How the New FASB Standard on Revenue Recognition May Impact Banks


revenue-maze.jpgThe Financial Accounting Standards Board (FASB) recently released its long-awaited standard addressing revenue recognition. Existing U.S. generally accepted accounting principles (GAAP) were largely developed on a piecemeal basis and are industry- or transactional-focused. Consequently, economically similar transactions sometimes resulted in different revenue recognition. Accounting Standards Update (ASU) 2014-09, “Revenue From Contracts With Customers (Topic 606),” adopts a standardized approach for revenue recognition. This was a joint effort with the International Accounting Standards Board (IASB), resulting in converged guidance under both GAAP and International Financial Reporting Standards (IFRS). Of course, companies will report the same total amount of revenue over time, but the timing of the recognition could be accelerated or delayed when compared with current practices. 

A Core Principle and a Five-Step Approach

The new ASU is based on a core principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” To achieve this principle, the guidance spells out several steps that a company must take when determining when to recognize revenue on its financial statements.

  1. Identify the contract with a customer.
  2. Identify the separate performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the separate performance obligations.
  5. Recognize revenue when (or as) performance obligations are satisfied.

Is This a Big Deal for Banks? 

The new ASU could be a challenge from two perspectives. First, there are certain industries for which there will be wholesale changes, including the software, telecommunication and real estate industries. For the banking industry, wholesale changes are not expected—largely because much of a bank’s revenue comes from financial instruments (including debt securities, loans and derivatives), and many of those are scoped out. That is not to say that banks won’t be affected, because most will. But for most banks, the effect is not likely to be significant.

Second, the challenge for banks (as well as other industries) will be taking the core principle and accompanying steps and figuring out how the guidance applies. In other words, the five steps provided are not written with a specific industry in mind, so a shift in thinking will be necessary to evaluate how the accounting will change for those transactions that will apply to banks. A few areas of potential application for banks include:

  • Loyalty point programs
  • Asset management fees
  • Credit card interchange fees
  • Deposit account fees

Effective Dates

The boards provided a lengthy implementation time for the new rules, giving companies time to develop and put in place new controls and processes. The ASU is effective for public companies for annual reporting periods (including interim reporting periods within) beginning after Dec. 15, 2016; early implementation is not allowed. For nonpublic companies, the guidance is effective for annual reporting periods beginning after Dec. 15, 2017, and interim and annual reporting periods thereafter. Early adoption is permitted for nonpublic companies with certain caveats.

Help Is on the Way

In addition to establishing a revenue recognition working group to own the guidance, the American Institute of Certified Public Accountants (AICPA) created 16 different industry task forces charged with providing industry-specific guidance. One of those 16 task forces is the depository institutions revenue recognition task force. With the issuance of the standard, the work now can begin.

In addition, the FASB and the IASB are forming a joint transition resource group, which will consist of 15 to 20 specialists representing preparers, auditors, regulators, users, and other stakeholders. Its objective will be to promote effective implementation and transition.

At just more than 700 pages, the new standard is the longest the FASB has ever issued. This was a major undertaking by the boards, and given the girth of the standard and the fact that it is not industry specific, it’s safe to say it’s just going to take time to digest. 

Part II: The Inspection Process – Compliance Lessons from the Construction Industry


quality-guarantee.jpgIn the first article of this series I compared the optimal compliance program to a well-built house. You may recall that the construction of a house and a sound compliance program share three key elements: the blueprint, foundation and framework. In this installment, we’ll talk about two more elements that compliance and construction have in common: inspections and maintenance. For the staff involved, this work can be painful to endure, but altogether necessary.

Just like a home inspection, a banking inspection ensures the safety and soundness of the structure. An overlooked mistake can spell a failed inspection, or worse, a structural collapse—and perhaps liability. Even after a passed inspection, periodic maintenance is required. Prompt detection, and swift and thorough remediation of the problem areas, can halt concerns before they worsen, thereby protecting your institution.

So how do you know whether your institution is ready to pass inspection? How do you determine whether you’re conducting the proper periodic maintenance check-ups and routines to keep your compliance programs as effective as possible? The answer is simple: By exercising proper oversight of these programs at the board level. This oversight is carried out by reviewing the right reports with the right content at the right times. 

Boards of directors must ensure that they gather solid intelligence to carry out their fiduciary duties and make informed decisions. One way to do this is to demand high quality reports at predictable intervals. Reports that are flawed or delivered too infrequently may conceal weaknesses that should be addressed. Reports should occur at three basic intervals:  monthly, quarterly, and annually.

Monthly Report

Monthly reports should focus on tactical execution, delivering performance data and metrics. These reports, typically delivered by the compliance team, should cover frontline activity and demonstrate whether the day-to-day work of compliance is being done on time and accurately. Monthly reporting should shine a bright light where weaknesses may exist, and should state the measures being taken to remedy the deficiencies. 

Quarterly Report

Quarterly reports should focus on trends and analytics that demonstrate whether risk exposures are increasing or decreasing. The quarterly report gives insight into how the compliance program is functioning over time. This report should contain information about regulatory trends, upcoming or changing rules and should consider the environmental and operating conditions that could affect the institution’s progress and performance.

These reports should also summarize the results of compliance monitoring activities that occurred during the quarter and which activities are planned in the quarter ahead. This data allows directors to conclude what, if any, internal events or changes will influence the institution. In general, these reports show the up-to-the-minute state of preparedness for exams and audits.

Annual Report

Finally, annual activities such as audits or reviews generate reports on the program’s effectiveness. This annual look-back reflects how well the institution kept its risk exposures to acceptable levels. These types of reports often opine on the overall capabilities of the executive team and compliance management group in carrying out their responsibilities. These reports take an independent look at the program to gauge its effectiveness, efficiency and performance over a historical period.  

Indicators of Poor Reporting

Good intentions can nonetheless produce bad results if the content of reports is inadequate.  When reviewing your institution’s reports, keep in mind these signs of flawed reporting:

  • Reports that are too long or too detailed. Key points cannot be extracted when the volume of information presented obscures the meaning. 
  • Reports that state only facts but provide no evaluative statements. The board needs to understand whether the data being presented is positive or negative.
  • Reports that fail to identify the root causes of weaknesses. Failure to identify the root cause delays implementing corrections. 
  • Reports that identify the root causes of deficiencies, but do not suggest appropriate corrective action. Solutions should be offered in reports. 
  • Reports that only emphasize weaknesses and ignore strengths. Focusing only on the negatives may inappropriately exaggerate the scope or materiality of an identified problem. 
  • Reports that do not reflect the materiality or severity of an issue. Treating every issue uniformly is a sign that perspective may be lacking.

Financial institution boards have a tough assignment: Overseeing the construction of a stable structure that can withstand not only regulatory scrutiny, but the storms of changing economic and regulatory conditions. Maintaining this structure after it’s built is equally daunting. It requires vigilance toward the review and interpretation of quality data, and applying that information to managing risks in an ever-changing climate. Proper reporting ensures proper maintenance of the compliance program, and a well-maintained program that can be clearly articulated to examiners is the key to passing future inspections. 

But, what if, during the inspection process, you realize that something has gone wrong? In the next article of this series I will go over the corrective steps and actions the board should take to repair the compliance program.