Suppose you are a
NEUTRAL party providing an analysis of the appropriateness of BISYSs
accounting treatment to a non-accountant overseeing the SECs 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, semi-annually, 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 policy-holder made premium
payments. BISYS earned three types of insurance commissions: first-year
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, semi-annually, quarterly or monthly?

Renewal commissions
were commissions earned on policies renewed in thesecond year and thereafter,
and were substantially smaller than first-year commissions. BISYS
receivedmonthly checks from carriers with statements indicating the policies
for which renewalcommissions were being paid. Rather than recording these
commissions on a cash basis aspayments were received from carriers, BISYS
estimated its renewal commissions and recorded acorresponding receivable. This
estimate was then adjusted quarterly, based on historical net cashreceipts.

2. Is it appropriate to record the
second year commissions using estimates rather than cash receipts?

In addition to
first-year and renewal commissions, BISYS received a variety of bonus
commissions. The majority of the bonus commissions were additional commissions
basedon total business for the year. The bonus rate increased during the year
as productionthresholds were reached. For example, the carrier might pay a 25%
bonus if production exceeded $10 million in premiums and increase the rate
to30% if production exceeded $20 million. The increase to 30% would be retroactively
paid so allproduction would receive the 30% rate. BISYS’s policy was to
estimate the bonus commissionsbased 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 attributableto first-year commission receivables that were over a
year old. BISYSmaintained 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 withdata substantiating or
detailing the receivable.

4. How should BISYS deal with older
receivables? Suppose you are a
NEUTRAL party providing an analysis of the appropriateness of BISYSs
accounting treatment to a non-accountant overseeing the SECs 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, semi-annually, 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 policy-holder made premium
payments. BISYS earned three types of insurance commissions: first-year
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, semi-annually, quarterly or monthly?Renewal commissions
were commissions earned on policies renewed in thesecond year and thereafter,
and were substantially smaller than first-year commissions. BISYS
receivedmonthly checks from carriers with statements indicating the policies
for which renewalcommissions were being paid. Rather than recording these
commissions on a cash basis aspayments were received from carriers, BISYS
estimated its renewal commissions and recorded acorresponding receivable. This
estimate was then adjusted quarterly, based on historical net cashreceipts.2. Is it appropriate to record the
second year commissions using estimates rather than cash receipts? In addition to
first-year and renewal commissions, BISYS received a variety of bonus
commissions. The majority of the bonus commissions were additional commissions
basedon total business for the year. The bonus rate increased during the year
as productionthresholds were reached. For example, the carrier might pay a 25%
bonus if production exceeded $10 million in premiums and increase the rate
to30% if production exceeded $20 million. The increase to 30% would be retroactively
paid so allproduction would receive the 30% rate. BISYS’s policy was to
estimate the bonus commissionsbased 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 attributableto first-year commission receivables that were over a
year old. BISYSmaintained 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 withdata substantiating or
detailing the receivable.4. How should BISYS deal with older
receivables?