From the federal financial institution regulators
The Board of Governors of the Federal Reserve System (Fed), the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration jointly issued updated frequently asked questions on the current expected credit losses (CECL) model on April 3, 2019. The agencies developed the FAQs to help institutions and examiners with the application of CECL and related supervisory expectations. FAQs added in this revision address issues including collateral-dependent loans, reasonable and supportable forecasts, internal control considerations related to data used in CECL calculations, and practices in existing supervisory guidance on the allowance for loan and lease losses. The update reflects changes in implementation dates for nonpublic business entities. The agencies also have made technical and editorial changes to previously released FAQs and have provided links in the appendix to relevant resources for institutions to use in their CECL implementation efforts.
The FDIC, on March 20, 2019, issued the winter 2018 edition of “Supervisory Insights,” which includes an article on the future of the London Interbank Offered Rate (LIBOR) as well as alternatives to it. For decades, LIBOR has been a popular reference rate for commercial loans, residential mortgages, and other credit instruments used by larger financial institutions as well as smaller community banks and savings institutions.
Despite the longtime use of LIBOR in financial markets worldwide, initiatives are in progress that could move financial markets away from its use as a reference rate after 2021. The FDIC recognizes that a transition away from LIBOR could result in some adjustments for financial institutions that have it embedded in their contracts. The article provides information to help entities better address the potential impact and planning considerations for a possible transition from LIBOR.
This edition also includes an overview of recently released regulations and other items of interest to banks.
On March 27, 2019, the FDIC released its annual performance plan, which includes the agency’s strategic goals and objectives for 2019. In the plan, the FDIC highlights priorities such as encouraging more de novo bank formations through streamlining the deposit insurance application review process. The FDIC also intends to focus on reducing unnecessary regulatory burdens for community banks without harming consumer protection or prudential requirements.
Additionally, according to the plan, the FDIC is establishing an Office of Innovation to work with banks and nonbanks to understand how the business of banking is changing because of technology. On the supervision side, the plan identifies cybersecurity risk as a continuing concern in the financial services sector, with emphasis on the increased frequency and sophistication of cyberattacks.
On March 26, 2019, the OCC issued Bulletin 2019-16 on interagency examination procedures for evaluating compliance with Regulations Z and E of the Consumer Financial Protection Bureau (CFPB). The Federal Financial Institutions Examination Council recently developed interagency examination procedures for the Truth in Lending Act implemented by Regulation Z and for the Electronic Fund Transfer Act implemented by Regulation E.
The CFPB finalized the Regulations Z and E amendments through several issuances between 2016 and 2018. The amendments established comprehensive consumer protections for prepaid accounts by applying Regulation E coverage, setting disclosure standards, and classifying certain prepaid accounts with credit features as subject to Regulation Z.
Bulletin 2019-16 makes the interagency exam procedures available on the OCC website for the new and amended Regulation Z and Regulation E requirements that are effective April 1, 2019. OCC examiners will use these procedures for examinations that began after April 1. The OCC will revise the Comptroller’s Handbook to include these interagency procedures.
As part of their efforts to limit interconnectedness among large banking organizations, on April 2, 2019, the Fed, the FDIC, and the OCC jointly proposed a rule that would discourage the global systemically important bank (GSIB) holding companies from purchasing large amounts of total loss-absorbing capacity (TLAC) debt by requiring such banks to hold additional capital against substantial holdings of TLAC debt. The agencies also would require the holding companies of GSIBs to report their outstanding TLAC debt. The agencies acknowledge that this increased capital requirement would help reduce interconnectedness among the largest banking organizations and reduce the impact on the financial system in the event of a GSIB failure.
Comments are due June 7, 2019.
From the Financial Accounting Standards Board (FASB)
At its April 3, 2019, meeting, the FASB board decided not to add to its agenda a project for the alternative presentation of the credit loss expense (that is, splitting expected credit loss expense between net income and other comprehensive income) as presented by the regional banks on Nov. 5, 2018, and as discussed at the public roundtable on the credit losses standard on Jan. 28, 2019. The board members agreed unanimously, primarily citing cost and complexity.
