Financial institutions face unique challenges in applying the new revenue recognition standard, Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), due to the variety of revenue streams common in the industry. The Financial Accounting Standards Board (FASB) addressed scope questions at the April 2016 Transition Resource Group (TRG) meeting. In a departure from previous TRG meetings, industry experts were invited to weigh in on current practice and potential impacts of TRG’s recommendations. Invited guests included senior accounting officers from J.P. Morgan and Citibank. FASB members generally agreed with TRG’s conclusions: deposit fees are within the scope of Topic 606 but servicing and financial guarantee fees will continue to be covered by existing guidance. FASB will consider technical corrections to existing guidance to reinforce its intent.
The new guidance applies to all contracts with customers and contains several scope exceptions, which primarily apply to items covered in other standards. These exclusions include certain guarantees, financial instruments and other contractual rights or obligations within the scopes of the following topics:
- Topic 310, Receivables
- Topic 320, Investments—Debt and Equity Securities
- Topic 323, Investments—Equity Method and Joint Ventures
- Topic 325, Investments—Other
- Topic 405, Liabilities
- Topic 470, Debt
- Topic 815, Derivatives and Hedging
- Topic 825, Financial Instruments
- Topic 860, Transfers and Servicing
- Topic 460 Guarantees
The above topics cover recognition and measurement of balance sheet items; the guidance varies on explicitness of income statement revenue recognition. The new revenue guidance notes a contract may be partially within the scope of the new revenue standard and partially within the scope of one of the above topics. If another topic specifies how to separate and/or initially measure one or more parts of the contract, then the separation measurement would be applied first. Any remaining allocated transaction price would be covered by the new revenue guidance in topic 606. If the other topic doesn’t contain separation or initial measurement guidance, an entity would apply Topic 606 to the entire contract. This has given rise to several questions about the appropriate accounting guidance for various banking fees. FASB members agreed with TRG recommendations, but the logic was inconsistent.
Some banks originate loans and subsequently sell them to third parties, such as the Federal National Mortgage Association (Fannie Mae). A bank may retain the right to service the loan or other loan portfolios. Servicers earn fees for the services provided, which vary by type of loan or contract terms. Servicers might receive late fees or interest income. A bank can provide these services or subcontract them out.
Currently, service income is generally recorded as it’s received. Public companies also refer to Securities and Exchange Commission Staff Accounting Bulletin Topic 13, Revenue Recognition, to consider if fees are fixed or determinable and if collectability is reasonably assured before recognizing revenue.
Topic 860 includes detailed guidance on the initial recognition and subsequent measurement of servicing assets and liabilities, but it doesn’t include explicit guidance on the revenue recognition for servicing fees. FASB views the guidance on servicing assets and liabilities measurement and the collection of servicing fees that give rise to the recognition of servicing income as being closely linked. The connection between the servicing asset, liability and servicing fees indicates the entire arrangement is outside the scope of Topic 606; therefore, entities should look to Topic 860 to determine the appropriate accounting.
Financial Guarantee Fees
Financial guarantee fees are based on the risk characteristics of the loan and prospective borrower. The revenue standard excludes guarantees within the scope of Topic 460. Financial guarantees generally are within the scope of Topic 460 unless they’re accounted for as a credit derivative or otherwise excluded, e.g., employment guarantees, funding guarantees, vendor rebates, take or pay contracts, etc. Current GAAP references in Topic 942 and Topic 310 imply financial guarantees should be accounted for under the revenue recognition guidance.
Consistent with FASB’s original intent, the TRG and FASB concluded guarantees within the scope of Topic 460 or Topic 815 aren’t within the scope of the revenue standard. FASB will consider a technical correction to eliminate the confusing references. FASB concluded that guarantee fees aren’t a separate service and performance obligation but rather an inextricable part of the guarantee arrangement within the scope of Topic 460 or Topic 815.
When a customer deposits money at a bank, the bank generally has an obligation to deliver cash to the customer on demand and will recognize a liability under the guidance in Topic 405. Deposit fees vary widely depending on the customer, account, quantity of transactions or deposit balance size. In addition, banks can sometimes charge customers fees that aren’t specifically related to customer access to funds—account maintenance or dormancy fees, for example.
In contrast to the decisions for servicing income and financial guarantees, FASB concluded that Topic 405 doesn’t provide a model for recognizing revenue for customer deposit-related fees, e.g., ATM fees, account maintenance or dormancy fees. In addition, no other topics cover revenue recognition for deposit fees. Therefore, deposit fees and charges are in the scope of the new revenue guidance, even though Topic 405 is listed as a scope exception.
Additional Outstanding Issue
The scope issues have been addressed, but one significant question remains for financial institutions adopting the new revenue standard. The accounting treatment for the sale of other real estate owned has raised many questions. To address industry concerns, the American Institute of CPAs (AICPA) plans to develop a single revenue recognition guide to provide hints and examples that can help entities implement the new standard. The guide’s progress is slow, and the release date is unknown. The AICPA has organized 16 industry-specific task forces, including depository and lending institutions, and members include preparers, auditors and industry professionals. Each task force has generated a list of implementation issues and will develop recommendations to be reviewed by the AICPA’s Financial Reporting Executive Committee before being referred to the TRG.
BKD has prepared several papers on the new revenue recognition standard and will continue to monitor updates. Visit our Hot Topics page to access these resources. For more information, contact your BKD advisor.