Agencies Respond to COVID-19; FASB Issues Reference Rate Reform ASU

| 3/19/2020
Agencies Respond to COVID-19; FASB Issues Reference Rate Reform ASU

Special message from Mike Percy, Managing Partner, Financial Services

Dear FIEB readers,

In my 33 years in public accounting, I have lived through many economic ups and downs. Nothing compares to the uncertainty we face with the coronavirus disease (COVID-19). The financial services industry has been tested in the past, and its resiliency – although with bumps in the road – has always prevailed. We will prevail through this situation as well. As we all know, this global pandemic affects us all and is a fluid situation. We will strive to keep you updated as this unfolds.

Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

Agencies respond to COVID-19 (coronavirus disease)

Over the past few weeks, financial institution regulators and the National Credit Union Administration (NCUA) have issued statements on the coronavirus. Given the fluid situation, we encourage readers to watch for more information.

  • FFIEC updates pandemic preparedness guidance (March 6, 2020)
    The Federal Financial Institutions Examination Council (FFIEC) updated previously issued guidance to remind financial institutions that business continuity plans should address the threat of a pandemic outbreak and its potential impact on the delivery of critical financial services. The guidance reinforces expectations that regulated institutions should periodically review risk management plans and continuity plans to confirm their ability to continue to deliver their products and services in a wide range of situations and with minimal disruption.
  • Federal financial institution regulators and state regulators encourage working with customers and members (March 9, 2020)
    In a press release, the agencies encourage financial institutions to meet financial needs and “work constructively with borrowers and other customers in affected communities.” The agencies further note, “Prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”
  • Federal banking agencies encourage use of Federal Reserve discount window (March 16, 2020)
    In a press release, the federal banking agencies note the discount window serves an important role in supporting the liquidity and stability of the banking system by providing short-term loans to banks. This vehicle helps institutions manage their liquidity risks efficiently and avoid negative consequences for their customers.
  • Federal banking agencies offer additional flexibility to support households and businesses (March 17, 2020)
    In a joint press release, the federal banking agencies announced two actions. The “Statement on the Use of Capital and Liquidity Buffers” encourages banks to support households and businesses and notes that banks have more than doubled their capital and liquidity levels over the past decade and today are substantially safer and stronger. The second action is a technical change. The interim final rule on technical changes to automatic distribution restrictions phases in the agencies’ automatic distribution restrictions gradually, as intended, if a bank’s capital declines by a certain amount. Both actions facilitate the use of capital buffers to promote lending activity to households and businesses.

Fed finalizes stress capital buffer rule

On March 4, 2020, the Fed approved a rule to simplify the capital rules for large banks that cover the stress capital buffer (SCB). The SCB integrates the Fed’s stress-test results with nonstress capital requirements so that required capital levels better align with each bank’s risk profile and likely losses. Banks now will have to meet only eight capital requirements, down from the current 13. The rule is similar to the April 2018 proposal.

FDIC issues “Quarterly Banking Profile” for fourth quarter 2019

The FDIC issued, on Feb. 25, 2020, its “Quarterly Banking Profile” covering the fourth quarter of 2019. According to the report, FDIC-insured banks and savings institutions reported $55.2 billion net income, a decrease of $4.1 billion (6.9%) from a year ago. The decrease in net income was a result of lower net interest income and higher noninterest expenses.

The report provides these additional fourth quarter statistics:

  • Net interest income decreased 2.4% from the previous year, totaling $136.8 billion. This marks the first annual decline since third quarter 2013.
  • Noninterest income grew 2.5%, driven by higher trading revenues and net gains on loan sales.
  • Total loans and leases increased 3.6% from a year ago.
  • Net charge-offs rose 10.4% from a year ago, while the number of loans that were 90 or more days past due were almost unchanged from the previous quarter, down 0.05%.
  • Community banks earned $6.4 billion during the fourth quarter, up 4.4% from the same period last year.

The total number of FDIC-insured commercial banks and savings institutions declined to 5,177 from 5,258 the previous quarter. During the third quarter three new banks were chartered, 77 banks were absorbed by mergers, and three banks failed. The number of institutions on the FDIC’s problem bank list fell to 51 for the third quarter, the lowest number since 2006.

NCUA issues fourth quarter 2019 performance data

On March 5, 2020, the NCUA reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the fourth quarter of 2019. Highlights of the fourth quarter include:

  • The number of federally insured credit unions declined from 5,375 in the fourth quarter of 2018 to 5,236 in the same quarter of 2019 (3,283 federal credit unions and 1,953 federally insured, state-chartered credit unions).
  • Total assets in federally insured credit unions rose by $113 billion (7.8%) over the year to $1.57 trillion.
  • Net income at an annual rate was $14.1 billion, up $1.1 billion, or 8.8% from the previous year.
  • The return on average assets increased from 92 to 94 basis points compared to a year ago.
  • The credit union system’s net worth ratio increased from 11.30 to 11.37% from last year.