The board also decided that the disclosure of gross charge-offs and recoveries within the vintage disclosures is not required as illustrated in example 15 of Accounting Standards Codification (ASC) 326-20-55-79 and that entities should follow the requirements in ASC 326-20-50-4 through 50-9. The board plans to monitor the disclosures made upon adoption and consider additional outreach with investors to determine if changes should be made after the standard is effective.
On March 25, 2019, the FASB issued a revised proposed Accounting Standards Update (ASU), “Income Taxes (Topic 740) – Disclosure Framework – Changes to the Disclosure Requirements for Income Taxes – Revision of Exposure Draft Issued July 26, 2016,” which is intended to make current income tax disclosure requirements more relevant for financial statement users.
The proposed ASU is an update of an exposure draft issued in July 2016 that included improved disclosure requirements for income taxes as part of the FASB’s broader disclosure framework project to improve the effectiveness of disclosures. The FASB delayed finalizing the original proposal because of pending tax reform, which subsequently was passed in December 2017.
This newly proposed ASU reflects revisions that are a result of changes from tax reform under the Tax Cuts and Jobs Act as well as input that was received for the original 2016 exposure draft. The proposed ASU would remove disclosures that are not considered cost beneficial or relevant. Examples include disclosure of “the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months” and the requirement to “make a statement that an estimate of the range cannot be made.” In addition to removing certain disclosure requirements, these disclosure requirements were added:
For all entities:
- “Income (or loss) from continuing operations before income tax expense (or benefit) and before intra-entity eliminations disaggregated between domestic and foreign”
- “Income tax expense (or benefit) from continuing operations disaggregated between federal, state, and foreign”
- “Income taxes paid disaggregated between federal, state, and foreign”
For public business entities:
- “Line items in the statement of financial position in which the unrecognized tax benefits are presented and the related amounts of such unrecognized tax benefits”
- “Amount and explanation of the valuation allowance recognized and/or released during the reporting period”
- “Total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards”
Comments are due May 31, 2019.
From the Securities and Exchange Commission (SEC)
On March 20, 2019, Martha Miller, the SEC’s new advocate for small business capital formation, spoke at the 1 Million Cups of Coffee event in Kansas City, Missouri, about the Office of the Advocate for Small Business Capital Formation, including why it was formed, what its purpose is, and how it will approach its mission. Miller said that small businesses – which include companies from emerging, privately held, and publicly traded companies with public market capitalization of less than $250 million – are “job creators, generators of economic opportunity, and fundamental to the growth of the country”; however, she added, “absence of access to funding, small businesses cannot create new jobs, foster innovation, and develop into the next generation of publicly traded companies whose growth fuels Main Street investors’ retirement accounts.”
The SEC established this new office to provide a voice to small businesses at the SEC and in the regulatory arena, to advocate for the small businesses and their investors in Washington, D.C., and to assist in accessing capital. According to Miller, this mission will be accomplished by:
- “Working with small businesses to understand their capital formation issues through education and outreach;
- “Helping small businesses resolve issues with the SEC and self-regulatory organizations, including by recommending policy changes; and
- “Analyzing the potential impact of proposed rules and regulations likely to significantly affect small businesses.”
On March 15, 2019, the SEC announced that it will host a live public forum focusing on distributed ledger technology (DLT) and digital assets. The forum, which will be webcast on May 31, 2019, is being organized by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub). The forum is intended to create better communication and understanding of DLT and digital assets issues. Topics to be addressed include initial coin offerings, digital asset platforms, DLT innovations, and impacts of such technologies on investors and the markets.
On March 28, 2019, the SEC published notices to solicit comments on new PCAOB rules.
