FASB Issues CECL Clarifications; FDIC, NCUA Recap Q3 ’19

Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

FDIC issues “Quarterly Banking Profile” for third-quarter 2019

The Federal Deposit Insurance Corp. (FDIC) issued, on Nov. 26, 2019, its “Quarterly Banking Profile” covering the third quarter. According to the report, FDIC-insured banks and savings institutions reported $57.4 billion net income, a decrease of $4.5 billion (7.3%) from a year ago. The decrease in earnings can be attributed to nonrecurring events at three large institutions.

The report provides these additional third-quarter statistics:

• Net interest income increased 1.2% from the previous year, totaling $138.8 billion. The average net interest margin decreased 10 basis points from the previous year.
• Noninterest income grew 4.3%, driven by higher other noninterest income and net gains on loan sales.
• Total loans and leases increased 4.6% from a year ago.
• Net charge-offs rose 17.2% 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 0.2%.
• Community banks earned $6.9 billion during the third quarter, up 7.2% from the same period last year.

The total number of FDIC-insured commercial banks and savings institutions declined to 5,256 from 5,303 the previous quarter. During the third quarter four new banks were chartered, 46 banks were absorbed by mergers, and no banks failed. The number of institutions on the FDIC’s problem bank list fell to 55 for the third quarter, the lowest number since 2007.

NCUA issues third-quarter 2019 performance data

The National Credit Union Administration (NCUA) reported, on Dec. 6, 2019, quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the third quarter of 2019. Highlights include:

• The number of federally insured credit unions declined to 5,281 from 5,436 in the third quarter of 2018. In the third quarter of 2019, 3,321 federal credit unions and 1,960 federally insured, state-chartered credit unions existed.
• Total assets reported for federally insured credit unions rose by 6.8% to $1.54 trillion, up $98 billion from a year ago.
• Net income at an annual rate totaled $14.7 billion, up $1.1 billion (8%) from the previous year.
• Compared to one year earlier, the return on average assets increased slightly from 96 to 98 basis points.
• The credit union system’s net worth ratio increased from 11.21% the previous year to 11.39% in the third quarter of 2019.

Financial institution regulators issue statement on alternative data in credit underwriting

The Federal Reserve Board (Fed), Consumer Financial Protection Bureau (CFPB), FDIC, Office of the Comptroller of the Currency (OCC), and NCUA on Dec. 3, 2019, issued a joint statement regarding consumer protection implications of the use of alternative data in underwriting, including the potential risks and benefits. The statement encourages the responsible use of such alternative data and stresses the importance of a well-designed compliance management program, which includes a thorough analysis of relevant consumer protection laws and regulations prior to using alternative data. For areas where increased compliance risk is identified, appropriate testing, monitoring, and controls should be implemented to help ensure compliance.

Agencies issue final rule updating counterparty credit risk calculation for derivative contracts

On Nov. 19, 2019, the FDIC, Fed, and OCC issued a final rule to implement the standardized approach for measuring counterparty credit risk (SA-CCR) under their regulatory capital rules. The agencies indicate that the updated methodology better reflects derivatives market improvements made since the 2007-2008 financial crisis. SA-CCR replaces the existing current exposure methodology to calculate standardized total risk-weighted assets for advanced approaches banks, while nonadvanced approaches banks may elect to use either methodology. The rule includes several changes from the October 2018 proposed rule based on public comments received. 

The final rule is effective April 1, 2020, with a mandatory compliance date of Jan. 1, 2022.

Agencies finalize rule on treatment of high-volatility commercial real estate

The FDIC, Fed, and OCC, on Nov. 19, 2019, issued a final rule to modify the treatment of high-volatility commercial real estate (HVCRE) exposure. The rule revises the definition of HVCRE exposure to align with the definition of “high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan,” from Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. 

The final rule also clarifies the capital treatment for loans using the revised HVCRE exposure definition, requiring a 150% risk weight for loans that meet the revised definition of an HVCRE exposure under the capital rule’s standard approach.

The final rule is effective April 1, 2020.

FDIC and OCC propose rules to clarify interest-rate authority

The FDIC on Nov. 19, 2019, and the OCC on Nov. 18, 2019, proposed rules to clarify that when a bank sells, assigns, or otherwise transfers a loan, interest rates permissible prior to the transfer continue to be permissible following the transfer.

Comments on the proposed OCC rule are due Jan. 21, 2020. Comments on the proposed FDIC rule are due Feb. 4, 2020.

FDIC seeks comment on regulatory actions

As announced on Dec. 3, 2019, the FDIC is seeking comments on approaches it is considering for analyzing the effects of its regulatory actions. Factors to be considered include effects on bank safety, bank soundness, and public confidence; effects on the treatment of bank customers or financially underserved communities; effects on the potential for illicit use of the financial system; effects on the availability of bank credit and other financial services; and compliance costs or profitability effects on banks or the public. 