FDIC and OCC extend comment period for CRA revisions

On Feb. 19, 2020, the FDIC and the OCC extended the original comment period for the Community Reinvestment Act (CRA) revisions by 30 days to April 8, 2020.

The FDIC and the OCC proposed, on Dec. 12, 2019, rules to update CRA regulations to reflect changes in the banking industry, including increases in digital banking. The proposal would clarify and expand activities that qualify for CRA credit, including loans and investments in tribal lands and minority depository institutions, increasing the qualifying threshold for loans to small businesses and small farms to $2 million. As part of the proposal, the FDIC and the OCC would publish a list of qualifying activities. The proposed rules also include requirements to identify additional assessment areas based on where deposits are located.


From the Financial Accounting Standards Board (FASB)

FASB issues transition guidance on reference rate reform

On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the London Interbank Offered Rate (LIBOR) or other interbank offered rate (reference rates) on financial reporting, which currently is expected to be discontinued by the end of 2021. Procedurally, many entities will have to work through a process to identify and remediate their exposure to reference rate changes, which may involve contract modifications.

To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:

  • A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.
  • When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.

The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued.

Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after Dec. 31, 2022, except for hedging relationships existing as of Dec. 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship.

The amendments in this ASU are effective for all entities as of March 12, 2020, through Dec. 31, 2022. 

FASB releases ASU on narrow-scope financial instruments guidance

As part of its ongoing Accounting Standards Codification (ASC) improvements project, the FASB issued, on March 9, 2020, ASU 2020-03, “Codification Improvements to Financial Instruments,” which clarifies several parts of the financial instruments guidance, including the current expected credit losses (CECL) standard. 

Among its improvements, the ASU clarifies that:

  • Disclosure requirements in ASC 320 apply to disclosure requirements related to debt securities in ASC 942 for depository and lending institutions.
  • The portfolio exception in ASC 820 applies to nonfinancial items.
  • All nonpublic companies and organizations must provide certain fair value option disclosures.
  • The contractual term of a net investment in a lease determined in accordance with ASC 842 should be the contractual term used to measure expected credit losses under ASC 326.
  • When an entity regains control of financial assets sold (under ASC 860), it should record an allowance for credit losses in accordance with ASC 326.

The effective dates of the amendments vary, based on when the related guidance is required to be adopted, and range from issuance to the end of 2023.

FASB announces roundtable discussion on leases

On March 5, 2020, the FASB announced a public roundtable discussion on the implementation of the leases accounting standard. Participants, including many who have already implemented the standard, will discuss their implementation experiences. The roundtable will focus on broad technical issues that companies and organizations have found challenging. In describing the roundtable, FASB Chairman Russell G. Golden stated, “What we learn at the roundtable will help the FASB understand and address ongoing implementation issues, which we hope will facilitate a smoother transition to the standard for private companies.”

On March 12, 2020, the FASB postponed the roundtable to May 18, 2020, from 9 a.m. to 4 p.m. Eastern at the FASB offices in Norwalk, Connecticut. 

Observers who would like to attend in person are required to register in advance. In addition, the meeting will be streamed live and archived on the FASB website.


From the Securities and Exchange Commission (SEC)

SEC offers temporary regulatory relief for companies affected by the coronavirus

On March 4, 2020, the SEC issued an order providing coronavirus-affected registrants temporary relief from certain filing and regulatory requirements. The order provides an additional 45 days to make required Exchange Act filings that would have been due between March 1 and April 30, 2020, if a registrant is unable to meet a deadline because of circumstances related to COVID-19.

In accordance with this order, a Form 8-K (or Form 6-K) is required to be filed by the later of March 16, 2020, or the original report deadline. The form requires:

  • A statement that the registrant is relying on the order
  • A brief description of why it could not file on time
  • The estimated date by which the report or form is expected to be filed 
  • If appropriate and material, a risk factor explaining the effect of COVID-19 on its business
  • If the reason the report could not be filed on time relates to the inability of any person, other than the registrant, to furnish any required opinion, report, or certification, an exhibit statement signed by such person stating the specific reasons why he or she is unable to furnish such items

A Form 12b-25 would not need to be filed if the report is filed within 45 days of the original filing deadline.

Additionally, the SEC clarified that, for purposes of the eligibility to use Form S-3 or Form S-8 and to meet the current public information eligibility requirements of Rule 144(c), a company relying on this temporary relief order will be considered current in its filing requirements under the Exchange Act if it was current as of March 1, 2020, and it files any report due during the relief period within 45 days of the original filing deadline.

The SEC reiterated the importance of companies disclosing material information related to COVID-19 and encouraged companies needing additional assistance with filing requirements to contact the SEC staff, which will address issues on a case-by-case basis.

