FASB issues several clarifications; SEC proposes ICFR changes; and CAQ issues CECL tool

| 5/15/2019
Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

Fed issues proposal on determining bank control

The Board of Governors of the Federal Reserve System (Fed), on April 23, 2019, issued a proposal and an invitation for comment on revised regulations for determining whether a company can exercise a controlling influence over another company for purposes of the Bank Holding Company Act and the Home Owners’ Loan Act.

The Fed indicated that by expanding the number of presumptions for use in such determinations of control, the revised rules would add transparency on the types of relationships that the Fed would view as supporting a determination of control. At the April 23, 2019, open board meeting, Fed staff commented that the proposal provides additional clarity and transparency in the rules “for banking organizations to make investment in nonbank companies including fintech [financial technology] companies.”

The comprehensive Fed proposal includes a tiered structure for the revised presumptions of control, based on the level of voting ownership at three different levels: 5%, 10%, and 15%. Additional factors, including the size of a company’s total equity investment, rights to director representation, and the scope of business relationships, also would be considered.

The Fed’s release includes a chart showing how different combinations of the factors would or would not result in a determination of control.

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

OCC proposes changes to OREO regulations

On April 24, 2019, the Office of the Comptroller of the Currency (OCC) issued a notice of proposed rulemaking (NPR) to update its regulations on other real estate owned (OREO) for national banks and federal savings associations. OREO generally refers to real estate acquired in satisfaction of debts previously contracted and real estate no longer used or planned for banking activities.

The proposal would revise a number of definitions and remove certain appendixes. Additionally, the proposal addresses the holding period for OREO, methods of disposition for OREO, applicable appraisal requirements and permissible expenditures on OREO, and notification requirements. The proposal also would remove outdated capital rules for national banks and federal savings associations, including provisions related to OREO.

Comments are due June 24, 2019.

OCC seeks comments on proposed Innovation Pilot Program

The OCC opened, on April 30, 2019, a 45-day public comment period on a proposed Innovation Pilot Program. The voluntary program would allow eligible entities to get regulatory input early in the testing of innovative products, services, or processes that might benefit consumers, businesses, financial institutions, and communities.

Participation in the program would be open to OCC-supervised financial institutions, including those that engage a third party to offer the innovative product or activity. A pilot may be proposed by an entity individually or as a collaboration. The program looks to “build on the OCC’s innovation initiatives to date and complement the agency’s vision to add value through constructive, proactive supervision and to serve as a valuable resource to industry stakeholders.”

Comments are due June 14, 2019.

NCUA considers changes to lender compensation regulations

On April 18, 2019, the National Credit Union Administration (NCUA) board approved the issuance of an advance notice of proposed rulemaking (ANPR) to solicit comments on ways to improve the agency’s regulations limiting compensation in connection with loans and lines of credit to members.

As part of its regulatory reform agenda, the NCUA is considering modernizing the current regulation, which addresses direct or indirect commissions, fees, or other compensation to credit union officials, employees, or their family members.

The ANPR requests feedback in the following areas:
  • “Providing greater flexibility on compensation plans associated with lending while controlling related risks;
  • “Determining loan metrics, such as loan volume, as part of compensation plans; and
  • “Defining the structure and understanding industry standards for such plans.”
Comments are due June 24, 2019.

From the Consumer Financial Protection Bureau (CFPB)

CFPB revises policy regarding civil investigative demands

The CFPB, on April 23, 2019, announced changes to policies regarding civil investigative demands (CIDs) to improve transparency and help ensure they provide more information about the potentially wrongful conduct under investigation.

In the announcement, the CFPB stated that “CIDs will provide more information about the potentially applicable provisions of law that may have been violated.” Additionally, “in investigations where determining the extent of the Bureau’s authority over the relevant activity is one of the significant purposes of the investigation, staff may specifically include that issue in the CID in the interests of further transparency.”

The new policy aligns with recent court decisions about notifications of purpose, and it also is consistent with a 2017 CFPB Office of Inspector General report that highlighted the importance of updating Office of Enforcement policies to reflect those court developments.

