Financial Institutions: Have You Reviewed Your Revenue Streams?
Financial institutions' revenue streams are unique in comparison to other industries. So with implementation for the Financial Accounting Standards Board’s (FASB) revenue recognition standard ASC 606 quickly approaching, it’s important to recognize which of your revenue streams are included in the new standard, and which are addressed by other sections of the FASB codification and therefore don’t fall under ASC 606.
Although you may believe that the new standard won’t have a significant impact on your institution’s financial statements, you still need to perform a review of all income statement revenue streams. By performing this review, you can determine which revenue streams are included in ASC 606 and might require adjustments to your revenue recognition process or financial statement disclosures.
Revenue recognition implementation quickly approaches
The new standard, along with its subsequent updates, was released in 2014. FASB’s intent is to provide a standardized approach for recognizing revenue across multiple industries. The standard became effective for public business entities (PBEs) with annual reporting periods beginning after December 15, 2017, and will be effective for non-PBEs for annual reporting periods beginning after December 31, 2018.
Ruling out certain revenue streams from ASC 606 requirements
To review your income statement, group accounts into various revenue streams, including interest income, service charges on deposit accounts, loan servicing fees, gains and losses on OREO sales, credit card fees, and interchange fees. Once your accounts are grouped, the revenue streams that are explicitly ruled out, such as interest income and loan servicing fees (as discussed by the FASB Transition Resource Group), should be summarized, and the reason for those revenue streams falling outside of ASC 606 should be documented in a memo.
Based on our experience with PBEs, we have verified that a significant percentage of most institutions’ revenue will typically end up being scoped out due to the majority of their income being interest-related. The other revenue streams that are determined to be included in the new revenue recognition standard will need to be analyzed further to determine what changes to your institutions’ revenue recognition process will be required.
Some revenue streams may need further evaluation
The Transition Resource Group (TRG) staff papers and the American Institute of CPAs (AICPA) Revenue Recognition Audit Guide provide the best guidance for how the standard will impact your accounting.
Included revenue streams, such as service charges on deposit accounts, gains or losses on OREO sales, and interchange fees will need to be evaluated further to determine if any change to the current accounting process is required. Your institution should review and document your conclusion as to the change, if any, ASC 606 will have on your current accounting process. The majority of community institutions will not see a significant impact to the timing of revenue recognition due on these types of revenue streams; however, it is still important to document the impact.
If your institution determines that your current accounting for a specific revenue stream is different than the new revenue recognition model prescribed in ASC 606, you will need to document what adjustment will be made, or the rationale (e.g., immaterial amounts) behind why the pattern of recognition has not changed. However, if the amount of revenue is determined to be material by management, the transaction should be subjected to the revenue recognition process as described in ASC 606, also known as the five-step process, which includes:
- Identifying the contract with the customer
- Identifying the separate performance obligations in the contract
- Determining the transaction price
- Allocating the transaction price to the separate performance obligations
- Recognizing revenue when (or as) performance obligations are satisfied
Review the new disclosure requirements
Beyond the evaluation of revenue streams, there are additional disclosure requirements in the new revenue recognition standard. The stated objective of the new disclosure requirements is for “an entity to disclosure sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers” (ASU 2014-09).
PBEs were required to disclose disaggregation of revenues, contract balances, performance obligations, significant judgments, and practical expedients (if used). Non-PBEs can omit some of these disclosures, but are required to provide alternative disclosures related to disaggregated revenue and contract balances. In either case, your institution should begin evaluating which disclosures you will be required to present in your financial statements, and then accumulating the necessary information to complete those disclosures.
Acquisition activity complicates income recognition
Based on the complexity of an institution and its contracts with customers, ASC 606 may have a significant or immaterial impact on income recognition. Institutions that have recently gone through acquisition activity may find this task more difficult depending on the number and complexity of contracts that came over with the acquisition. In either case, the five step process will be the same for any revenue stream that does not explicitly fall inside or outside of the standard and described in detail in a TRG staff paper.
How we can help
Even if the revenue recognition standard won’t significantly affect current revenue accounting at your institution, there is still work to be done. CLA financial institution professionals have experience working with more than 1,500 financial institutions across the country. We can provide guidance as you review your revenue streams and tools to analyze contracts, help you structure your supporting documentation, and provide example disclosure wording.