Comments are due Jan. 28, 2020.

Agencies issue guidance on hemp banking

The FDIC, Fed, OCC, and Financial Crimes Enforcement Network (FinCEN), along with state bank regulators, on Dec. 3, 2019, issued a statement clarifying that banks are not required to file suspicious activity reports on customers solely because they are engaged in legal hemp production, as hemp is no longer considered a Schedule I controlled substance. 

The statement also outlines background information on the U.S. Department of Agriculture’s Oct. 31, 2019, interim final rule on the production of hemp and indicates that FinCEN will issue additional guidance after further reviewing the interim final rule.

Federal regulators revise Business Continuity Management booklet

The members of the Federal Financial Institutions Examination Council (FFIEC), on Nov. 14, 2019, issued an updated Business Continuity Management booklet, which is part of the FFIEC Information Technology Examination Handbook. This booklet replaces the Business Continuity Planning booklet issued in 2015.

The updated booklet emphasizes “the continued maintenance of systems and controls for the resilience and continuity of operations” rather than just the planning process to recover operations after a disruption.

From the Consumer Financial Protection Bureau (CFPB)

CFPB issues notice of proposed rulemaking related to remittance rule

On Dec. 3, 2019, the CFPB proposed changes to the Regulation E remittance rule, which establishes protections for consumers sending international money transfers. 

The first proposed change is to make permanent a temporary exception allowing institutions to estimate certain exchange rates and third-party fees in disclosures to consumers. The exception currently is set to expire July 21, 2020. 

Additionally, the proposal increases the safe harbor threshold for determining whether an institution is a remittance transfer provider – and therefore subject to the remittance rule – from 100 remittance transfers annually to 500. The CFPB estimates that the proposed threshold change will reduce regulatory burden on approximately 400 banks and 250 credit unions.

Comments on the proposed rule are due Jan. 21, 2020.

From the Financial Accounting Standards Board (FASB)

FASB issues guidance on negative allowances for PCD assets and other clarifications

On Nov. 26, 2019, the FASB issued Accounting Standards Update (ASU) No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” to make narrow-scope improvements to the credit losses standard. Most significantly the standard permits entities to recognize expected recoveries (negative allowances) of previously written-off or expected-to-be-written-off purchased credit deteriorated (PCD) assets. However, recoveries or expected recoveries of the unamortized noncredit discount or premium would not be included in the allowance for credit loss. The ASU retains existing guidance that prohibits entities from recognizing a negative allowance on available-for-sale debt securities.

Other technical improvements include:

• For troubled debt restructurings, transition relief is provided to permit entities to calculate the prepayment-adjusted effective interest rate using prepayment assumptions as of the date of adoption.
• As a practical expedient, entities would be allowed to exclude the accrued interest receivables component of amortized cost basis from certain disclosures when the accrued interest receivables are measured and presented separately from the other components of amortized cost basis.
• For the collateral maintenance practical expedient, the scope and methodology for estimating credit losses when applying the collateral maintenance practical expedient in paragraph 326-20-35-6 are clarified.

The amendments have the same effective dates as the credit losses standard for entities that have not adopted that standard. For entities that early adopted the credit losses standard, the amendments are effective for fiscal years beginning after Dec. 15, 2019, and interim periods therein.

FASB proposes codification improvements

The FASB has a standing project on its agenda to address suggestions received from stakeholders and to make other incremental improvements to GAAP. On Nov. 26, 2019, the FASB issued a proposed ASU, “Codification Improvements.” Although the proposed ASU covers a number of topics, the ones most relevant for financial institutions include:

• “Receivables” (Topic 310)
• “Financial Instruments – Credit Losses” (Topic 326)
• “Intangibles – Goodwill and Other” (Topic 350)
• “Business Combinations (Topic 805)
• “Derivatives and Hedging” (Topic 815)
• “Fair Value Measurement” (Topic 820)
• “Financial Instruments” (Topic 825)
• “Transfers and Servicing” (Topic 860)
• “Financial Services – Depository and Lending” (Topic 942)

The proposed changes clarify the Accounting Standards Codification or correct unintended application of guidance. They are not expected to have a significant effect on current accounting practice or create a substantial administrative cost for most entities.

Comments are due Dec. 26, 2019.

From the Securities and Exchange Commission (SEC)

Staff issues guidance on CECL

On Nov. 19, 2019, the SEC issued Staff Accounting Bulletin (SAB) 119: “Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326.” Presented in a question and answer format, SAB 119 updates existing staff guidance on developing a systematic methodology for estimating credit losses, and it explains the documentation the staff typically would expect from registrants in support of estimates of current expected credit losses (CECL) for lending activities, when material. SABs represent staff interpretations and practices and are not official SEC rules or interpretations. SAB 119 is applicable upon a registrant’s adoption of Topic 326, and nothing in the SAB should be read to accelerate or delay the effective dates of the standard as modified by the FASB.

