the premium to be paid before you recognize your service fee. Nothing as specific as yours but similar in the facts. I dont believe you have completed the revenue process to entitle you to recognize revenue day 1. I cant upload the file but here is the link
http://www.sec.gov/interps/account/sab104rev.pdf
If I have the facts wrong PM me and we can take this offline.
Bklynboy...Thanks for your insight. I reviewed SAB 104 and see the parallel with the Medical Bill Payor. The only difference here is that the company no longer performs any services for the insurer and its business relationship was terminated. Due to improper activities the insurance co agreed to pay the company a settlenent with a lump sum followed by monthly payments for the run-out of inforce policies. The company completed its revenue cycle at the time of the settlement, and did not provide any services after that date. The initial offer in the settlement was a one time payment. The company wanted more so agreed to a smaller one time payment plus a % of premium collected for the runout. This approach was estimated to yield a higher settlement payout. Might this clarification change your conclusion? Thanks again for your help.
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