In December 2018, the PCAOB adopted a new auditing standard, “Auditing Accounting Estimates, Including Fair Value Measurements,” to replace three existing PCAOB auditing standards on estimates. Changes in the standard address the auditor’s professional skepticism, including potential management bias, when auditing estimates. A special topics appendix addresses auditing fair values of financial instruments, including the use of information from third-party pricing sources.
Concurrent with the new standard, the PCAOB also adopted amendments related to using the work of a company’s employed or engaged specialists and the work of an auditor’s employed or engaged specialists. With the issuance of PCAOB Release No. 2018-006, “Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists,” the board amended two existing auditing standards, Auditing Standard (AS) 1105, “Audit Evidence,” and AS 1201, “Supervision of the Audit Engagement.” AS 1210, “Using the Work of a Specialist,” was retitled and replaced by AS 1210, “Using the Work of an Auditor-Engaged Specialist.”
Subject to approval by the SEC, the new and amended standards will be effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020.
Comments on the SEC notices of filing are due April 25, 2019.
From the Public Company Accounting Oversight Board (PCAOB)
On March 18, 2019, the PCAOB released three staff guidance documents that address implementation of the new critical audit matter (CAM) requirements. These new requirements, which phase in from June 30, 2019, through Dec. 15, 2020, will require auditors to communicate CAMs in the auditor’s report under PCAOB AS 3101, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.”
The three staff guidance documents cover the following:
- “Implementation of Critical Audit Matters: The Basics” provides a high-level overview of the CAM requirements.
- “Implementation of Critical Audit Matters: Staff Observations From Review of Audit Methodologies” includes observations from the PCAOB’s chief auditor’s review of audit firm methodologies.
- “Implementation of Critical Audit Matters: A Deeper Dive on the Determination of CAMs” includes answers to frequently asked questions for determining CAMs.
Although the staff developed these documents primarily to offer insights for auditors, “The Basics” document also may be of interest to preparers, audit committees, and investors.
Additionally, the PCAOB created a webpage addressing implementation of the new auditor’s report. This resource provides information, available resources, and training opportunities to auditors and other stakeholders, with a particular emphasis on how auditors are preparing to identify and communicate CAMs. The PCAOB staff also will continue to monitor CAM implementation and determine if additional guidance is needed.
Three webinars on implementation of new CAM requirements planned for April 25, May 8, and May 15 are no longer taking registrations, as they have reached capacity. They all will cover the same material on CAM determination, communication, and documentation requirements as well as other considerations relevant to CAM requirements. In addition, they qualify as professional education credits for participants. The PCAOB usually posts recordings of its webinars on its new auditor’s report implementation page, alongside other resources and recently released staff guidance.
From the Center for Audit Quality (CAQ)
On April 2, 2019, the CAQ issued an updated tool to assist audit committees in evaluating the external auditor. Focused on audit committees serving public companies, “External Auditor Assessment Tool: A Reference for U.S. Audit Committees” updates the CAQ’s 2017 publication.
The updated tool adds questions related to firm-level audit quality considerations, including leadership, culture, engagement team management, audit engagement performance, and monitoring. It also includes information about accounting and auditing developments and potential risks. The tool offers questions for audit committees to consider asking in four categories:
- Quality of services and sufficiency of resources provided by the engagement team
- Quality of services and sufficiency of resources provided by the audit firm
- Communication and interaction with the external auditor
- Auditor independence, objectivity, and professional skepticism
The tool suggests audit committees refer to the CAQ’s January 2019 publication “Audit Quality Disclosure Framework” for additional considerations when asking external auditors about the quality and sufficiency of resources provided by the audit firm.
The CAQ has posted a recording of its April 1, 2019, webcast "The Enhanced Auditor’s Report Is Here: Get the Facts on CAMs and More." The first in a five-part series, the webcast addressed early lessons learned in the implementation of CAMs requirements, how audit committees and management can prepare, and how information included in CAMs communications may be used by investors.