FASB Delays CECL for Private Entities & Smaller Public Companies

| 10/23/2019

Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

Agencies propose “Interagency Policy Statement on Allowances for Credit Losses”

On Oct. 17, 2019, the “Interagency Policy Statement on Allowances for Credit Losses,” was posted in the Federal Register. The Federal Deposit Insurance Corp. (FDIC) board voted to approve the proposal at its Aug. 20 meeting. The Federal Reserve Board (Fed), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) also have approved.
The proposed interagency policy statement (IPS) provides supervisory expectations for:
  • Designing, documenting, and validating expected credit loss estimation processes, including the internal controls over these processes
  • Maintaining appropriate allowances for credit losses (ACLs)
  • The responsibilities of boards of directors and management
  • Examiner reviews of ACLs

The proposal would replace the following policy statements:

  • December 2006 IPS on the allowance for loan and leases losses (ALLL) (Fed, FDIC, NCUA, OCC)
  • July 2001 policy statement on ALLL methodologies and documentation for banks and savings institutions (Fed, FDIC, OCC)
  • May 2002 Interpretive Ruling and Policy Statement 02-3 on ALLL methodologies and documentation for federally insured credit unions (NCUA)

The proposal has 60-day comment period, which closes on Dec. 16, 2019.

Agencies finalize simplifications to the Volcker rule

The FDIC, Fed, OCC, Commodity Futures Trading Commission, and Securities and Exchange Commission on Oct. 8, 2019, finalized revisions to the Volcker rule, which generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds. The final rule is aimed at tailoring the Volcker rule so that banking entities can be more efficient in providing financial services. Among other changes, the final rule includes:

  • Basing compliance requirements on the size of a firm’s trading assets and liabilities, with the strictest requirements applied to banking entities with the most significant trading activity
  • Redefining the rebuttable presumption for instruments under the short-term intent prong to state that instruments held for 60 days or longer are not covered
  • Defining that banking entities that trade within internal risk limits set under the final rule’s conditions are engaged in permissible market making or underwriting activity
  • Simplifying the applicable criteria for the hedging exemption from the proprietary trading prohibition
  • Streamlining the information required to be reported to the agencies on trading activity

The final rule will be effective on Jan. 1, 2020, with a compliance date of Jan. 1, 2021.

Agencies issue final rule increasing management interlock thresholds

On Oct. 2, 2019, the FDIC, Fed, and OCC finalized a rule to increase the threshold at which bank directors or other management officials are prohibited from serving at more than one depository institution or holding company. In the past, a management official of a depository organization with total assets greater than $2.5 billion (or any affiliate of such an organization) was not allowed to serve at the same time as a management official of an unaffiliated depository organization with total assets greater than $1.5 billion (or any affiliate of such an organization), regardless of the location of the two depository organizations. The final rule raises both total assets thresholds to $10 billion.

The final rule was effective on Oct. 10, 2019.

Agencies issue final rule to increase threshold for residential real estate appraisals

The FDIC, Fed, and OCC, on Sept. 27, 2019, finalized a rule to increase the threshold at which an appraisal is required for residential real estate transactions from $250,000 to $400,000. The threshold was most recently adjusted in 1994. For transactions below the threshold, banks must obtain an evaluation to estimate the value of the collateral. The agencies obtained agreement from the Consumer Financial Protection Bureau in increasing the threshold, as required.

Other changes in the final rule include requirements related to the rural residential appraisal exemption and a requirement to review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice.

The threshold change was effective Oct. 9, 2019, while certain other provisions are effective Jan. 1, 2020.

NCUA approves payday alternative loan rule

At its Sept. 19, 2019, meeting, the NCUA board approved a final rule to allow credit unions to offer new payday alternative loans (PALs) to members. The rule allows for additional loan types and does not replace an existing rule on PALs. Aspects of the new program include:
  • Loan amounts may be up to $2,000 with no minimum amount (existing program has a minimum of $200 and a maximum of $1,000).
  • Maximum term is 12 months (existing program has a maximum of six months).
  • Loans can be made immediately upon the borrower’s establishing membership (existing program requires membership for at least one month).

The final rule is effective Dec. 2, 2019.

OCC finalizes amendments to stress-testing rule

The OCC issued a final rule on Oct. 2, 2019, to amend the stress-testing rule for national banks and federal savings associations in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Among other changes, the amendments:

  • Modify the definition of “covered institution” to increase the minimum threshold for national banks and federal savings associations to conduct stress tests from $10 billion to $250 billion
  • Change the required frequency for stress tests from annually to every two years
  • Reduce the required number of stress-testing scenarios from three to two, removing the “adverse” testing scenario

The final rule is effective Nov. 24, 2019.