CFPB proposes changes to HMDA reporting thresholds

On May 2, 2019, the CFPB issued a comprehensive NPR that would give smaller institutions relief from data collection and reporting requirements of the Home Mortgage Disclosure Act (HMDA). The proposal outlines two alternatives to amend Regulation C that would increase the threshold for reporting data about closed-end mortgage loans so that institutions originating fewer than either 50 or 100 closed-end mortgage loans in either of the two preceding calendar years would not have to report such data as of Jan. 1, 2020. For open-end lines of credit, the CFPB is proposing to extend for another two years the current temporary coverage threshold of 500 open-end lines of credit. After Jan. 1, 2022, the open-end lines of credit threshold would be set permanently at 200.

Comments on the proposed rule are due June 12, 2019, except for comments on the Paperwork Reduction Act analysis in Part VIII of the supplementary information, which are due July 12, 2019.

In addition to the NPR, the CFPB issued an ANPR requesting feedback on the costs and benefits of the expanded HMDA data reporting requirements and previously existing data points that were revised by the 2015 HMDA final rule.

Comments on the ANPR are due July 8, 2019.

From the Office of Foreign Assets Control (OFAC)

OFAC publishes a compliance commitments framework

The U.S. Department of the Treasury’s OFAC, on May 2, 2019, published its perspective on what is needed in a sanctions compliance program. The information is aimed at organizations subject to U.S. jurisdiction, as well as foreign entities that conduct business in the United States or with U.S. persons.

A Framework for OFAC Compliance Commitments” highlights the importance of a risk-based approach for the development, implementation, and updating of a sanctions compliance program.

The guidance identifies five essential components of a sanctions compliance program:
  • Management commitment
  • Risk assessment
  • Internal controls
  • Testing and auditing
  • Training
The framework also notes that the OFAC will take into account a bank’s sanctions compliance program when imposing any penalties for a sanctions violation.

From the Financial Accounting Standards Board (FASB)

FASB issues clarifications for credit losses, recognition and measurement, and hedging

The FASB issued on April 25, 2019, Accounting Standards Update (ASU) No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which clarifies guidance related to recently issued credit losses, hedging, and recognition and measurement standards.

ASU 2019-04 includes amendments in the following categories:
  1. Codification improvements resulting from the June 11, 2018, and Nov. 1, 2018, Credit Losses Transition Resource Group (TRG) meetings
    • Issue 1A: Accrued interest
      • “Measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets.”
      • “Make an accounting policy election not to measure an allowance for credit losses on accrued interest receivable amounts if an entity writes off the uncollectible accrued interest receivable balance in a timely manner and makes certain disclosures.”
      • “Make an accounting policy election to write off accrued interest amounts by reversing interest income or recognizing credit loss expense, or a combination of both. The entity also is required to make certain disclosures.”
      • “Make an accounting policy election to present accrued interest receivable balances and the related allowance for credit losses for those accrued interest receivable balances separately from the associated financial assets on the balance sheet. If the accrued interest receivable balances and the related allowance for credit losses are not presented as a separate line item on the balance sheet, an entity should disclose the amount of accrued interest receivable balances and the related allowance for credit losses and where the balance is presented.”
      • “Elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements.”
    • Issue 1B: Transfers between classifications or categories for loans and debt securities
    • Issue 1C: Recoveries
      • Recoveries should be included when estimating the allowance for credit losses.
      • Expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off. 
  2. Codification improvements to ASU 2016-13
    • Issue 2A: Conforming amendment to Subtopic 310-40
    • Issue 2B: Conforming amendment to Subtopic 323-10
    • Issue 2C: Clarification that reinsurance recoverables are within the scope of Subtopic 326-20
    • Issue 2D: Projections of interest rate environments for variable-rate financial instruments  
    • Issue 2E: Consideration of prepayments in determining the effective interest rate  
  3. Codification improvements to ASU 2017-12 and other hedging items
    • Issue 3A: Partial-term fair value hedges of interest-rate risk
    • Issue 3B: Amortization of fair value hedge basis adjustments
    • Issue 3C: Disclosure of fair value hedge basis adjustments 
    • Issue 3D: Consideration of the hedged Contractually specified interest rate under the hypothetical derivative method
    • Issue 3E: Scope for not-for-profit entities
    • Issue 3F: Hedge accounting provisions applicable to certain private companies and not-for-profit entities
    • Issue 3G: Application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments
    • Issue 3H: ASU 2017-12 transition guidance
  4. Codification improvements to ASU 2016-01
    • Issue 4A: Scope clarifications for Subtopics 320-10 and 321-10
    • Issue 4B: Held-to-maturity debt securities fair value disclosures
      • Clarifies the board’s intent to exempt entities other than public business entities from fair value disclosure requirements for financial instruments not measured at fair value on the balance sheet
    • Issue 4C: Applicability of Topic 820 to the measurement alternative
    • Issue 4D: Remeasurement of equity securities at historical exchange rates
  5. Codification improvements resulting from the Nov. 1, 2018, Credit Losses TRG meeting
    • Issue 5A: Vintage disclosures – line-of-credit arrangements converted to term loans
      • Entities must present the amortized cost basis of line-of-credit arrangements that are converted to term loans in a separate column as illustrated in example 15.
    • Issue 5B: Contractual extensions and renewals
      • Entities should consider extension or renewal options (excluding those accounted for as derivatives in accordance with Topic 815) that are included in the original or modified contract and are not unconditionally cancellable by the entity.
The ASU provides transition, if applicable, and effective dates for each respective area. 

