By Stephen LaBarbera, CPA – Manager, Doeren Mayhew

Although financial institutions will not be significantly impacted by new revenue recognition changes, it is important for management teams to understand the principals-based guidance of Accounting Standard Update (ASU) 20 14-09, Revenue from Contracts with Customers (Topic 606) with its non-public  effective date of 2020 on the horizon.

A major overhaul to revenue recognition, Topic 606 replaces the current rules-based revenue recognition guidance with principle-based guidance, as well as most industry-specific revenue guidance in the Financial Accounting Standard Codification (FASB) Accounting Standard Codification.

Although Topic 606 does not apply to interest income or gain/loss activity on financial instruments including loans, investment securities and derivatives, the ASU will impact credit unions and banks alike. Therefore, a general understanding of the principle-based framework is important.

The American Institution of Certified Public Accountants (AICPA) has formed a Depository and Lending Institution Revenue Recognition Task Force to help provide helpful hints and illustrative examples for how to apply the ASU in credit unions and banks. To help you better understand the impact the ASU may have on your institution, Doeren Mayhew’s credit union CPAs and bank CPAs have highlighted some of the potential revenue recognition implementation areas identified or reviewed by this task force.

Potential Impact of Revenue Recognition Changes

  • Rather than applying the rigid requirements of FASB ASC 360-20 relating to the sale of real estate, Topic 606’s principles-based approach may be applicable.

The ASU will most significantly impact sales of large commercial real estate properties that generate large gains on sale.

The change in the accounting guidance will go unnoticed for “clean sales” (e.g., sale transactions without any form of continuing involvement). However, below are some instances related to seller financed sales, whereby Topic 606 and the associated implementation guidance need to be reviewed more closely:

 – Certain sales that include financing (not at a market rate)
 – Financed sales that have collectability issues
 – When the buyer is not committed to perform their obligation

  • Deposit-related fees (e.g., NSF fees and ATM fees) are in the scope of Topic 606.  However, the application of Topic 606 for deposit-related fees will likely not lead to a significant change in revenue recognition outcomes when compared to current practice. This is due to the straight forward nature of revenue recognition for deposit fees (i.e., the fee is earned at the completion of the service or transaction, rather than over a period of time).

Although the effects of the ASU are not currently expected to be significant in this area, the effect on deposit-related fee income is an area needing consideration and monitoring.

  • Generally, credit card receivables and related fee income will continue to be accounted for under ASU 310 and ASU 310-20. However, interchange income associated with credit card rewards programs is a complex area that may require further consideration based on the facts and circumstances of the specific program.
  • Loan servicing income and fees for providing financial guarantees generally fall within the scope of other ASCs and are not within the scope of Topic 606. Therefore, current guidance and accounting practice will remain unchanged.
  • Any income producing contract or contract clause (e.g., contract negotiated bonuses) will need to be reviewed under the provisions of Topic 606.

Moving Forward

Applying the new standard may require changes to your institution’s accounting policies and procedures, and possibly changes to computer systems. Therefore, management should become familiar with Topic 606’s principle framework and stay up-to-date as information is provided on its specific impact on the financial institution industry.

Look to the credit union CPAs and bank CPAs at Doeren Mayhew to keep you informed as revenue recognition is better defined in the financial institution industry. When applying the guidance under Topic 606, credit unions and banks should closely review their facts and circumstances with the provisions in the ASU. For questions regarding, implementation in your credit union or bank, contact an industry advisor in our Financial Institutions Group today.