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What should a forecast of income include?

Income forecast requested by mortgage provider

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A client has forwarded a request from their mortgage company to provide an income forecast.

The client has only been running her company since Oct 17 and taking dividends since April 18.  On preparing the accounts to March 19, she had taken more dividends than reserves were available and had frequently taken additional payments she had classed as loans that were actually dividends.

Due to the nature of the business, they are VAT exempt.  Income can vary substantially month to month but the client says from April they have taken a set dividend and nothing else, but the only records available that I could look at are bank statements.  The clients insistent that the mortgage company knows the figures are not guaranteed and would never hold me responsible if they are not accurate which i obviously disagree with.

I've not actually seen a request like this for a few years so would like advice on what if anything you would do to provide income forecast.  Are management accounts overkill?  Also what caveat should be added to the letter?

Replies (21)

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By johngroganjga
12th Sep 2019 11:25

Is this a request to you, or one to your client that she has forwarded to you, and asked you to assist with. There is a big difference between you putting your name on a forecast that goes to a lender and your client doing so.

You should certainly not put your name on such a document. If you are being asked to do so reply to the effect that you do not have a crystal ball.

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Replying to johngroganjga:
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By AthollAccounts
12th Sep 2019 11:39

It's one she has forwarded to me, but the request is for "An accountants projection letter"

That's my gut feeling, however the client is herself a mortgage advisor and was pretty unhappy when I said at the very least I would be adding a caveat as she says she is asked to provide for every self employed client. I know that's not true because she does my mortgage and I wasn't asked for it!

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By Accountant A
12th Sep 2019 11:26

AthollAccounts wrote:

Also what caveat should be added to the letter?

A very large one - in flashing lights.

A forecast, even for a well run business, is based on assumptions provided by the business owner. These are not your doing; you are just sticking numbers together in some agreed format.

You certainly can't "certify" figures - although I would suggest that you should challenge (in writing) anything that the client provides that looks at odds with your knowledge of the client or more generally.

The caveat I would suggest would be along the lines of "prepared, without audit, from information provided by [director's name]".

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By ireallyshouldknowthisbut
12th Sep 2019 11:29

If you are ICAEW read the regulations on this. Its very strongly advised against.

We don't ever do them, just provide current year "year to dates"

That said many accountants must do them, based on the amount of flack we get for sticking to our institute's rules.

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Replying to ireallyshouldknowthisbut:
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By AthollAccounts
12th Sep 2019 11:42

I'm ACCA, but I previously worked for an ICAS firm and remember often getting a huge amount of flack as we would only provide in a certain way and with big disclaimers of responsibility.

Thanks for the advice. Waiting on a response from technical team but wanted to see what feeling was in practice too.

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Replying to ireallyshouldknowthisbut:
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By lionofludesch
12th Sep 2019 12:03

ireallyshouldknowthisbut wrote:
.... based on the amount of flack we get for sticking to our institute's rules.

It's flak - from the German "Flugabwehrkanone". Just saying, like.....

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By JDBENJAMIN
13th Sep 2019 10:32

I like it when that particular spelling error is shot down.

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Caroline
By accountantccole
12th Sep 2019 11:44

I'd be really careful with predictions and have historically worked backwards - "this is last year's data and I have no reason to believe that there will be significant change in the following year". Where I have management accounts for the year to date and can see income has doubled for the same period last year, mention this too. Just keep it factual rather than guessing the future unless there is a formal order book you can rely on.

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By Roland195
12th Sep 2019 11:58

I won't contradict the good advice given so far but in my experience, this is arguably a more important issue to your client than any of the other services you provide - they likely care not a jot that their accounts have been prepared in the correct format according to appropriate standards, couldn't find their copy of their tax return let alone understand it but they will certainly remember when their house purchase doesn't go through.

And while we can argue this is neither our job or our concern, it's unlikely to look that way to the paying client.

I have never had any objection to any of the caveats, get out clauses or weasel words I have written on such forms. More often than not, I don't fill in the form as given if it cannot be suitably modified to reflect the unaudited/verified figures and gives more scope to for CYA paragraphs.

If the ICAEW really advise against this, it further shows how little they understand or care about the bread & butter of their members in general practice.

