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Some Big (And Not So Big) Changes Ahead

Apr 30, 2017

The Financial Accounting Standards Board (FASB) issues new accounting standards each year in an effort to continually improve the usefulness of accounting standards generally accepted in the United States (GAAP).  Since 2014, the FASB has finalized three key Accounting Standards Updates (ASUs), concluding its work on some longstanding projects.  These are not some marginal adjustments to existing guidance; these standards will bring about fundamental changes in how organizations account for elements that haven’t changed all that much for decades.  Financial institutions need to understand the impact these ASUs and related Accounting Standards Codification (ASC) Topics will have on their financial statements and their operations so they can properly plan and implement necessary changes.

Revenue Recognition

ASU No. 2014-09, Revenue from Contracts with Customers, (ASC 606) will apply to all entities and will require recognition of revenue when a performance obligation (promise to provide a good or service) is satisfied by transferring control of the product or service to the customer.  Institutions will follow a five-step, principle-based model to determine when and how much revenue should be recognized.

The good news for financial institutions is that the new standard does not apply to interest income or expense.  The greatest impact of ASC 606 on financial institutions will be the accounting for gain on sales of other real estate financed by the institution that are currently subject to the various methods for recognizing and/or deferring any gain (e.g., full accrual method, installment method, deposit method, etc.).  Under ASC 606, institutions generally will recognize gain on financed sales when the real estate is transferred to the buyer.  Gain could still be deferred, though, if there is doubt about collection or the arrangement does not meet the requirements to recognize gain in the five-step process.  ASC 606 could also affect how other noninterest income may be recognized, although it appears at this time the impact on such items will be relatively minor.

Revenue recognition for other entities could be significantly influenced by ASC 606 depending on their industry and operations, which means financial statements obtained from borrowers could look different.  Lenders should consider whether credit underwriting guidelines and loan covenants will need to be updated for these changes.


ASU No. 2016-02, Leases, (ASC 842) affects all entities that enter into leasing transactions.  When ASC 842 becomes effective, most leases, including operating leases, will be recognized on the balance sheet as right of use assets and lease obligations (liabilities).  For more information on how ASC 842 will impact lease accounting, check out FASB’s New Standard for Leases.

Similar to the new revenue recognition standard, the leasing standard could end up affecting borrowers more than institutions.  Once again, lenders should understand the accounting changes and how they might impact the financial statements of borrowers and related loan covenants.

Financial institutions that have significant operating leases should also consider the impact of ASC 842 on regulatory capital ratios.  Regulatory capital itself will not be affected by recognizing right of use assets and lease obligations, but the increase in assets will likely decrease the related ratios.  (It is possible regulatory capital rules could be changed to account for new right of use assets, but it does not appear any changes will be made at this time.)  Please contact your Wipfli relationship executive if you would like help estimating the impact of the new lease standard on your financial statements and regulatory capital.

Credit Impairment of Financial Instruments

ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, (ASC 326) will require institutions to estimate and recognize losses expected over the life of loans held for investment and securities held to maturity.  This is no doubt the most important of the three standards for financial institutions since this will drastically affect the process for estimating the allowance for loan losses.

Effective Dates for Calendar Year-Ends(1)
  Other Entities
Revenue (Q1) 2018  
Leases (Q1) 2019  
            Revenue (Q4)
CECL (Q1) -
“Large” PBE
  Leases (Q4)
CECL (Q1) -
“Small” PBE
  CECL (Q4)

(1) Effective dates for institutions with fiscal year-ends will be later based on their fiscal year-end.

Implementing ASC 326 and specifically the Current Expected Credit Loss (CECL) model will take a lot of time and resources.  Wipfli has helped and will continue to help financial institutions through the implementation process of this standard so that institutions will be ready for the changes ahead.  Here are some recent newsletter articles discussing CECL and some implementation tips:

Looking Ahead

All three of these new accounting rules will impact financial institution financial statements, some more than others.  These standards may also affect the financial statements of borrowers.  We have some time before the new standards are effective, but some substantial changes to accounting processes and procedures may be required.  Consequently, we cannot wait too long.  Please let us know if you would like more information or help implementing any of these standards.




Brett D. Schwantes, CPA
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