Called to Account: New accounting rule raises revenue for big banks, but not all are highlighting the change

As new accounting standards for recognizing revenue take effect in the first quarter of 2018, big banks are taking decidedly different tacks in explaining how some revenues would be reported going forward, and why they are higher or lower than what investors may have expected.

The biggest commercial and investment banks have already explained how new rules for reporting revenue, effective for most public companies on Jan 1, would impact results. The disclosures grew more detailed each quarter throughout the past year until annual reports explained the financial impact on business units and product categories for 2017 and 2016.

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JPMorgan Chase JPM, -0.04%  put a few lines about a positive impact on revenue— $313 million—on page two of its earnings release, but that’s an absolute not relative impact, since the bank also adjusted 2017 results for comparison purposes. The change is the result of presenting certain expenses that were previously offset against revenue mostly in its asset and wealth management but also in its corporate investment bank on a gross basis going forward. The bank said it expects the 2018 full-year impact on revenue to be positive by about $1.2 billion.

That was almost exactly what JPM predicted in its 2017 annual report, when it said the change would result in an increase in both noninterest revenue and noninterest expense of $264 million for the three months ended March 31, 2017 and $304 million for the quarter ended December 31, 2017. JPM said that it expected the new standard to increase revenue and expense for full-year 2018 by about $1.2 billion. The bank told investors that most of the impact would be in its asset and wealth management business, but would not result in any material changes to the timing of revenue recognition.

JPMorgan Chase did not immediately respond to a request for comment.

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Citigroup C, -1.52% in contrast, did not mention the change, or its impact, at all when it announced first-quarter earnings on Friday. The bank has been preparing investors for the change for a while, however. In its 10-Q filed in May 2017, Citigroup wrote that it would likely have to change its presentation of expenses associated with underwriting activity to gross from net.

At year-end, Citi said it would have to start reporting some revenue, for underwriting activity for example, on a gross basis, because the new standards forced a recognition of its role as the principal, not the agent, on deals. The 2017 annual underwriting revenues and expenses where Citi is the principal, rather than the agent, were grossed up by about $1.0 billion, but the change did not have an impact on net income.

In first-quarter earnings, Citi said its equity underwriting revenues fell 14% to $216 million, while debt underwriting revenues fell 8% to $699 million. However, it is not clear how much of this decline is related to adoption of the new standard, since the underwriting expenses were not detailed in the press release.

However, reporting under the new standard for 2017 would have increased Citi’s efficiency ratio, the ratio of a bank’s non-interest expense to revenues, by approximately 57 basis points for the year ended December 31, 2017, the bank said in the annual report, and it expects that impact to continue. A higher efficiency ratio indicates a less efficient bank, according to regulatory standards.

A spokesman from Citigroup declined to comment on their reporting.

Wells Fargo & Co. WFC, -0.62%   also reported on Friday and changed its presentation of underwriting costs to gross from net, writing in its annual report for 2017 that its broker-dealer would have to present costs for its underwriting activities separately under expenses, “rather than the current presentation against the related revenues.”

Wells Fargo said its card fees were down $88 million in the first quarter to $908 million from $996 million in the fourth quarter of 2017. That’s partially as a result of the new revenue recognition rules which require card payment network charges to be netted against related interchange and network revenues in card fees. Changing to the new required accounting lowered card fees and reduced noninterest expense by an equal amount.

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At the end of 2017, Wells Fargo recorded a cumulative-effect adjustment of $44 million for adopting the new accounting standard, primarily related to changes in the timing of revenue for corporate trust services that are provided over the life of a trust. Wells Fargo also changed the presentation to gross from net for underwriting expenses of its broker-dealer, but card payment network charges are now netted against card fee revenue rather than presented separately on a gross basis.

A spokesman from Wells Fargo did not respond immediately to a request for comment.

This week Goldman Sachs GS, +1.05% Morgan Stanley MS, +1.02% and Bank of America BAC, -1.06%  will report first-quarter earnings and investors will see how well they predicted the impact of new rules.

Bank of America reported on Monday morning that it had adopted the new standard as of Jan. 1, 2018 but that it “does not have a material impact” on its financial statements. In its 2017 annual report, the bank wrote that the new revenue standard would not impact the timing or measurement of its revenue recognition because it already was accounting for its contracts in scope according to the new standard. But it said that it would have to change the presentation of underwriting-related costs, separating them as operating expenses rather than netting them against investment banking income.

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Bank of America wrote that the expected increase to both revenue and expenses for 2017 was about $200 million. However, it did not break out the impact of the changes for its first-quarter earnings report.

A spokesman for Bank of America did not immediately respond to a request for comment on the impact of the changes.

Goldman Sachs’ 2017 annual report said it would now have to delay recognition of non-refundable and milestone payments on financial advisory assignments until the assignments are completed, and recognize certain investment management fees earlier than under its existing revenue recognition policies. The cumulative effect on prior periods of adopting the new rules at the end of 2017 was a decline in retained earnings of $53 million, net of tax.

Goldman Sachs will also have to changes its presentation of underwriting costs and certain distribution costs in its investment management business from a net presentation against revenues to a gross basis. Soft dollar commissions, which are currently reported gross as operating expenses, will also now be presented net within commissions and fees, according to Goldman Sach’s year-end financial disclosures. Goldman Sachs told investors, and the SEC, it did not expect the changes to have a material impact on the firm’s results.

Morgan Stanley said at 2017 year-end that it would also put underwriting and advisory costs on a gross basis on a non-compensation expense line versus netting the expenses against investment banking revenues.

In the same way, certain costs related to the selling and distribution of investment funds would no longer be netted against asset management revenues. The investment bank said in its 2017 annual report that it expected to see a 5% gross-up of asset management revenues and an increase of non-compensation expenses for the investment management business segment of less than 10%. These changes, it wrote, will not have an impact on net income.

Morgan Stanley also expected that the timing of the recognition of certain performance fees from fund management activities in the investment management business segment, which were approximately $80 million in 2017 and recognized throughout the year, would now be deferred each year until the fees no longer have a probability of being reversed.

The SPDR S&P Bank ETF KBE, +0.19%  has gained 16% in the last 12 months, while the Financial Select Sector SPDR Fund XLF, +0.35%  has gained 21%.

The S&P 500 SPX, +0.59%  has gained 15% in the same period and the Dow Jones Industrial Average DJIA, +0.75%  has added 20%.

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