Depository Institutions, Are You Prepared to Implement the Revenue Recognition Standard?

by Jason Brodmerkel, CPA

September 6, 2017

With all of the recent discussions about the upcoming Credit Losses standard (Topic 326), it’s not difficult to forget that the Revenue Recognition standard (Topic 606) is right around the corner. *

As you recall, the Revenue Recognition Standard was released in May of 2014 with the objective to remove inconsistencies and weaknesses with existing revenue requirements. For Institutions, the greatest potential impact will be to non-interest income categories.

If you haven’t considered the effects of the standard until now (or while reading this are just now realizing it): let this article be a last minute “cram session” to help your Institution gain a full understanding of the potential impact.

What’s In?
We understand that the standard can feel confusing. Because of this, we developed the chart below which highlights potential impacts to the standard and your income statement. 

Key

    X: Will Impact
    [X]: Potential Impact

What’s Out?

Now that you have an understanding of what your Institution needs to consider in its implementation process, the good news is, there are more than a few items out of scope. Below are items you may leave out of your overall revenue recognition implementation process. 

  • “Core” Interest Income 
  • Financing instruments and other contractual rights or obligations (e.g. receivables, debt and equity securities, liabilities, debt, derivatives, transfers and servicing, etc.) 
  • Lease contracts
  • Contracts within the scope of ASC 944, Financial Services –Insurance
  • Guarantees (other than product or service warranties)
  • Non-monetary exchanges between entities in same line of business to facilitate sales to customers

Am I Implementing Correctly?

Depending on the number of contracts and types of revenue streams your depository and lending institution has, implementation might be time consuming and daunting. Below is a best practice process flow for management’s consideration:

1. Scope revenue streams as either in or out 

  • As noted above, it’s best to first determine the types of income statement streams that affect your institution.
  • Next, disaggregate income statement line items into homogenous groups (e.g. separating by scope, grouping equivalent contracts).
  • Consider intercompany impacts for stand-alone reporting.
  • Prioritize contracts that produce the highest percentage of overall revenue.
  • Develop a plan to make sure they are in-compliance by your institution’s deadline.
  • Assemble a team to help implement.

2. Perform contract review

To implement correctly, the Financial Accounting Standards Board (FASB) has depicted a best practice approach when performing contract review as follows: 

  • Identify the contract with a customer
  • Identify the performance obligations (promises) in the contract
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations in the contract
  • Recognize revenue when (or as) the reporting organization satisfies a performance obligation

Next Steps:

  1. Once your institution has determined the scoping impact and performed contract review of revenue streams, what’s next? Here is list of items for management’s considerations:  Document and finalize implementation memos.
  2. Ensure Corporate Governance is informed of impact.
  3. Prepare revisions to accounting policy documentation, with a 1/1/18 effective date.
  4. Continue to prepare disclosure changes and enhance interim SAB 11-M and 74 disclosures
  5. Ensure internal controls (both operating and financial reporting) are up-to-date and in-compliance.
  6. Maintain dialogue with your investor relations group and external auditors, as necessary.

Disclosure Impact for Public Business Entities

Certain disclosures will vary between Public Business Entities (PBEs) and Non-PBEs. Non-PBEs can elect to forego certain disclosures outlined below but instead must provide certain alternative disclosures related to disaggregation of revenue and contract balances.

Disaggregation of Revenue

  • Quantitative disclosure of revenue disaggregated into categories that show how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Contract Balances

  • Opening and closing balances and revenue recognized during the period.
  • Information about significant changes in contract balances.

Performance Obligations

  • Description of when performance obligations are satisfied, significant payment terms, nature of goods or services promised, and obligations for returns, refunds, and warranties.
  • Transaction price allocated to remaining performance obligations and when such revenue will be recognized.
  • Whether the entity is applying the practical expedient for certain performance obligations.

Significant Judgments

  • The timing of satisfaction of performance obligations and the transaction price and amounts allocated to performance obligations.
  • The method used to recognize revenue for performance obligations satisfied over time and why that method is representative of the transfer of goods or services.
  • Judgments made in evaluating when a customer obtains control of promised goods or service for performance obligations satisfied at a point of time.
  • Methods, inputs, and assumptions used for determining the transaction price, assessing constraints on variable consideration, allocating transaction price, and measuring obligations for returns, refunds and similar obligations.

Practical Expedients

If an entity elects either of the following practical expedients, it should disclose:

  • Determining the existence of a significant financing component.
  • Determining the incremental costs of obtaining a contract.

Additional Resources to Help You Navigate

The AICPA revenue recognition site features news and practical guidance, including information for specific industries, a roadmap to understanding the standard, a learning and implementation plan and a perspective on the standard’s tax effects. The AICPA’s Financial Reporting Executive Committee has released working drafts of revenue recognition implementation issues for the Depository and Lending Institutions industry. Comments are due on October 2, 2017. 

*Dates effecting public organizations* annual reporting periods beginning after December 15, 2017 and nonpublic organizations annual reporting periods beginning after December 15, 2018.