At a glance
The new revenue standard must be adopted by public companies in 2018. Almost all entities will be affected to some extent by the new standard, though the effect will vary depending on industry and current accounting practices. Although originally issued as a converged standard under US GAAP and IFRS, the FASB and IASB have made slightly different amendments so the ultimate application of the guidance could differ under US GAAP and IFRS.
The revenue standard applies to transactions that are not in the scope of other guidance including specific guidance on financial instruments, which may differ between US GAAP and IFRS. Therefore, the revenue standard, although substantially converged, will not always be applied to the same population of transactions for a US GAAP entity as compared to an IFRS entity.
The Revenue Recognition Transition Resource Group (TRG) has discussed various implementation issues impacting companies across many industries. These discussions may provide helpful insight into application of the guidance and the SEC expects registrants to consider these discussions in applying the new standard.
This publication addresses implementation developments and highlights certain challenges specific to entities in the banking industry who report in US GAAP. This publication does not provide a comprehensive analysis of the impact of the new guidance on banking entities. The content should also be considered together with our Revenue guide
.1 The new revenue standard defers to other guidance within US GAAP, but supersedes certain existing revenue recognition guidance, including certain industry-specific guidance. The standard is effective for public business entities that are US GAAP reporters for the first interim period within annual reporting periods beginning after December 15, 2017 (nonpublic business entities have an additional year to adopt). The standard permits early adoption for both public and nonpublic entities for reporting periods beginning after December 15, 2016.
.2 Banking entities continue to analyze the impact of this new guidance on a variety of revenue streams and contracts. This publication highlights some factors to consider as entities evaluate the impact of the new standard to certain revenue arrangements common in banks and other financial service entities. This publication does not provide a comprehensive analysis of the impact of the new guidance on banking entities.
.3 The new revenue standard (codified in ASC 606
, Revenue from Contracts with Customers
) applies to all contracts with customers, except the following:
.4 Entities first need to consider all other potentially relevant accounting literature before concluding that the arrangement is in the scope of the revenue standard. Arrangements that are entirely in the scope of other guidance should be accounted for under that guidance, assuming it has not been superseded by ASC 606
. For example, the sales of financial assets are governed by ASC 860
and will continue to follow that guidance. If a certain transaction in the arrangement is not in the scope of any other guidance and revenue is earned from a contract with a customer, then the new revenue standard would apply.
.5 A significant amount of revenue or income earned by a "traditional" banking entity is likely governed by specific literature that remains applicable, and as such, a bank would continue to apply that guidance. However, there are certain revenue-generating activities that may fall within the scope of the new revenue standard. The following table summarizes some traditional banking revenue streams and the applicability of the revenue guidance.
Transactions/revenue streams scoped out of the new standard
Transactions/revenue streams within the scope of the new standard
Transactions/revenue streams that may be subject to the new standard
Discussed by TRG
Not discussed by TRG
Mortgage servicing or subservicing arrangements accounted for under ASC 860
- Financial guarantees that are accounted for under ASC 460
.6 This is not an all-inclusive list of revenue streams that banking entities should consider. Entities should work from a detailed inventory of sources of revenues in evaluating the impact of this standard. In addition, entities should consider differences in contracts, agreements and products within a particular revenue stream to evaluate if different treatment will be required under the new guidance.
Credit card annual fees
.7 As noted, the scope of ASC 606
excludes transactions accounted for in accordance with ASC 310
. ASC 310
provides guidance on accounting for credit card annual fees, but acknowledges that these fees may be designed to compensate the lending institution for many services, including standing ready to provide credit.
.8 The TRG discussed the issue of credit card fees during the July 2015 meeting. The majority of TRG members expressed the view that credit card annual fees are within the scope of ASC 310
, and not in the scope of ASC 606
unless the overall nature of the arrangement is not a credit card lending arrangement. The TRG noted that if the revenue streams from a credit card arrangement (e.g., annual fees, interest, etc.) are outside the scope of the new revenue standard, the associated rewards programs would similarly be outside the scope of the new revenue standard. The TRG did not address other aspects of the credit card business, such as interchange revenue.
.9 Under IFRS, there is no equivalent accounting model for credit card annual fees, such as the one in ASC 310
. This may result in a difference between the application of US GAAP and IFRS.
