United States

Accounting update: New revenue recognition rule affects asset managers

INSIGHT ARTICLE  | 

The Financial Standards Accounting Board’s new rule on revenue recognition (ASC 606) will mark a major change in accounting when it takes effect next year. RSM partner Joel Steinberg discussed the rule’s impact on asset managers at RSM’s ninth annual Investment Industry Summit on Sept. 19, 2017.

Until now, FASB had no comprehensive guidance on revenue recognition that applied to all industries. While every industry will be affected to some degree, the new standard will significantly affect asset managers who earn contingent fees. In general, asset managers will need to be more conservative in recognizing fee revenue.

Deferred recognition

Under the new standard, performance fee revenue can be recognized only when it won’t have to be returned, for example, due to market volatility or a decline in fund performance.

An asset manager typically cannot predict market volatility. Therefore, fee recognition must be deferred until the fee is finalized and no risk exists that it will have to be returned.

An exception may apply in cases where the time from recognition to finalization is so short as to render the chance of a claw-back negligible.

Up-Front fees

ASC 606 also disallows administrative fees from being recognized at the start of a contract.

In the past, some firms recognized administrative fees up front in multiyear contracts. For example, a firm entering a two-year consulting agreement might charge the client an administrative fee on day one.

ASC 606 specifically excludes administrative fees as distinct contractual obligations for which revenue may be recognized.

Prior-year comparisons

Companies will need to recalculate prior-year revenue so that financial statements can be compared. The rule gives two alternatives:

  • Restate previous statements
  • Compute the effect and show the change on the current year’s opening balance

The American Institute of Certified Public Accountants (AICPA) is drafting an industry guide on the new standard to address difficulties that come to light as the rules begin to be implemented.

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