SEC and PCAOB issue joint statement on financial reporting considerations for the coronavirus

On Feb. 19, 2020, the SEC and PCAOB issued a joint statement covering, among other items, the effects of the coronavirus on financial reporting including the issuer’s disclosures and the audit firm’s audit quality. The statement acknowledges that the effects of the coronavirus on any particular industry or issuer might not be known. However, users might need disclosure of how issuers plan for and respond to coronavirus events. The statement reminds companies to work with their audit committees and auditors to “ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”

SEC amends accelerated and large accelerated filer definitions

On March 12, 2020, the SEC adopted amendments to the accelerated filer and large accelerated filer definitions, which will result in fewer registrants being required to obtain an auditor attestation on the effectiveness of ICFR. According to the final rule, an issuer that qualifies as a smaller reporting company (SRC) and has annual revenues of less than $100 million also qualifies as a nonaccelerated filer and, therefore, is not required to obtain an auditor’s attestation on ICFR and is not subject to any accelerated filing requirements.

The table summarizes the new definitions with regards to public float and revenue classification thresholds for each potential category of issuer:

FIEB March 2020

The amendments have no impact on the statutory exemption from Section 404(b) afforded to an issuer that qualifies as an emerging growth company. The amendments also do not change the requirement that companies establish, maintain, and provide management’s assessment on the effectiveness of ICFR.

Additionally, the amendments increase the public float transition threshold for an accelerated filer or large accelerated filer to become a nonaccelerated filer to $60 million from $50 million, and for a large accelerated filer to become an accelerated filer to $560 million from $500 million. Also, a revenue test was included in the transition thresholds for exiting both accelerated and large accelerated filer status.

The  amendments will become effective 30 days after publication in the Federal Register and will apply to an annual report filing due on or after the effective date. 

SEC changes financial disclosure requirements related to registered debt offerings

The SEC adopted, on March 2, 2020, amendments to the financial disclosure requirements for registered debt offerings that include credit enhancements, such as subsidiary guarantees, or affiliates whose securities are pledged as collateral. The requirement changes are designed to improve the quality of disclosure and increase the likelihood that issuers will complete registered debt offerings. 

Included among the disclosure requirement changes, the SEC reduced the circumstances that require separate audited financial statements of subsidiary issuers and guarantors. In place of separate statements, the SEC simplified the required alternative disclosures. Regarding separate financial statements of affiliates whose securities are pledged as collateral for registered securities, the SEC revised the required disclosure to be similar to those for subsidiary issuers and guarantors. 

The amendments will be effective Jan. 4, 2021, but early voluntary compliance is permitted. 

SEC proposes rule changes to the exempt offering framework

To promote capital formation and increase investment opportunities while still protecting investors, the SEC proposed changes to the framework for securities offerings that are exempt from registration. The amendments, as proposed on March 4, 2020, are aimed at simplifying and improving the exempt offering framework, which currently includes 10 different exemptions and complex rules covering issuers with multiple securities transactions.

Incorporating feedback received on the SEC’s concept release in June 2019, the proposal would, among other changes, create an integration principle to help determine whether multiple securities transactions by an issuer should be considered part of the same offering, provide certain safe harbors, increase certain types of offering and investment limits, expand the availability of certain “test-the-waters” communications for exempt securities, and simplify certain disclosure and eligibility requirements and disqualification provisions to decrease differences among the multiple exemptions.

Comments are due 60 days after publication in the Federal Register.

SEC schedules compliance outreach seminar

The SEC posted, on Feb. 25, 2020, the opening of registration for its compliance outreach national seminar for investment companies and investment advisers scheduled for April 21, 2020, at the SEC’s headquarters in Washington, D.C. The seminar also will be streamed live on the SEC’s website. The event is “intended to help Chief Compliance Officers (CCOs) and other senior personnel at investment companies and investment advisory firms enhance their compliance programs for the protection of investors.”

SEC publishes interpretive guidance on key performance indicators

On Feb. 25, 2020, the SEC published interpretive guidance on the use of key performance indicators (KPIs). KPIs can include measures defined in GAAP, a non-GAAP measure, or a different measure. GAAP and non-GAAP measures differ from other KPIs because specific frameworks exist for their use (for example, non-GAAP measures are defined in Item 10(e) of Regulation S-K, and specific rules and requirements exist for the use of non-GAAP measures in SEC filings). KPIs other than GAAP or non-GAAP measures are not directly addressed in SEC rules or regulations.

The interpretive guidance provides guidance on the types of disclosures the SEC would expect with respect to KPIs, including when the entity changes the calculation or method used to compare the KPIs from one period to another. It also reminds registrants of the need to consider disclosure controls and procedures when disclosing a KPI.

SEC announces departure of Corp Fin chief accountant

On March 12, 2020, the SEC announced that after nearly 20 years of public service Kyle Moffatt, chief accountant and disclosure program director in the Division of Corporation Finance (Corp Fin), will leave the SEC later in March. Upon Moffatt’s departure, Lindsay McCord and Patrick Gilmore, deputy chief accountants in Corp Fin, will become acting chief accountant and acting disclosure review program director, respectively.

Want more insights on addressing coronavirus-related challenges?
Go to the Crowe COVID-19 resource center for more analysis and updates. 

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Sydney Garmong
Office Managing Partner, Washington, D.C.