Mortgage servicing fees
.10 Mortgage servicing fees are earned when an entity provides servicing of a mortgage (or other financial assets) on behalf of another party who owns the loan or other asset. Such arrangements may occur in conjunction with the sale of originated mortgages when servicing rights are retained by the seller or through subservicing arrangements. When an entity records a mortgage servicing right as an asset (or a liability), the initial and subsequent recognition of the asset (or liability) is subject to the guidance in ASC 860
.11 The TRG discussed the potential applicability of the new revenue standard to mortgage servicing rights and revenue at the April 2016 TRG meeting because ASC 860
provides guidance on the subsequent accounting for mortgage servicing rights but does not prescribe how servicing revenue should be recognized. The majority of TRG members believed that a mortgage servicing contract subject to the guidance in ASC 860
would not be subject to the revenue standard even though ASC 860
does not prescribe how servicing revenue should be recognized. However, if a bank concludes that its servicing arrangement is not subject to ASC 860
, the majority of the TRG members believed that it would be subject to the new revenue standard. It is important to note that neither the TRG nor the FASB engaged in a detailed discussion on which mortgage servicing agreements would be within the scope of ASC 860
.12 At its April 2016 meeting, the TRG considered whether the new revenue standard impacts the recognition of revenue for financial guarantee contracts subject to ASC 460
. The FASB subsequently issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,
which clarifies that contracts subject to ASC 460
would not be within the scope of the new revenue standard.
Service and transaction fees on depository accounts
.13 When a customer deposits funds at a bank, the customer and the bank enter into a depository agreement that provides the customer with certain services, such as custody of deposited funds and access to those deposited funds. There are a number of mechanisms a customer can use to access deposited funds and, depending on the mechanism, the bank may charge the customer a fee for accessing the funds (e.g., utilizing a third-party bank's ATM). Banks may also charge fees for not maintaining a specified minimum account balance (e.g., account maintenance fee) or fees for underutilized accounts (e.g., account dormancy fees).
.14 During the April 2016 TRG meeting, the majority of TRG members expressed a view that deposit fees are within the scope of the new revenue standard. This conclusion was largely based on the lack of authoritative guidance for fees in ASC 405
. However, the FASB staff outlined implementation considerations in the TRG paper that provide insight into how banks might assess certain factors as they consider the recognition of deposit fees under the new standard. Some of these insights are discussed below under "The five step model."
The five step model
.15 The new revenue model requires a contract-based approach under which the following steps will apply:
Identify the contract with the customer.
Identify the performance obligations in the contract.
Determine the total transaction price.
Allocate the total transaction price to each performance obligation in the contract.
Recognize as revenue when (or as) each performance obligation is satisfied.
.16 PwC's revenue guide contains a comprehensive analysis of these steps. Here, we highlight the relevant steps with respect to recognition of deposit fees.
Steps 1 and 2: Identify the contract with the customer / Identify performance obligations
.17 The contract term is the period during which the parties to the contract have present and enforceable rights and obligations. Determining the contract term can have a significant impact on the application of ASC 606
because it will affect (among other things) the identification of promised goods or services, determination of the transaction price, and allocation of the transaction price. TRG Paper 52, Scoping Considerations for Financial Institutions,
provides some considerations with respect to the contract term for deposit arrangements.
.18 In the paper, the FASB staff noted that a number of deposit agreements permit the arrangement to be terminated at will by either the bank or the customer at any point in time without significant penalty. At its October 2014 meeting, the TRG discussed the ramifications when each party to the contract has the unilateral right to terminate the contract. During that meeting, the TRG supported a view that if a contract can be terminated by either party without compensating the other party for the termination, the contract term would not extend beyond the goods or services already transferred.
.19 If the contract term is deemed to be day-to-day (or minute-to-minute) as a result of the termination provisions, the termination clauses are akin to renewal rights and thus each day (or minute) represents a renewal of the contract. As a result, the outcome of applying ASC 606
likely may be similar to the current recognition model regardless of how many performance obligations are identified and, in the case of deposit-related fees, may be similar to today. In the TRG paper on the deposit fee scope issue, the staff provided the example of an ATM fee, noting that if the depository contract is terminable by either party at will, there are no future performance obligations. As a result, the bank would likely recognize the fee when received because it provided the service (access to funds) to its customer at that time, and it has no future performance obligation. The staff also provided the example of account maintenance fees with similar analysis. However, certain arrangements might require further analysis under the revenue standard, including assessment of whether the arrangement provides the customer with a material right that the customer would not receive without entering into the contract.
Step 3: Determine the total transaction price
.20 The transaction price includes both fixed and variable amounts. For example, variable consideration may include discounts, refunds, credits, price concessions, penalties, and other similar items. The transaction price may also be impacted by amounts payable to a customer or the existence of a significant financing component.
.21 In TRG Paper 52, the FASB staff also considered situations when certain deposit customers pay fees and other customers pay no fees (or reduced fees). Specifically, the FASB considered how to determine the transaction price when the contract provided for no fees to be charged to a depositor but other depositors are required to pay fees. The staff noted that the revenue guidance defines the transaction price as "the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer."
