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Revenue recognition for Banking
Efficient recognition and measurement of revenue is essential for the well being, progress and prosperity of any company or individual engaging in business transactions. As the financial markets have become more and more globalized, the need for standardized procedures has increased. That is why the new standard guidelines have been developed with the aim of streamlining the process of keeping accurate financial records and preparing financial statements.
The Five Step Principle
The main principle of measuring and recognizing revenue and cash flows is that an entity receives and records the appropriate amount from customers as a result of the services or goods the entity provides. The following five steps can be applied in order to achieve this principle:
- Establish an agreement or contract with a customer
- Agree on the exact outcomes that are identified in the contract
- Determine the amount that will be paid by the customer
- Assign the amount to the outcomes in the contract
- Recognize the revenue when the entity achieves the outcomes
For banks it will be necessary to take a closer look at the terms of their contracts and exercise judgement, taking all the factors into consideration including implied terms which may be within the contract.
Consistency will be important for banks as they uphold the requirements of the new standard across the board with their various contracts. They need to make sure that contracts which are alike in nature and detail are handled in like manner.
When it comes to disclosures, banks will probably find that they need to provide an increased number than previously. This will include information about quality and quantity of contracts with clients, as well as any judgements made or adjustments to judgements. Contract assets which are recognized from costs to acquire or settle a contract will also need to be declared.
Credit card arrangements are another area where banks will need to apply the new standard, which will affect the accounting for rewards programs and interchange fee revenue. There may also be changes in some annual fees.
Some of the general services provided by the banking industry which could fall within the range of the new standard would include the following:
- Fees for administrative services of deposit accounts (such as ATM fees, maintenance fees, and wire transfer fees)
- Services relating to payment processing and cash management
- Services for trust and custody
- Servicing arrangements for some financial assets