FASB proposes changes for disclosure and presentation

On May 6, 2019, the FASB issued a proposed ASU, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” to address matters identified by the Securities and Exchange Commission in its August 2018 Release No. 33-10532, “Disclosure Update and Simplification.”

The proposed amendments would modify the disclosure or presentation requirements and provide clarification or technical corrections to a wide range of topics within the Accounting Standards Codification. These changes are of highest interest to financial institutions:
  • Topic 440-10, “Commitments – Overall”: “Add disclosure of assets mortgaged, pledged, or otherwise subject to lien and the obligations collateralized.”
  • Topic 470-10, “Debt – Overall”: “Add disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings.”
  • Topic 860-30, “Transfers and Servicing – Secured Borrowing and Collateral”:
    • “Amend guidance to clarify that accrued interest should be included in the disclosure of liabilities incurred in securities borrowing or repurchase or resale transactions.”
    • “Add requirement to present separately the carrying amount of reverse repurchase agreements on the face of the balance sheet if that amount exceeds 10 percent of total assets.”
    • “Add disclosure of the effective interest rates of repurchase liabilities.”
    • “Add disclosure of amounts at risk with an individual counterparty if that amount exceeds more than 10 percent of stockholder’s equity.”
    • “Add disclosure of whether there are any provisions in a reverse repurchase agreement to ensure that the market value of the underlying assets remains sufficient to protect against counterparty default and, if so, the nature of those provisions.”
    • “Amend illustrative guidance to illustrate disclosure of effective interest rates of repurchase liabilities.”
Other topics include Topic 205, “Presentation of Financial Statements”; Topic 250, “Accounting Changes and Error Corrections”; Topic 260, “Earnings Per Share”; Topic 270, “Interim Reporting”; Topic 280, “Segment Reporting”; Topic 505, “Equity”; Topic 805, “Business Combinations”; Topic 810, “Consolidation”; and Topic 850, “Related Party Disclosures.”

Pages 5 through 7 of the proposal provide a summary table identifying the codification subtopics and the nature of the proposed amendments.

Comments are due June 28, 2019.

From the Securities and Exchange Commission (SEC)

SEC proposes to expand exemption from auditor attestation on internal control over financial reporting (ICFR)

On May 9, 2019, the SEC issued a proposal, “Amendments to the Accelerated Filer and Large Accelerated Filer Definitions,” to revise the definitions of “accelerated filer” and “large accelerated filer,” which would result in fewer registrants being required to obtain an auditor attestation on the effectiveness of ICFR.

The proposal generally does not change the public float thresholds used to determine filing status. Rather, it adds a revenue test for certain registrants, aimed at scoping out lower-revenue entities that are not large accelerated filers. Specifically, the SEC proposes to exempt smaller reporting companies (SCRs) with less than $100 million in revenue from the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. The proposal has no impact on the statutory exemption from Section 404(b) afforded to issuers that qualify as emerging growth companies.

