Project Spark
Retail
Compliance
KPI's: 6 products over 15 years
Accounting policy calculation model to value future income from warranty commissions.
Requirement
The client is a national retailer of consumer electronic goods which earns an ongoing commission on warranties sold to consumers. The warranty provider pays the company an annual commission for each year the consumers keep paying the warranty premiums.
As the company had met its performance obligations at the point of initial sale, under IFRS15 it needed to calculate the present value of all future commissions anticipated and recognise it as revenue when the sale was made.
Solution
The model was developed in order to accept standard format input of data from the warranty provider which set out the value of new warranties sold, plus a list of customers from prior months who had cancelled in the current month.
The model uses a customer retention curve to anticipate future cancellations and then calculates the future value of warranty commissions based on remaining customers. The carrying value would increase monthly (finance income) as future annual payments got closer in time, and decreased when cash is received. The model also calculates a 'true up' at each month end where anticipated cancellations are replaced with actual cancellations so that the carrying value is always up to date.
As the model accepts standard format data from the underwriter each month, it is easy to update and a macro is used to consolidate individual warranties into monthly cohorts, helping to reduce the file size. Feedback from the company’s auditor was very positive and the model was adopted for use in supporting its accounting disclosures.