views March 2016 Revenue Recognition Standard: Implementation Considerations for Financial Institutions Danny Lane, Senior Associate | DHG Financial Services Adam Thomas, Partner | DHG Financial Services In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard – Accounting Standards Codification Update 2014-09, Revenue from Contracts with Customers. Due to a one-year deferral, the effective date for application of the new revenue recognition standard will be for annual reporting periods beginning after Dec. 15, 2017, for public business entities and for annual reporting periods beginning after Dec. 15, 2018, for non-public companies.

Early adoption is permitted for both public and non-public companies for annual periods beginning after Dec. 15, 2016. The extent of the effect upon each financial institution will depend largely upon its business activities and the terms of its contracts. Note that financial instruments specifically are excluded from Likely to be affected to some degree · · · · Credit card arrangements Sales of other real estate owned Trust services Administration services for customer deposit accounts · Asset management fees Assurance | Tax | Advisory | dhgllp.com the new standard. Examples of arrangements common to most financial institutions and the likely impact are included in the following table. Not likely to be significantly affected · · · · Monthly service charges Insufficient funds fees ATM fees Wire transfer fees Out of the scope of the new accounting standard · Loans (interest income and other lending fees) · Securities (interest and dividend income) · Derivatives · Repurchase agreements · Loan servicing arrangements .

views Build an inventory of revenue sources and contracts: Once a desired implementation method has been decided, the best approach to the task is to break it down step-by-step with specific documentation accumulation goals in mind. The project team should build an inventory of revenue sources and contract types. It will be prudent to avoid a “not applicable” approach and to analyze each revenue source, such as those previously mentioned, and the related contracts and begin the process of accumulating necessary financial documentation for each reporting period for each contract identified. Other complicated instruments, such as line of credit agreements with related fees for servicing customer deposit accounts and standby loan guarantee fees that are partially within the scope of the new standard, will also need to be evaluated. Also, once the new standard is adopted, nonrecurring transactions should be evaluated carefully to determine the appropriate revenue recognition. Create a Transition Plan While 2018 and 2019 may seem like a long time away, it will be prudent to start a transition plan as soon as possible by implementing the following: The new standard indicates five specific steps to be applied to each contract within its scope for implementation.

Documentation for each of these steps and their applicability for individual revenue sources or contracts should be assembled as follows: Build a transition team: To determine the implementation effects of the new standard for a specific financial institution, it is important to determine how it may affect each business line, so the process should not involve accounting department personnel solely. The project team should also include individuals from each business line, along with resources from departments such as human resources and IT to benefit from the additional perspectives that are most likely to identify the impact across the entire organization. Management should include its auditors in various stages of implementation to avoid surprises. Step One Identify the contract with the customer.

Any contract with a customer that creates an enforceable right or obligation falls within the scope of the guidance, unless otherwise explicitly excluded. Step Two Identify the performance obligations (promises) in the contract. The transition team should consider appropriate milestones, including key decision points, communications to the board of directors, audit committee and other key stakeholders. Step Three Determine the transaction price. This is the amount the financial institution expects to collect in exchange for providing the goods or services to a customer. Determine transition method: There are two transition methods available for implementation: the full retrospective method and the modified retrospective method. Step Four Allocate the transaction price to the performance obligations in the contract. Step Five Recognize revenue when (or as) the reporting organization satisfies a performance obligation. The full retrospective method will involve recasting prior period financial statements. This method likely would be preferred by the financial statement users because it will result in greater comparability of the periods presented. While this process may seem fairly straightforward, actual analysis and identification of the qualifying events may become quite complex for each contract that falls within the scope of the revenue recognition standard.

It will be important to document management’s considerations for each of the aforementioned steps. The modified retrospective method will recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings. Disclosures reflecting the results under legacy GAAP would be required for the initial year of adoption, which would effectively require dual recordkeeping for that year. Consider operational changes: As it is with most significant changes in accounting policies and procedures, give appropriate consideration of the changes to internal controls throughout the financial institution, including the adoption process, ongoing accounting and disclosure requirements and relevant technological changes. Regardless of the implementation method chosen, the project team should realize and plan for the fact that financial institutions generally will have to provide more disclosures in financial statements, including qualitative and quantitative information about contracts with customers, significant judgments made and contract assets recognized from costs to obtain or fulfill a contract. Assurance | Tax | Advisory | dhgllp.com 2 . views To avoid surprises, management should begin preparing for implementation of this revenue recognition standard as soon as possible, if they have not already done so, because the task may become more time consuming than it may initially appear. DHG advisors are available to answer questions and help you through such an analysis. Additionally, consider how this adoption will impact the financial institution’s customers. Adoption of the new standard will impact the financial statements and debt covenants of many borrowers. Consider training needs for loan officers, so that they understand the potential effects of the new standard on key debt covenants for existing and new loan customers. About DHG Financial Services Adam Thomas, Partner, DHG Financial Services, has 14 years of experience serving financial institutions. Adam has significant experience working with public companies, including navigating business combinations, liaising with SEC counsel, reviewing SEC filings and auditing internal controls (for both FDICIA and Sarbanes-Oxley).

Adam has led internal and external training sessions, with subject matter ranging from the allowance for loan losses to acquired loan accounting. Adam also brings experience with dealing with share-based compensation, fair value measurements, and income tax provision accounting. DHG Financial Services, a national practice of Dixon Hughes Goodman, focuses on publicly traded and privatelyheld financial services companies across the U.S. Our 30 financial services partners and more than 300 dedicated professionals provide you with in-depth, specialized industry knowledge and a wide range of assurance, tax and advisory services to address issues facing your industry in today’s challenging environment.

For more information, visit dhgllp.com/financial-services. About the Authors Danny Lane Senior Associate DHG Financial Services danny.lane@dhgllp.com Danny Lane, Senior Associate, has more than 30 years of experience in the financial institutions industry, including 25 years in the private sector and more than five years in public accounting. He has significant experience in financial and regulatory reporting, compliance with consumer laws and regulations, development of internal controls, budgeting, strategy development and interest rate risk management. Danny has presented on internal audit topics, as well. Assurance | Tax | Advisory | dhgllp.com 3 Adam Thomas Partner DHG Financial Services adam.thomas@dhgllp.com .