August COVID-19 financial reporting, governance, and risk management

| 8/19/2020
August COVID-19 financial reporting, governance, and risk management

Special message from Mike Percy, Managing Partner, Financial Services

Dear FIEB readers,

I continue to hope this message finds you, your friends, your family, and your colleagues safe. With the fall season just around the corner, starting Sept. 23, the conference season will be here. Of course, it is not going to be the typical season experience as most conferences will be held online this year. Two of the largest conferences for our industry are hosted by the American Institute of Certified Public Accountants (AICPA). While we will not be heading to Washington, D.C., or Las Vegas, participants will have a virtual experience. You can save an additional $100 with these codes:

2020 AICPA National Conference on Banks & Savings Institutions
Sept. 14-16, 2020
Use coupon code “SCS” to receive a $100 discount off regular registration price. This discount may be applied in addition to the early bird discount of $100 – for a total savings of $200 off the regular registration fee – for those who register by Aug. 31, 2020.

2020 AICPA Online Conference on Credit Unions
Oct. 19-21, 2020
Use coupon code “SIO” to receive a $100 discount off the regular registration price. This discount may be applied in addition to the early bird discount of $100 – for a total savings of $200 off the regular registration fee – for those who register by Sept. 4, 2020.

Given this continuing unusual environment, we once again have organized this month’s Financial Institutions Executive Briefing to focus on the most critical issues and will strive to keep you updated as events unfold.

Matters of importance from the financial regulators

CFPB seeks input on creating more inclusive financial system

On July 28, 2020, the Consumer Financial Protection Bureau (CFPB) issued a request for information seeking input on creating a regulatory environment that will expand credit access and protect consumers and communities from discrimination, consistent with the goals of the Equal Credit Opportunity Act (ECOA). Specifically, the CFPB is looking for input on the following topics:

  • Disparate impact
  • Limited English proficiency
  • Special-purpose credit programs
  • Affirmative advertising to disadvantaged groups
  • Small-business lending
  • Sexual orientation and gender identity discrimination
  • Scope of federal preemption of state law
  • Public assistance income
  • Artificial intelligence and machine learning
  • ECOA adverse action notices

Comments are due Oct. 2, 2020.

OCC releases update to the Bank Accounting Advisory Series

On Aug. 17, 2020, the OCC released an update to the Bank Accounting Advisory Series (BAAS). The BAAS covers a variety of topics and promotes consistent application of accounting standards among national banks and federal savings associations. This edition of the BAAS reflects accounting standards issued by the FASB and includes recent answers to frequently asked questions from the industry and examiners.

The 2020 BAAS includes new questions on topics such as, but not limited to, the following:

  • Bank-owned life insurance
  • Tax sharing arrangements
  • CECL
    • Reasonably expected troubled debt restructurings
    • Acquired loans
    • Accrued interest receivable
    • Collateral dependent financial assets

Updates to topics include, but are not limited to, the following: 

  • Debt and equity securities
  • Other real estate owned
  • CECL: Freestanding insurance contracts

The BAAS does not represent official rules or regulations of the OCC. Rather, it represents the OCC’s Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance based on the facts and circumstances presented. While the BAAS is published by the OCC, the information in the BAAS is relevant to all financial institutions.

OCC creates exception to withdrawal period for CIFs

On Aug. 4, 2020, the Office of the Comptroller of the Currency (OCC) issued an interim final rule to clarify rules for withdrawals from collective investment funds (CIF) and established a limited exception to the withdrawal period. Typically, a bank administering certain CIFs is allowed to require a prior notice period of up to one year for withdrawals from the fund. The interim final rule codifies that standard withdrawal period and creates a limited exception allowing an extension of that period with prior OCC approval.

The interim final rule took effect Aug. 13, 2020, and comments are due Sept. 14, 2020.

Fed releases survey results on bank lending practices

The Federal Reserve Board (Fed) has released the results of the July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices, which correlate to experience over the second quarter of 2020. The survey covers changes in the standards, terms, and demand for bank loans to businesses and households over the previous three-month period.

