FEATURE Financial Institutions
HAVE YOU REVIEWED YOUR REVENUE STREAMS? Todd Sprang , Managing Principal of Industry, and Adam Donahue, Manager, CliftonLarsonAllen
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 becomes effective for public business entities (PBEs) with annual reporting periods beginning after December 15, 2017, and after December 15, 2018, for non PBEs.
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.
A significant percentage of most institutions’ revenue will
typically end up being ruled 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 will 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 cur- rent 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, as they are typically not material to the total revenue of the institution, and therefore the accounting for such amounts may not necessarily need to change. If your institution determines that your current accounting for
a specific revenue stream is different that the new revenue recog- nition model prescribed in ASC 606, you will need to document what adjustment will be made, or the rationale (e.g., immaterial amounts) behind not making any adjustment. 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:
Financial institutions’ revenue streams are unique in comparison to other industries... 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.
Todd Sprang —
todd.sprang@claconnect.com Adam Donahue –
adam.donahue@
claconnect.com
8 MIDWEST INDEPENDENT BANK
MIBANC.com
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