Sole trader - incorporation - financial advisor

[Taxmansussex]

I have a client who has been trading for a number of years as a financial advisor. He wishes to incorporate.

There is no significant goodwill, but the client has commissions due over the next 3 years of approx £150k. He wishes to introduce this asset to the company on incorporation.

I am struggling with the way the accounting will work for this transaction.

When the commissions are received they will need to be recorded as sales of the company. If, on introduction to the company the entry is Dr Asset (or WIP?) and Cr Directors loan - what is the entry when the commission is received?

Am I missing something here?

thanks

[Incredulum]

I m no expert on FAs' commissions. But are you sure that they should not have been accounted for when the product was first sold? Rather than when the cash is received?

[Taxmansussex]

I am looking into that - the client is of the view that the receipt of the commission is contingent on the product still being in place at certain dates, and he therefore accounts for it on a receipts basis. Does anyone have any experience in this area?

[Incredulum]

In which case is there anything at all to introduce to the company?

[Taxmansussex]

Well, lets assume that the receipt of the income is contingent on conditions being met. In that case the income should be brought into account when the conditions are met.

Therefore, there would be an asset to introduce, being the contingent right to receive income, and I cant get my head around the accounting for this, as mentioned above.

Clearly, I will be requiring more information from the FA about the conditions to be met before the income is receivable. In the meantime, any ideas?

[RAL]

Generally there are two types of commission for IFA. One is when the product sold, for example term assurance. After some years (between 2 to 5 years) IFA would receive further commission based on premium paid by the customers.

Is this deferred revenue? has this been recognised in the accounts (sole trader) as a deferred revenue? Probably not. I am not sure how you can introduce being the contingent right to receive income, as IFA as a sole trader would be entitled to income. Only way I can think of to introduce in the company is by way of is "sale of this contingent right to receive income" to the limited company by IFA.

[Taxmansussex]

Thanks RAL, I have just been taken on by the client, his sole trader accounts do not show any right to deferred income. His view was that it was potentially receivable, but if the product was disposed of he would not get the commission and may have to pay back some commission received. He would therefore agrue that the income should be recognised when definately receivable.

I agree that he would need to sell the "potential right to commission" to the company - in which case the company acquires an asset and he has a directors loan balance to draw down.

However, I cant get the accounting straight in my head - i.e. on the sale to company we Dr asset Cr DLA, but when the commission is received what do we do? we need to credit sales, but we also need to credit the asset...

My double entry bookkeeping is letting me down..!

[RAL]

I agree that he would need to sell the "potential right to commission" to the company - in which case the company acquires an asset and he has a directors loan balance to draw down.
[/quote}

= Goodwill

However, I cant get the accounting straight in my head - i.e. on the sale to company we Dr asset Cr DLA, but when the commission is received what do we do? we need to credit sales, but we also need to credit the asset...

My double entry bookkeeping is letting me down..!

No, you do not need to credit the asset,however you need to write down the asset proportionally over the period.

[Taxmansussex]

Aha! of course.. feel an idiot now.. Many thanks.