Responses to the survey indicated that banks tightened their standards and terms on commercial and industrial (C&I) loans to firms of all sizes, all three major commercial real estate (CRE) loan categories, all categories of residential real estate (RRE) loans, and all three consumer loan categories. Banks reported weaker demand for C&I loans from firms of all sizes, all three major CRE loan categories, and all categories of consumer loans. However, banks reported stronger demand for all categories of RRE loans.

Banks reported that their lending standards across all loan categories currently are at the tighter end of the range of standards between 2005 and the present.

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Paycheck Protection Program (PPP)

Small Business Administration issues new FAQs and interim final rule on PPP forgiveness

On Aug. 11, 2020, the Small Business Administration (SBA) and the U.S. Department of the Treasury updated their frequently asked questions document addressing Paycheck Protection Program loan forgiveness. The FAQs cover topics such as administrative aspects of forgiveness applications, which payroll and nonpayroll costs are eligible for forgiveness, and loan forgiveness reductions.

The SBA and Treasury also issued an interim final rule, “Appeals of SBA Loan Review Decisions Under the Paycheck Protection Program,” to provide the process for lenders and borrowers to appeal certain loan review decisions affecting forgiveness.

Comments will be due 30 days after publication in the Federal Register.

SBA updates FAQ on PPP

On Aug. 11, 2020, the SBA and Treasury added two questions to their general frequently asked questions document. Question 50 clarifies that the effect of agent or third-party fees is not material to the SBA guarantee or SBA payments of fees to lenders. Question 51 clarifies that payments of insurance premiums of group healthcare benefits include vision and dental. 

SBA releases PPP summary information

The SBA released, on Aug. 3, 2020, a PPP report summarizing details of the program through the end of July. The report provides details on the number of loans to date; total dollar amounts of loans; lender information including number, size, and segments; loans by state and industry; loans by size; and top PPP lenders. It also notes that as of July 31, 2020, the amount of funding remaining under the program was $128,230,770,853.

Main Street Lending Program

Fed continues to update FAQs

The Fed updated the Main Street Lending Program frequently asked questions document on July 31, 2020, to provide additional guidance on the program as well as other topics. The Fed has added questions and answers addressing Main Street Expanded Loan Facility upsized tranches, the application process, certifications and covenants, lender information, regulatory treatment, and operational details.

On Aug. 6, 2020, the Fed also updated its Main Street for Nonprofit Organizations frequently asked questions

Fed announces extension and releases new term sheets

On July 28, 2020, the Fed announced an extension through Dec. 31 of its lending facilities, including the Main Street Lending Program, previously scheduled to expire on or around Sept. 30. The three-month extension is meant to facilitate planning by potential participants in the programs and provide certainty that the facilities will continue to be available to assist in the economic recovery from effects of the COVID-19 pandemic.

Additionally, on July 28, 2020, the Fed released updated term sheets for all of the available loan facilities under the Main Street Lending Program.

Loan modifications

Agencies issue statement on additional loan accommodations

On Aug. 3, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued a statement outlining risk management and consumer protection principles relating to additional loan accommodations as initial accommodations related to COVID-19 are ending. The statement reiterates that the FFIEC members have encouraged financial institutions to work with borrowers unable to meet contractual payment obligations due to COVID-19 and that they view loan accommodations as positive actions.

The statement also recognizes the challenges faced by financial institutions in assessing credit risk due to COVID-19 as initial loan accommodations are coming to an end and some borrowers continue to face financial challenges. Institutions are encouraged to consider additional accommodation options that consider credit risks, ease cash flow concerns for customers, and facilitate long-term loan repayment.

Additionally, the statement offers detail about prudent risk management practices, well-structured and sustainable accommodations, consumer protection, accounting and regulatory reporting, and internal controls.

From the Financial Accounting Standards Board (FASB)

FASB addresses agenda prioritization and lease guidance

At the FASB’s meeting on July 29, 2020, the board discussed staff research and outreach on potential projects related to recent agenda and other implementation requests.

The board added the following projects to the technical agenda:

  • Consider targeted improvements for Topic 842, “Leases,” to address:
    • Sales-type leases with substantial variable lease payments
    • Lease payment remeasurement based on a reference index or rate
    • Reduction of scope in a lease contract
  • Evaluate how underwriting restrictions on the sale of equity securities should be considered in fair value measurements.
  • Examine effects of other types of sale restrictions on fair value measurements.
  • Consider development of a principle for benchmark interest rates eligible for fair value hedge accounting.