SEC presents at the AICPA Conference on Current SEC and PCAOB Developments

The American Institute of CPAs (AICPA) held its annual Conference on Current SEC and PCAOB Developments in Washington, D.C., Dec. 9-11, 2019.

Chair Jay Clayton and Chief Accountant Sagar Teotia kicked off the SEC’s participation with a joint discussion of multiple topics, including the role accountants and auditors play in protecting investors and supporting capital formation. Other topics they addressed included the importance of audit committees, the transition away from the London Interbank Offered Rate (LIBOR), non-GAAP measures, the SEC’s Office of the Chief Accountant’s consultation process, and the implementation of new accounting standards.

SEC representatives delivered remarks:

• Teotia – statement on background and role of the office of the chief accountant and the office’s ongoing priorities, including engagement with stakeholders; oversight of the FASB; new accounting standards and current FASB standard-setting; oversight of the Public Company Accounting Oversight Board (PCAOB); international accounting, audit, and disclosure matters; staff guidance and other initiatives; and other significant areas such as internal control over financial reporting, audit committees, and technology and innovation 
• Louis J. Collins, professional accounting fellow – remarks on current state, initial observations, and comparability of critical audit matters (CAMs) implementation
• Lauren K. Alexander, professional accounting fellow – remarks on consultations related to the new revenue recognition standard, specifically principal versus agent guidance, and observations from a consultation on the new credit losses standard
• Aaron Shaw, professional accounting fellow – remarks on application of the revenue standard to a sale and leaseback transaction and determination of whether a registrant is the primary beneficiary of a variable interest entity
• Jamie N. Davis, professional accounting fellow – remarks on discontinuation of LIBOR, including effects on cash flow hedges, efforts of the FASB to address the discontinuation of LIBOR, and amendments to equity-classified preferred stock instruments that use LIBOR
• Nipa Patel, professional accounting fellow – remarks on audit standard-setting including the SEC’s oversight responsibilities, PCAOB standard-setting, and international audit standard-setting
• Erin Bennett, professional accounting fellow – remarks on application of equity method accounting, implementation of the new lease accounting standard, and collectability of lease payments
• Susan M. Mercier, professional accounting fellow – remarks on consultations related to the new revenue recognition standard, specifically related to identification of performance obligations 
• Vassilios Karapanos, associate chief accountant – remarks on auditor independence related to lending relationships and frequently asked questions on independence updated during 2019

Corp Fin presents at the AICPA Conference on Current SEC and PCAOB Developments

At the AICPA Conference on Current SEC and PCAOB Developments, SEC Division of Corporation Finance (Corp Fin) members, including William Hinman, director; Kyle Moffatt, division chief accountant; Patrick Gilmore, deputy chief accountant; Lindsay McCord, deputy chief accountant; and Craig Olinger, senior adviser to the chief accountant, discussed the following topics:

• The staff review of filings to understand, but not necessarily issue comments on, registrant disclosures regarding:
  o Cybersecurity
  o Brexit
  o LIBOR
  o Sustainability reporting
• Status of various rulemakings (for example, acquisition and dispositions of businesses, guarantor financial statements, and the definition of accelerated and large accelerated filer)
• CAMs and staff filing reviews
• Impact of stock buybacks on compensation discussion and analysis
• Observations on waiver requests under Rule 3-13
• Non-GAAP measures
• Disclosures related to supplier finance arrangements, particularly within the context of management’s discussion and analysis
• Predecessor financial statements
• International reporting issues

SEC appoints two new deputy chief accountants

The SEC appointed John Vanosdall and Paul Munter deputy chief accountants in the Office of the Chief Accountant (OCA) as announced on Dec. 3, 2019. Vanosdall will head the OCA’s accounting group. Most recently, he was a partner at PricewaterhouseCoopers LLP, where he concentrated on a range of technical accounting and mergers and acquisitions matters. Previously, he served as an SEC professional accounting fellow.

Munter will lead the OCA’s international matters activities. Munter joins the SEC from the University of Colorado Boulder, where he was a senior instructor of accounting. He is a retired partner from KPMG LLP, where he served as the lead technical partner for the U.S. firm’s international accounting and International Financial Reporting Standards areas.