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Replying to Roland195:
By ireallyshouldknowthisbut
12th Sep 2019 15:08

@Roland,

I would disagree about ICAEW's stance. I think its quite sensible that accountants ought not be asked to predict future incomes. That is for the banks to project from past data, not us to make it up, and then have it treated as if its reliable information.

I have lost a client over this, albeit it was "a factor" not the whole reason.

I am not aware of any client NOT get a mortgage due to our using YTD's etc, but we have had some arguments over it and it can ruffle clients feathers a bit.

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Replying to ireallyshouldknowthisbut:
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By Roland195
12th Sep 2019 15:50

[quote=ireallyshouldknowthisbut]

@Roland,

I would disagree about ICAEW's stance. I think its quite sensible that accountants ought not be asked to predict future incomes. That is for the banks to project from past data, not us to make it up, and then have it treated as if its reliable information.

[quote]

I think my point is more that the institutes should recognise the pressure their members are put under by the lending industry that effectively tries to pass the buck on responsible lending to us by asking fool or impossible questions - Will this continue? can your client afford this? Is your client responsible?

As you said, clearly they have an expectation that this is answered otherwise they wouldn't do it but to be fair they certainly don't seem to object to any answer covered by a caveat that makes in functionally useless or even declining to answer the question so long as you write your reason in the box.

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Replying to Roland195:
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By AthollAccounts
12th Sep 2019 15:14

That's very true. A lot of what we do isn't really tangible to the client so it is things like this that matter more to them.

My client initially wasn't too happy when I said I'd get back to her, but did understand when I said I was happy to help but had to be in a way that did not expose me to liability

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RLI
By lionofludesch
12th Sep 2019 11:59

I've always said we don't predict stuff and the mortgage company has generally accepted that.

Having said that, I was asked for one last year, told the guy I wouldn't do it and he went to an unqualified and she did one for him, no problem. I'm not convinced that this is any more than box-ticking on the mortgage company's part.

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Replying to lionofludesch:
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By Accountant A
12th Sep 2019 14:20

lionofludesch wrote:

I'm not convinced that this is any more than box-ticking on the mortgage company's part.

I suspect, in practice, that's right but they might have a go at taking legal action against an accountant who was foolish enough to give information without some very clear caveats.

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Replying to Accountant A:
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By AthollAccounts
12th Sep 2019 15:16

That's my feeling. The mortgage advisor insists they would never hold any one responsible if income turned out to be lower, but I'm sure if losses arose and there was no caveat that would quickly change.

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Replying to Accountant A:
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By lionofludesch
12th Sep 2019 17:53

Accountant A wrote:

lionofludesch wrote:

I'm not convinced that this is any more than box-ticking on the mortgage company's part.

I suspect, in practice, that's right but they might have a go at taking legal action against an accountant who was foolish enough to give information without some very clear caveats.

I don't disagree.

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By JDBENJAMIN
13th Sep 2019 10:45

No one ever really uses these things. It's just something on a ticklist that will be filed and forgotten. I have never heard of a mortgage company trying to sue an accountant over the content of a reference or forecast, except in cases of fraud. Just make certain the forecast is so full of caveats as to be of no practical use, as the lender won't care.

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By Red Leader
12th Sep 2019 12:25

Don't.Do.It.

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By Duggimon
12th Sep 2019 14:05

You are the only person at any point in the chain that cares. The mortgage adviser asks for one because they've been told to ask, your client just wants to get their mortgage.

Do a best guess, write on it that it's a best guess and shouldn't be used by anyone for any purpose and then call it a day, there's no real reason not to as long as you're clear that you're guessing and there's no real reason why your guess will be any more right than just using a random number generator.

99/100 times the mortgage adviser will take it without a second glance.

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By Red Leader
12th Sep 2019 14:46

If the borrower defaults, it's always nice for the lender to have someone to sue. Feel free to nominate yourself.

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By [email protected]
13th Sep 2019 13:04

Treat it like a forecast for a business
List your assumptions and make it clear that it is based on data and projections provided by the client.

Past performance is a good indicator for future costs. Always be conservative about growth assumptions and stress test the model.
Also I would insist on preparing a set of managment accounts up to the current month to demonstrate how the current year is performing. This also helps you to build the forecast.
You'll need access to records other than just the bank statement - the order book for one -what is in the pipeline? again useful for building the projection.
If the client is unwilling to provide the information you request then politely decline on the basis that if they are not open with you you are not able to serve their best interest

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