I have an Investment Consultant client (sole trader) who feels that he may have some possible future exposure for the mis-selling of investments, although as he doesn't know if, or when, or how much liability may arise, he has requested that a provision is made in his accounts for a possible future liability, which is understandable.
His PI insurance has an excess for each and every claim and therefore the provision could easily be quantified as the amount of excess multiplied by the number of clients affected.
However, the client feels that the insurers may try to wriggle out of paying out on such claims and feels that a higher provision should be made in the accounts, which he has not, as yet quantified.
I was therefore wondering whether anybody else had any experience of this type of provision being made and how they went about quantifying the amount provided.
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Why does client want this provision included in his accounts? Not to obtain tax relief on it by any chance? Or is he just a stickler for accurate and prudent financial reporting?
FRS 12
There needs to be:
a present obligation,as a result of past events,to make a future transfer of economic benefits,which can be reliably estimated.
If your client is saying that it's an occupational hazard that some policies are inevitably missold, then it's probably on a footing with a warranty provision (acceptable under FRS 12 and, therefore, for tax purposes).
The difference is a warranty provision can get past all four requirements, whereas you only seem to be managing the first four.
Are there any industry statistics on misselling?
All good stuff
There needs to be:
a present obligation,as a result of past events,to make a future transfer of economic benefits,which can be reliably estimated.
If your client is saying that it's an occupational hazard that some policies are inevitably missold, then it's probably on a footing with a warranty provision (acceptable under FRS 12 and, therefore, for tax purposes).
The difference is a warranty provision can get past all four requirements, whereas you only seem to be managing the first four.
Are there any industry statistics on misselling?
All good stuff Steve but we need to know why client wants provision first don't we. If he's self employed he can put whatever he wants in his accounts if it will make him happy but FRS12 only comes into play if he wants tax relief. Hence the questions in my first post.
What you're describing
Falls within the definition of a contingent liability, rather than a provision.
What is the basis for the belief that the insurers will try to avoid liability. Has your client confessed to a mis-declaration or some breach of the policy conditions.
No - tax relief will be due
No - tax relief will be due on a valid FRS12 provision when it is made. One of the areas where tax simply follows GAAP.
Yes a contingent liability is, by definition, not provided for in the accounts so there is no deduction in the accounts to claim tax relief on in any event.