SEC names chief of the Cyber Unit

On Dec. 2, 2019, the SEC named Kristina Littman chief of the Division of Enforcement’s Cyber Unit. The Cyber Unit focuses on protecting investors and markets from cyberrelated misconduct. Littman joined the SEC’s Division of Enforcement in 2010 as a staff attorney. Since then, she has held senior attorney positions in the Market Abuse Unit and the Trial Unit.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB presents at the AICPA Conference on Current SEC and PCAOB Developments

The PCAOB provided its perspectives at the conference in three separate sessions:

• The five members of the board engaged in a panel discussion, which included remarks on the reaffirmation of the board’s five-year strategic plan, the importance of audit quality (a focus of the strategic plan), changes to the PCAOB’s inspection program aimed at improving effectiveness and efficiency, changes to inspection reports to improve readability and understandability, and the board’s focus on engagement with issuer audit committees.
• Megan Zietsman, the PCAOB chief auditor, provided an update on PCAOB standard-setting activities including CAMs, an upcoming concept release on changes to quality control standards, consideration of audit firm use of technology or automated tools, and the final standards on auditing estimates and using the work of specialists.
• George Botic, director of the Division of Registrations and Inspections, and Mark Adler, acting director of the Division of Enforcement and Investigations, each presented prepared remarks in a joint session. Among other topics, Botic discussed in more detail the effectiveness and efficiency changes planned for the inspection process and the outlook for 2020 inspections. Adler highlighted the PCAOB’s significant enforcement cases in 2019 against both global network firms and nonaffiliated firms and their associated individuals, and he shared thoughts on enforcement priorities in the next year.

PCAOB issues critical audit matters publication

The PCAOB released, on Dec. 10, 2019, its first “Critical Audit Matters Spotlight” report presenting observations from the PCAOB’s review of CAMs on 12 large accelerated filers and including information about the PCAOB’s outreach and data analysis activities. According to the publication, the board believes “that sharing our initial observations from the experiences of the first adopters of CAM requirements could help auditors, companies, audit committees, and other stakeholders.”

PCAOB approves 2020 budget and five-year strategic plan

On Nov. 19, 2019, the PCAOB approved its fiscal year 2020 budget and its five-year strategic plan for 2019 through 2023. The strategic plan guides the PCAOB’s programs, operations, and budget. 

The plan includes the following strategic goals:

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• “Drive improvement in the quality of audit services through a combination of prevention, detection, deterrence, and remediation.”
• “Anticipate and respond to the changing environment, including emerging technologies and related risks and opportunities.”
• “Enhance transparency and accessibility through proactive stakeholder engagement.”
• “Pursue operational excellence through efficient and effective use of our resources, information, and technology.”
• “Develop, empower, and reward our people to achieve our shared goals.”

 

From the American Institute of Certified Public Accountants (AICPA)

AICPA amends the description of materiality

To eliminate inconsistencies, the AICPA’s Auditing Standards Board on Dec. 5, 2019, issued Statement on Auditing Standards No. 138, “Amendments to the Description of the Concept of Materiality,” and Statement on Standards for Attestation Engagements No. 20 of the same title, to more closely align the materiality concepts discussed in AICPA Professional Standards with the materiality descriptions used by the U.S. judicial system, the PCAOB, the SEC, and the FASB. 

The standards are effective for audits of financial statements for periods ending on or after Dec. 15, 2020, and practitioners’ examination and review reports dated on or after Dec. 15, 2020.

AICPA issues working drafts on CECL implementation issues

The AICPA’s Financial Reporting Executive Committee (FinREC) exposed for public comment two new working drafts on implementing CECL. The drafts relate primarily to the insurance industry. The final guidance will be included in the AICPA’s forthcoming Credit Losses Audit and Accounting Guide. Issues exposed for public comment include CECL considerations for reinsurance recoverables and premiums receivable.

Comments are due on Feb. 10, 2020.

From the Center for Audit Quality (CAQ)

CAQ document addresses auditors’ role in company-prepared information

On Dec. 3, 2019, the CAQ published “The Role of Auditors in Company-Prepared Information: Present and Future” to help stakeholders understand the current role of auditors in various types of company-prepared and publicly disclosed information. The document addresses how auditors can play a greater role in strengthening the reliability of decision-useful information published outside the audited financial statements.

CAQ requests proposals for auditing-related research

On Nov. 14, 2019, the CAQ issued its annual request for proposals to fund independent academic research on projects of interest to the auditing profession. Topics of interest for 2020 include corporate disclosures of nonfinancial information and non-GAAP measures. 

The request also identifies several topics of continued interest including:

• Critical audit matters
• Innovative technologies
• Materiality
• Professional skepticism
• Auditing accounting estimates and fair value measurements
• Audits of internal control over financial reporting 
• Auditor risk assessments
• Fraudulent financial reporting
• Boards’ and audit committees’ effectiveness

Proposals should be submitted through the online submission form and are due March 16, 2020.