.22 With respect to deposits with no fees, the only consideration received by the bank is the customer's deposit. The deposit serves as a source of financing for the bank, but the deposit itself is outside the scope of ASC 606
. The staff noted that there may be no fees within the scope of ASC 606
if no fees are charged and the bank is not entitled to fees either in the form of cash or non-cash consideration. To illustrate this point, the staff highlighted that a "no-fee" customer could initiate a number of transactions, then close their account, in which case the bank would have no right to charge the customer.
.23 The staff also highlighted that under current GAAP, banks do not impute fee income with offsets to additional interest expense for these types of no fee arrangements. Also, they noted that the new revenue standard did not amend the guidance for accounting for interest on deposit liabilities. In addition, the staff noted that while the transaction price may be adjusted to incorporate elements of financing under ASC 606
, such provisions would not be significant to these deposit arrangements given their short-term nature. The revenue standard also provides a practical expedient that allows entities to disregard the effects of a financing component if an entity expects, at contract inception, that the period between the entity's performance and customer payment will be one year or less.
.24 In many circumstances, payments made by banks to their customers should be reported as reductions of the transaction price, not expenses, unless the payments are made when the bank is purchasing distinct goods and services from customers at fair value. Banks should consider the need to reduce the transaction price (e.g., the fee) for refunds given to customers who raise customer service issues.
Gross versus net presentation
.25 Some transactions involve two or more parties that contribute to providing a specified good or service to a customer. In such instances, a bank should assess whether it is acting as a principal in providing goods or services to the customer, or whether it is acting as an agent on behalf of another party who is providing the goods or services to the customer. This analysis is based on whether the bank obtains control (and therefore acts as a principal) of the specified goods or services based on the facts and circumstances of each arrangement. When it is not clear whether the bank obtains control of the specified goods or services, the revenue standard provides indicators to consider:
The entity is primarily responsible for fulfilling the promise to provide the specified good or service
The entity has inventory risk
The entity has discretion in establishing the prices for the specified good or service
.26 An entity might have inventory risk in a service arrangement if it is committed to pay the service provider even if the entity is unable to identify a customer to purchase the service.
.27 When a bank is acting as principal in a transaction (and hiring other parties to assist in performing services), the bank should present the revenues and expenses earned and incurred gross in the income statement.
.28 A bank acting in an agency capacity would only reflect the portion of the fees relating to services they perform as revenue for acting in an agency capacity. One area where this topic has been discussed relates to merchant-acquiring banks in credit card processing relationships.
.29 In a single contract, an entity may act as a principal with respect to certain performance obligations and an agent with respect to others. Said differently, the principal versus agent assessment is at the performance obligation level, not at the contract level.
.30 The revenue standard includes extensive disclosure requirements intended to enable financial statement users to understand the amount, timing, and judgments related to revenue recognition and corresponding cash flows arising from contracts with customers. Some of the more significant disclosure requirements include qualitative and quantitative information about:
Contracts with customers
Reconciliation of contract balances
The significant judgments, and changes in judgments, made in applying the guidance to those contracts
Assets recognized from the costs to obtain or fulfill contracts with customers
.31 The disclosure requirements are more detailed than currently required under US GAAP and focus significantly on management's judgments. For example, they include specific disclosures of the estimates used and judgments made in determining the amount and timing of revenue recognition.
.32 The revenue standard also requires an entity to disclose the amount of its remaining performance obligations and the expected timing of the satisfaction of those performance obligations for contracts with durations of greater than one year, and both quantitative and qualitative explanations of when amounts will be recognized as revenue.
.33 The new standard will have an impact on all industries, including banks and other financial institutions. For certain arrangements, the impact could be a change to the timing of revenue recognition, the income statement presentation, or the disclosure. As a result, the standard will require management to perform a review of existing contracts, business models, company practices, and accounting policies.
.34 Banks should continue their ongoing processes of planning and assessing the impact of the new standard on their policies, procedures and systems by:
Cataloguing revenue streams and determining whether they are in scope of the new standard
Reviewing current policies and practices and identifying differences under the new standard
Mapping policy differences to processes and systems
Educating and communicating within the organization and to investors
Effecting process and system changes
Drafting applicable disclosures
.35 Banks should evaluate the amended guidance, including the TRG discussions that did not result in amendments, which may provide helpful insights into certain transactions. Banks should also continue to monitor the FASB's implementation efforts and output from industry groups, including the AICPA's industry task forces. However, it is important to recognize that while issues are still being discussed within the industry, we do not expect additional authoritative guidance to identify and resolve all areas of judgment. In addition, there may be differences in facts and contractual provisions between an individual institution's activities compared to those discussed in various forums. As a result, we recommend that banks continue to pursue their individual implementation efforts.
PwC clients who have questions about this In depth should contact their engagement partner. Engagement teams who have questions should contact the National Professional Services Group.