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Financial institutions must prepare for updated customer-contract revenue requirements

The FASB and IASB recently issued jointly converged standards for revenue recognition, the implications for which include adjustments that will need to be made by many credit unions and community banks.

Seeking to improve financial reporting standards on a global basis, the Accounting Standards Update will most directly impact transaction recordings for upfront fees, the incremental costs of obtaining a contract, customer loyalty programs, performance-based fees and sales of foreclosed properties. Prior to the mid-2016 implementation, financial institutions will need to consider their existing review processes and consider restructuring their contracts in order to achieve the desired results, while still adhering to the adjusted standards.

Current systems may require changes that ensure the capability of handling additional data and estimates, while managers will have to assess the need for any adjustments for proper disclosure and accounting. For some, changes to bonus structures and incentive plans may have to be made as well, all while maintaining compliance with regulatory requirements. Additional consideration needs to be given to possible changes to key performance metrics and possible impacts to customers’ loan covenants.

Points of preparation 
The new guidance applies to most property sales, including other real estate and non-interest income generated from customer contracts, such as insurance commissions. In order to meet these new standards, these banks and credit unions will need to accurately identify their contracts with customers, as well as the performance obligations – any promised transfers of goods or services, for example – within that contract. They will also need to identify transaction price and, in some scenarios, allocate that transaction price according to the different performance obligations contained in the contract. Revenue can then ultimately be recognized when or as those performance obligations are met.

Some important exclusions, as far as customer-contract considerations go, include the following:

  • Lease contracts within the scope of Topic 840
  • Insurance contracts within the scope of Topic 944
  • Some financial instruments, such as investments, deposits, borrowings, loans, derivatives and hedges
  • Certain guarantees, excluding product or service warranties

These scoped-out financial institution contracts will likely be welcomed by many smaller entities, but they may still feel an impact from the changes to foreclosed-property guidelines. In the event that a local bank or credit union has financed a sale of one of its distressed properties for a new owner, there are varying allowances for what can now be recognized, or “de-recognized.”

Under the previous guidance standards, a certain initial investment percentage must be met for a range of properties in order to gain full recognition. Some gray areas may arise as the transition is made from the older, more black-and-white requirements to the new guidance, which allows for some context to be taken into account, particularly as it relates to the sufficiency of a buyer’s initial investment.

According to the FASB and ISAB, the motivation for these changes was to improve the principles for recognizing revenue, while still leaving room for some interpretation. The ASU seeks to remove some of the broader inconsistencies and weaknesses contained in revenue requirements, but at the same time to provide a greater framework for addressing issues associated with revenue.

Additionally, the update seeks to improve the comparability of revenue-recognition practices across all entities – not just smaller financial institutions – including broader industries, jurisdictions and capital markets. In turn, the hope is to provide more useful information to those who use financial statements by way of improved disclosure requirements, while also simplifying the preparation process by minimizing the number of requirements to which these entities have to refer.

For more information on how these changes may impact their business, financial services sector clients may contact LaPorte Audit and Assurance Services Director Eric Bosch at