Revenue or investment
Posted: 29 Jun 2020, 23:28
Suppose a management entity brokers a transaction (let's say the sale of an asset from one entity to another), but simply acts as a broker - so it is not itself involved in lending/buying/selling etc. Let's say that new asset is put into a new entity and starts generating earnings. The management entity is not a shareholder and has no further involvement, it just brokered the deal.
But instead of charging a fee for its service, it agrees to take a fixed percentage of profits generated from the transaction that was brokered, after an initial hurdle is met. So if the initial deal was to broker to sale of a factory, once that new entity owning the factory generates €50m of earnings, 5% of further earnings go to the management entity, with no cap. It could take 5 years until that threshold is met. However the factory's capacity/life is not expected to be significantly more than €55m of earnings, so the upside is potentially limited.
So for the management entity it sounds like a revenue arrangement based on fully variable consideration. (ie not recording revenue until greater certainty of receivables arises).
However when I think about it, it seems also that it's more of an investment (for which the management entity 'paid' in upfront brokering services, rather than cash'). Clearly not an investment in shares but an interest in the performance of an asset.
At high level, could anyone point me to the fundamental distinction in this scenario, which might then point me to a solution.
But instead of charging a fee for its service, it agrees to take a fixed percentage of profits generated from the transaction that was brokered, after an initial hurdle is met. So if the initial deal was to broker to sale of a factory, once that new entity owning the factory generates €50m of earnings, 5% of further earnings go to the management entity, with no cap. It could take 5 years until that threshold is met. However the factory's capacity/life is not expected to be significantly more than €55m of earnings, so the upside is potentially limited.
So for the management entity it sounds like a revenue arrangement based on fully variable consideration. (ie not recording revenue until greater certainty of receivables arises).
However when I think about it, it seems also that it's more of an investment (for which the management entity 'paid' in upfront brokering services, rather than cash'). Clearly not an investment in shares but an interest in the performance of an asset.
At high level, could anyone point me to the fundamental distinction in this scenario, which might then point me to a solution.