I need help answering these questions attached based on accounting principles
Suppose you are a NEUTRAL party providing an analysis of the appropriateness of BISYS?s accounting treatment to a nonaccountant overseeing the SEC?s case. Write a MEMO answering
the following 4 questions. Your answers to each question should be supported by accounting rules, concepts, or standards. Yes/No answers are unhelpful and you will receive no credit for unsupported responses.
Insurance Services' primary source of revenue was commissions earned on the sale of life insurance products. BISYS received insurance commissions from insurance carriers. The company recorded commission revenue when the policies were placed or renewed. Although premiums were paid annually, semiannually, quarterly, or monthly, BISYS immediately recorded the total commission due on the full year's premium even though it collected the receivable only as the policyholder made premium payments. BISYS earned three types of insurance commissions: firstyear commissions, renewal commissions and bonus commissions.
1. Is it appropriate to record the commissions immediately even though the insurance premiums are paid by the customers annually, semiannually, quarterly or monthly? Renewal commissions were commissions earned on policies renewed in the second year and thereafter, and were substantially smaller than firstyear commissions. BISYS received monthly checks from carriers with statements indicating the policies for which renewal commissions were
being paid. Rather than recording these commissions on a cash basis as payments were received from carriers, BISYS estimated its renewal commissions and recorded a corresponding receivable. This estimate was then adjusted quarterly, based on historical net cash receipts.
2. Is it appropriate to record the second year commissions using estimates rather than cash receipts? In addition to firstyear and renewal commissions, BISYS received a variety of bonus commissions. The majority of the bonus commissions were additional commissions based on total business for the year. The bonus rate increased during the year as production thresholds were reached. For example, the carrier might pay a 25% bonus if production exceeded $10 million in premiums and increase the rate to 30% if production exceeded $20 million. The increase to 30% would be retroactively paid so all production would receive the 30% rate. BISYS's policy was to estimate the bonus commissions based on prior history and adjust quarterly for current production.
3. Is it appropriate to estimate bonus commissions following this approach? What type of information should BISYS use for determining estimates?
As of June 30, 2003, the receivable balance was $33.6 million, of which more than $23 million, or 69%, was attributable to firstyear commission receivables that were over a year old. BISYS maintained no documentation to support those ending balances, which were based on estimates. Accordingly, it was not possible to compare the amounts supposedly owed by each carrier with data substantiating or detailing the receivable. 4. How should BISYS deal with older receivables?
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