Our oldest child recently turned 16 and got his driver’s license this past spring. What amazed me was how quickly after this we had to figure out how the three drivers in our family were going to get to three different places with two vehicles! With some careful planning, we were able to get everyone where they needed to go, but it quickly became evident the third car we were planning to buy this fall would come in handy sooner rather than later.
We went to a dealer, found a car that would suit our needs, and settled on a reasonable selling price. Those that have purchased new cars probably know what happened next. The dealer shared with us how they could protect our investment through exterior and interior products, rustproofing, gap insurance, and warranties. This part is never fun for me, but we got through it and signed the papers.
Being a good accountant, after I got home, I started to think about how the new revenue recognition standard could impact the dealer in the future. For every car that is sold, the dealer will have to determine whether there is one performance obligation or multiple performance obligations that will require separate revenue recognition for the different obligations (e.g., the car, the car products, the insurance, the warranties).
Admittedly, the new revenue recognition standard will not have much impact on financial institutions’ accounting, although sales of other real estate and fees earned for various operations (e.g., wealth management, trusts, etc.) will need to be addressed. On the other hand, borrowers may be significantly impacted, which will consequently affect their loan ratios and maybe even loan covenants. If you or your borrowers would like any assistance figuring out the impact of the new standard on financial reporting, please let us know – we would be happy to set up a meeting!