Simplified practice
Nominal provision
Adds up, period by period, the indemnities corresponding to the commissions earned. It ignores turnover, the reason for termination and the deferral of payment.
IAS 37 · Agents' indemnity
A certain obligation, an amount to estimate
IAS 37 valuation of the end-of-contract indemnity fund for commercial agents in Italy
When an agency contract ends, the principal owes the agent the indemnities provided for by the Italian Civil Code and by the national collective agreements (AEC). The right arises from the contract, but the amount and timing of payment depend on uncertain events: turnover, terminations, mortality, disability and the trend in commissions. We estimate this liability with an agent-by-agent actuarial model, for use in both IAS/IFRS and Italian GAAP financial statements.
— 01 / Context
Which indemnities make up the fund
The obligation towards agents is certain in its existence, because it stems from the agency contract, and uncertain in its amount, because payment depends on why and when the contract ends: no indemnity is due, for instance, where the agent resigns without just cause or the contract is terminated for the agent's breach. For this reason IAS 37 requires a provision equal to the best estimate of the expenditure, discounted where the effect of the time value of money is material.
The rules have two sources. Article 1751 of the Italian Civil Code sets a ceiling equal to the average annual commission over the last five years; the collective agreements for the commerce and industry sectors set out how the indemnity is calculated. Following the Honyvem judgment of the EU Court of Justice (C-465/04, 2006), the agent is entitled to the more favourable of the two: the valuation compares them for each agent and for each year in which the contract could end.
The actuarial value differs from the sum of indemnities accrued because it reflects the probability that each indemnity will actually be paid and the time between the reporting date and payment.
Components of the valuation
FISC · Customer indemnity
Accrues as a percentage of commissions, at rates that rise with the length of the agency relationship. It is the largest component of the fund.
FIM · Merit-based indemnity
Provided for by the collective agreements where the agent has developed the customer base and the principal continues to benefit. In the industry sector it follows a conventional algorithm: forecast period, customer migration rate and a flat-rate reduction.
Article 1751 Civil Code
Benchmark and ceiling: the average annual commission over the last five years of the relationship.
FIRR · Enasarco
Paid annually to the Enasarco Foundation; it creates no fund on the balance sheet but is part of the comparison with Article 1751.
— 02 / Methodology
From the sum of indemnities to the best estimate
We developed a methodology, implemented in dedicated software, that models analytically the demographic and economic drivers of the fund. For each agent we project commissions and indemnities year by year and apply multiple-decrement tables: ISTAT mortality, disability, and turnover and terminations estimated from the portfolio's history. Expected amounts are discounted using the spot yield curve of AA corporate bonds, maturity by maturity rather than at a single flat rate.
In each projection year the model compares the indemnity calculated under the collective agreements (FIRR, FISC and FIM) with the one under Article 1751 and retains the more favourable for the agent, as the Honyvem case law requires. The comparison is made scenario by scenario rather than once and for all: which basis applies depends on when and why the contract ends. The value of the fund and the charge for the period can be recalculated at any time, for the year-end close as well as for interim reporting.
Eurokleis methodology
Actuarial valuation
Weights each indemnity by its probability of payment and discounts it. Applies, agent by agent, the more favourable of the collective agreements and Article 1751.
— 03 / Process
From the data set to the notes to the accounts
Data collection and checks
We collect agent records, contract start dates, sector (commerce or industry), single or multi-principal status and at least five years of commission history. We check the data for consistency and completeness before any calculation.
Setting the technical bases
We agree the turnover assumptions, estimated from the portfolio's history, the mortality and disability tables, the expected trend in commissions and the discount yield curve.
Calculation and reconciliation
We calculate the best estimate for each agent using the algorithms for the relevant sector and contract type, weighting the FIM by its probability of accruing, and aggregate it at portfolio level. We reconcile the fund with the previous year: charge for the period, amounts used on terminations and the effect of changes in assumptions.
Report and disclosure
We deliver a technical report setting out the assumptions adopted, the sensitivity analysis on discount rate, turnover, commission growth and mortality tables, and the movement tables for the notes. We remain available to the auditor for any clarification.
— A valuation for your next reporting date
Let's talk before your year-end close
Tell us about your agent portfolio: number of contracts, sector, available commission data, reporting and audit deadlines. We will set out the data we need and the delivery timetable.
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