OCC releases 2020 supervision priorities

On Oct. 1, 2019, the OCC released its “Fiscal Year 2020 Bank Supervision Operating Plan,” identifying the priorities for each of its supervisory operating units. For fiscal year (FY) 2020, which started on Oct. 1, 2019, in addition to the fundamental supervision to assign ratings, these risk areas will be part of the units’ focus:

  • Cybersecurity and operational resiliency
  • Management of Bank Secrecy Act/anti-money laundering compliance
  • Underwriting practices and oversight and control functions for commercial and retail credit
  • Changing interest-rate outlooks’ effect on bank activities and risk exposures
  • Current expected credit losses (CECL) accounting standard preparedness, and preparation for the potential phase-out of the London Interbank Offered Rate (LIBOR)
  • Technological innovation and implementation

FDIC establishes qualifying criteria for CBLR framework

The FDIC finalized a rule on Sept. 17, 2019, to set criteria for community banks to use the community bank leverage ratio (CBLR) framework in accordance with the EGRRCPA. Banks with less than $10 billion in total assets, a leverage ratio of greater than 9%, and limited amounts of off balance sheet exposures and trading assets and liabilities can choose to use the CBLR framework.

The final rule is effective Jan. 1, 2020, and the new framework will be available starting with the March 31, 2020, call report.

From the Financial Accounting Standards Board (FASB)

FASB affirms deferred effective dates for major accounting standards

At its Oct. 16, 2019, meeting, the FASB discussed comments on a proposed Accounting Standards Update (ASU), “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,”  which were due Sept. 16. As a result, the board affirmed its decisions to provide private entities and certain small public companies additional time to implement the standards on CECL, leases, and hedging. 

The FASB decided not to extend effective date relief to broker-dealer entities (BDs) that are SEC filers. The main impact of this decision is that BDs that are SEC filers will have to apply CECL starting next year. The board suggested that it might consider effective date relief for BDs in future standard-setting activities.

One amendment that was not included in the proposal will align the effective date of ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” with the amended CECL effective dates.

For credit losses (Topic 326), the board decided to maintain the current effective date for SEC filers, excluding smaller reporting companies (SRCs), which stands as fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For all other entities, including SRCs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2022, including interim periods within, which for calendar year-ends is Jan. 1, 2023.

For leases (Topic 842), the proposal retains the current effective date for public business entities (PBEs), not-for-profit conduit bond obligors, and employee benefit plans that file or furnish financial statements with the SEC, which stands as fiscal years beginning after Dec. 15, 2018, including interim periods within. For entities other than PBEs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

For hedging (Topic 815), the proposal retains the existing effective date for PBEs, which is fiscal years beginning after Dec. 15, 2018, including interim periods within. For entities other than PBEs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

The board has instructed the staff to prepare a final ASU for vote by written ballot, which is expected to be issued in November 2019.

FASB schedules roundtable on identifiable intangible assets and goodwill

The FASB has scheduled a public roundtable discussion for Nov. 15, 2019, to gather views on its Invitation to Comment (ITC), “Identifiable Intangible Assets and Subsequent Accounting for Goodwill,” that was issued on July 9, 2019. The ITC asks for stakeholder input on the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill.

From the Securities and Exchange Commission (SEC)

SEC issues proposal to revise statistical disclosures for banking registrants

On Sept. 17, 2019, the SEC issued a proposed rule, “Update of Statistical Disclosures for Bank and Savings and Loan Registrants,” to update statistical disclosures of banking registrants currently provided under Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.” The proposal clarifies the types of entities within its scope and carries over, updates, or eliminates various current Guide 3 disclosures. In addition, the proposal rescinds Guide 3 and relocates required disclosures to new Subpart 1400 of Regulation S-K.

The proposal clarifies, for both domestic and foreign registrants, that banks and savings and loan registrants are subject to Subpart 1400 and, with minor exceptions (see “Credit ratios” in upcoming list), matches the periods required for statistical disclosures to the annual and interim periods presented in the financial statements. The proposal carries over many current Guide 3 disclosures to Subpart 1400; however, it also eliminates certain Guide 3 disclosure topics (for example, return on equity and assets and short-term borrowings) and makes minor changes to Article 9 of Regulation S-X.

Highlights of significant proposed disclosure changes include:

  • Average balance, interest and yield/rate analysis, and rate/volume analysis. Further disaggregates the categories of short-term interest-earning assets and short-term interest-bearing liabilities
  • Investment portfolio. Deletes certain disclosures and matches, with U.S. GAAP or International Financial Reporting Standards (IFRS), the categories presented for weighted average yield disclosures for each range of maturities by category of debt securities
  • Loan portfolio.
    • Deletes certain disclosures and matches, with U.S. GAAP or IFRS, the loan categories for maturity by loan category disclosures
    • Clarifies how contractual maturities and noncontractual rollovers or extensions affect the disclosure
  • Allowance for credit losses.
    • Deletes the analysis of loss experience disclosure; carries over the ratio of net charge-offs during the period to average loans outstanding and requires the disclosure of the net charge-off ratio on a more disaggregated basis using loan categories under U.S. GAAP or IFRS
    • Does not propose disclosures related to the new credit loss standard but requests comment on whether there are material allowance disclosures under an expected credit loss model that are not already required by SEC rules, the proposed rules, U.S. GAAP, or IFRS
  • Credit ratios.
    • Requires disclosure of certain credit ratios on a consolidated basis and disaggregates the current credit ratio disclosure (that is, net charge-offs during the period to average loans outstanding) into each loan category disclosed under U.S. GAAP or IFRS
    • Proposes discussion of the factors that drove material changes in the ratios, or related components, during the periods presented
    • Requires five years of credit ratio disclosures for initial registration statements (including Regulation A offering statements); for other filings, would require disclosures for the financial statement periods presented in the filing
  • Deposits. Requires disclosure of uninsured time deposits disaggregated by type and maturity
Comments are due on Dec. 2, 2019.

