1. Revenue Recognition (ASU 2014-09) – While this was adopted in 2014, the FASB delayed the effective date for a year. Public entities must adopt this accounting standards update (ASU) for years beginning after December 15, 2017, with non-public entities in years beginning after December 15, 2018. Early adoption is permitted. Key items as it effects banks are:
- Activities outside the scope of the standard: interest income, mortgage servicing rights, loan origination fees, gains and losses on financial assets
- Activities within the scope of the standard – credit card interchange fees, rewards programs and merchant revenue, asset and cash management fees, fees for trust and custodial services, deposit account fees, sales of non-financial assets (e.g. foreclosed assets)It is important to note that loan officers, credit analysts, loan committees, etc. understand this ASU as it affects their borrowers’ revenue recognition practices. Currently, revenue is recognized when it is realized or realizable and earned. When this accounting standard is adopted by borrowers, revenue will be recognized based on the transfer of control. This transfer of control will have an element of judgement, so it is important that bankers understand how their borrowers are recognizing revenue and the effect on the financial statements submitted as part of the underwriting or credit analysis process.
2. Consolidation (ASU 2015-02) – While this was adopted in 2015, it is effective for public entities with years beginning after December 15, 2015, and all other entities with fiscal years beginning after December 15, 2016. This ASU clarifies and simplifies the consolidation process for limited partnerships and similar legal entities, and while entities previously were required under previous accounting standards, to consolidate a variable interest entity (VIE), entities may no longer have to consolidate certain VIEs. Given this accounting change, all reporting entities that hold variable interest in other entities will need to reevaluate their interest and determine whether consolidation is necessary or not. It will again be important for banks to understand how their borrowers are treating and reporting entities in financial statements issued for underwriting or credit analysis purposes.
3. Financial Instruments (ASU 2016-01) – Issued in early 2016, this update eliminates the requirement to classify equity investments as trading or available-for-sale and requires measurement of such securities at fair value, with any subsequent changes recognized through net income. If a ‘readily determinable fair value’ is not available (e.g. there is no active markets the security is traded in), then cost minus impairment, plus or minus any observable price changes (in orderly transaction by the issuer), is used. This update is effective for fiscal years beginning after December 15, 2017, for public entities, and fiscal years beginning after December 15, 2018, for all other entities. Early adoption is permissible for non-public entities.