Revenue Recognition and Banks

An article by Francine McKenna for MarketWatch discusses recent disclosures by banks discussing the impact of the new revenue recognition standard.

According to the article, until recently most banks and investment companies indicated that, when adopted, the new standard would not have significant impact on their reported income.

Given that the standard ASU 2014-09, Revenue Recognition from Contracts with Customers (Topic 606), does not apply to interest revenue earned on financial instruments, their comments seemed appropriate.

However, with the most recent quarterly reports, some financial services companies have acknowledged that for certain of their revenue streams, i.e. those not derived from financial instruments, their earnings will be affected by the new standard.  Those revenue streams are associated with the transaction processing and services activities banks perform for their customers.

According to Ms. McKenna’s article “[e]xposure [to ASU 2014-09] for financial services companies is based on the way the new standard reframes how revenue from contracts with customers is recognized, in particular the impact of the bank’s role in the transaction—as principal or agent. If the bank has control—for example it assumes all the risks and rewards of ownership or bears all of the responsibility to provide the goods or services—it is likely the principal in the transaction and will report the revenue on a gross versus a net basis.”

For public companies, ASU 2014-09 will be adopted for interim and annual periods beginning in 2018.

Prior to this recent quarter, banks and other financial services companies have not disclosed that the effect of adopting the new standard will have a “material” or “significant” impact on reported revenues or earnings.  Instead, in their disclosures, they discussed the way in which they plan to adopt the standard, with most suggesting that they will adopt the new standard by applying the “modified retrospective” approach.

Under the modified retrospective approach, the financial services companies will record the adjustment “on a cumulative basis only to the opening retained earnings balance, rather than as a restatement of prior period amounts,” which, as pointed out in the article, will limit analysts ability to develop a “clear trend line from the past to future reporting under the new standard after January 2018.”

Those interested can view the article here.

About docjonz

I am an Associate Professor of accounting at Hofstra University in Hempstead, NY. Additionally, I have more than 30 years of professional accounting experience in various capacities including auditing, accounting standard setting and corporate accounting policy.
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