As part of the targeted improvements to leases, the FASB directed the staff to draft a proposal with a 45-day comment period. The board tentatively decided that lessors would be required to classify leases with payments that are predominantly variable as operating leases and that lessees would have an option to remeasure lease liabilities for changes in a reference index or rate affecting future lease payments. Also, the board tentatively determined that when a separate lease component within a contract is terminated and the economics of the remaining lease components remain substantially the same as before the partial termination of that contract, a lessee or lessor would not apply modification accounting to the remaining lease components.

Projects discussed by the board but not added to the agenda include fair value hedge accounting for fixed-rate call option monetization strategies, customer account disclosures, permitting an entity to elect as its functional currency the parent’s reporting currency for all its foreign subsidiaries, and including the current portion of fixed assets as an element of working capital.

FASB reports on post-implementation review

At the July 29, 2020, FASB board meeting, the staff provided an update on the post-implementation review (PIR) process for leases, current expected credit losses (CECL), and revenue recognition.

Related to CECL, the staff provided a summary of its activities including four public meetings, 23 educational papers from the CECL Transition Resource Group, outreach with various types of stakeholders, and continued monitoring of the CECL adoption by public companies. The FASB has issued five targeted improvement updates of Topic 326, “Financial Instruments – Credit Losses,” and has deferred the effective date for public business entities that do not meet the definition of a U.S. Securities and Exchange Commission (SEC) filer, private companies, and not-for-profit organizations. Additionally, two staff Q&As – one on the weighted-average remaining maturity method and one on developing an estimate of expected credit losses on financial assets – have been issued to provide additional guidance. The staff also plans to hold a roundtable in early 2021.

The FASB has launched a dedicated PIR webpage for all items related to PIR.

FASB announces rescheduled roundtable discussion on leases implementation

On July 23, 2020, the FASB announced the rescheduled date of its public roundtable discussion on its leases accounting standard implementation. The discussion will focus on broad technical issues that organizations have found challenging. The virtual roundtable is scheduled for two sessions on Sept. 18, 2020.

In describing the roundtable, FASB Chair Richard R. Jones said that “feedback will help us improve how we support ongoing leases implementation for all stakeholders, as well as identify any issues we may need to address.” Observers will be able to view the livestreamed and archived roundtable sessions on the FASB website.

Securities and Exchange Commission (SEC) need to know

SEC holds Small Business Capital Formation meeting

The Small Business Capital Formation Advisory Committee met on Aug. 4, 2020, to discuss how capital markets are serving underrepresented founders, including minorities and women. SEC Chairman Jay Clayton and commissioners Allison Herren Lee, Hester Peirce, and Elad Roisman offered remarks at the meeting, which also included a discussion of opportunities to access capital for underrepresented founders and a discussion of solutions for inclusive capital formation including best practices and potential regulatory solutions. Data regarding underrepresented founders provided details of minority-owned and women-owned businesses including access to capital challenges. A recording of the meeting is available on the SEC’s website.

SEC names new Corp Fin chief accountant

On Aug. 5, 2020, the SEC announced that Lindsay McCord has been named chief accountant of its Division of Corporation Finance (Corp Fin), where she has served as acting chief accountant since March 2020. Previously, McCord served as a Corp Fin deputy chief accountant, managing a team responsible for providing technical guidance and interpretations of financial statement and related disclosure requirements.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB releases conversations with audit committees

On July 31, 2020, the PCAOB posted “Conversations With Audit Committee Chairs: COVID-19 and the Audit,” which summarizes the results of discussions with audit committee chairs on their thoughts about COVID-19’s effects on financial reporting and the audit. Audit committee chairs said they are focusing on numerous topics that present increased financial reporting and audit risk. The two main areas highlighted in the report are increased risks associated with remote work and increased communications with auditors. The document identifies forms of communication that audit committee chairs found helpful and provides suggestions for communication with the auditors during the pandemic. It also includes example questions to discuss with auditors regarding remote work and the additional risks it might present related to productivity, timing, testing, technology matters, and cybersecurity concerns.

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.
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Joe Durham
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