SEC adopts “test-the-waters” expansion

The SEC adopted on Sept. 26, 2019, a new rule that expands “test-the-waters” reform to all issuers.

Under this new rule, all prospective issuers, not just emerging growth companies, are permitted to assess market interest in a possible initial public offering or other proposed registered securities offering by allowing discussions with potential qualified investors before the filing of a registration statement. These communications will be exempt from Securities Act Section 5 restrictions on written and oral offers prior to or after filing a registration statement. The expansion of the “test-the-waters” reform is designed to give companies more flexibility in determining whether to proceed with a registered offering before incurring the costs of preparing a registration statement.

The rule is effective Dec. 3, 2019.

SEC adopts recordkeeping and reporting requirements for security-based swap dealers

The SEC, on Sept. 19, 2019, adopted a package of rules and rule amendments under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and amendments institute recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants, and they modify the requirements for broker-dealers. The rules require companies to create and maintain certain business records to document and track their security-based swap operations and are designed to make it easier for the SEC to monitor compliance and reduce market risk. Among other changes, the rules establish or amend periodic reporting and annual audit requirements, establish early warning notification requirements, and amend the SEC’s existing cross-border rule.

Corp Fin realigns disclosure program

On Sept. 27, 2019, the Division of Corporation Finance (Corp Fin) announced the realignment of the work of its disclosure program. The new structure is aimed at fostering collaboration, transparency, and efficiency. Under the new disclosure program structure, efforts of the Corp Fin staff will be focused in the following groups:

  • Disclosure Review Program. This group will conduct the majority of its selective and required filing reviews in seven industry-focused offices.
  • Specialized Policy and Disclosure. The work of the offices of International Corporate Finance, Mergers and Acquisitions, and Structured Finance as well as corporate governance policy matters across Corp Fin will be included in this group.
  • Office of Risk and Strategy. This office will provide filing review teams with guidance on developing risks and evolving disclosures.
  • Office of Assessment and Continuous Improvement. This new office has been established to evaluate the effectiveness of the disclosure review program.

SEC chief accountant delivers keynote to AICPA national conference

In a Sept. 9, 2019, keynote speech before the American Institute of CPAs National Conference on Banks & Savings Institutions on “The Importance of Financial Reporting and Auditing, Domestically and Internationally,” Sagar Teotia, SEC chief accountant, addressed a number of issues related to maintaining financial reporting system integrity, including:

  • Overseeing standard-setting
  • Implementing FASB standards
  • Implementing Public Company Accounting Oversight Board standards
  • Advising on SEC rulemaking
  • Focusing on international activities
  • Preparing for what’s next

Of note, Teotia mentioned he supports the FASB’s plans to conduct continuing outreach on the implementation of the CECL standard, the Office of the Chief Accountant (OCA) continues to receive consultations on the topic, and, consistent with other recent standards, OCA has consistently respected well-reasoned judgments that entities have made in applying new accounting standards. He said OCA will continue to do so in credit losses and in other areas.

Vaughn discusses SAB 74 disclosures for CECL

Kevin Vaughn, SEC senior associate chief accountant, on Sept. 9, 2019, provided thoughts on Staff Accounting Bulletin (SAB) 74 disclosures for CECL at the 2019 AICPA National Conference on Banks & Savings Institutions. His comments included:

  • Management should share what they know when they know it under SAB 74.
  • Investors want to know the impact of CECL on the financial statements. In addition, an estimated range – plus an explanation for why the company cannot provide a more accurate estimate – would help investors prepare for the Jan. 1 adoption of the CECL standard.
  • The expectation is not that entities will wait to disclose the impact of CECL until they have precise numbers.
  • Entities should plan what information they will share with investors post-adoption.

SEC chair addresses the Economic Club of New York

On Sept. 9, 2019, SEC Chair Jay Clayton addressed the SEC’s recent accomplishments focused on the long-term interests of mainstream investors. He also discussed recent Foreign Corrupt Practices Act enforcement as well as corporate debt markets, LIBOR transition, and Brexit.

From the Public Company Accounting Oversight Board (PCAOB)

Board member discusses cybersecurity, resiliency, and financial regulators’ role

On Oct. 3, 2019, PCAOB board member Kathleen M. Hamm spoke about cybersecurity, resiliency, and the role of financial regulators at the Program on International Financial Systems Technology and Capital Market Regulation Conference in Tokyo, Japan. In her speech, she addressed the nature of cyberthreats, how internet interconnectedness brings significant risks, how financial regulators can address cyberthreats, and the tools available to regulators to defend against cyberthreats. She said, “effective cybersecurity and resiliency includes three key elements: (1) identifying and implementing baseline protections and best practices, (2) engaging in information sharing, and (3) preparing an effective response and recovery plan.”

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