For banks and similar financial institutions, the revenue test includes all gross revenues from traditional banking activities. Banking activity revenues include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. Revenues do not include gains and losses on dispositions of investment portfolio securities (although they may include gains on a trading account activity that is a regular part of the institution’s activities).

For banks with assets of $1 billion or more and subject to the Federal Deposit Insurance Corp. Improvement Act (FDICIA), this proposal has no impact on the FDICIA auditor attestation requirement.

The proposal does not change the requirement that companies establish, maintain, and provide management’s assessment on the effectiveness of ICFR. The table summarizes the proposed new definitions:

exhibit 1

The proposal also revises certain thresholds, combined with the revenue test, with respect to exiting different tiers of filer status (that is, nonaccelerated, accelerated, or large accelerated filer).

The proposal does not include an effective date, which will depend on the feedback received and timing of the rulemaking process.

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

SEC proposes changes to disclosures for acquisitions and dispositions

On May 3, 2019, the SEC issued for public comment proposed rule amendments designed to improve the information for investors about the acquisition and disposition of businesses. The goal is to facilitate more timely access to capital and to reduce financial disclosure complexity and compliance costs.

The proposal includes amendments to Rules 3-05 and 3-14, Article 11 of Regulation S-X, and related forms for requirements on information related to financial statements of businesses acquired or to be acquired and for business dispositions. For investment companies, the proposal also includes new Rule 6-11 of Regulation S-X and amendments to Form N-14 for financial reporting of acquisitions involving investment companies.

Proposed changes include, among other things:
  • Revising the significance tests by changing the investment and income tests, increasing the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business
  • Requiring the acquired business financial statements for the two most recent fiscal years instead of three years
  • Allowing disclosure of financial statements that leave out certain expenses for certain acquisitions of a component of an entity
  • Clarifying when financial statements and pro forma financial information are required
  • Removing the requirement for separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a whole fiscal year
  • Clarifying Rule 3-14 application requirements related to determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the requirements
  • Amending the pro forma financial information requirements and disclosures to improve their content and relevance
Comments are due 60 days after publication in the Federal Register.

SEC staff releases agenda for 2019 FinTech Forum

On May 31, 2019, the SEC will host a live public forum focusing on distributed ledger technology and digital assets. The forum will be webcast and then made available for later viewing. On April 24, 2019, the SEC released the agenda, which includes four panel discussions: capital formation considerations, trading and markets considerations, investment management considerations, and distributed ledger technology innovations.

SEC and FINRA announce National Compliance Outreach Program for Broker-Dealers

On April 16, 2019, the SEC and the Financial Industry Regulatory Authority (FINRA) announced that registration for the 2019 National Compliance Outreach Program for Broker-Dealers is open. The program will be June 27, 2019, at the Federal Reserve Bank of Chicago.

Designed for regulators and broker-dealer industry professionals, the program is a gathering to discuss compliance practices and promote a more effective compliance structure for investor protection. Emphasis will be on leadership insights, retail investor protection, and regulatory topics such as digital assets and cybersecurity.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB publishes 2018 Annual Report

The PCAOB released its 2018 Annual Report summarizing its operations and financial results and covering its key strategic initiatives. During 2018, the PCAOB followed a collaborative strategic planning process and performed a comprehensive organizational assessment that resulted in initiatives across all of its programs and activities.

The report highlights areas in which the PCAOB progressed in its four strategic priorities that were identified for 2018 through 2022: effective oversight, innovation, improved engagement, and process and culture optimization. To address oversight, the PCAOB focused on improvement to inspections, standard-setting activities, enforcement, economic and risk analyses, and international engagement during 2018.

Additionally, the report addresses the PCAOB’s work in its standard-setting and research projects, highlighting standards approved in 2018 and identifying data and technology and quality control as priorities for 2019. The PCAOB also plans to examine all other items on the standard-setting and research agendas to determine items to advance, items to remove, and whether to add any new items.

From the Center for Audit Quality (CAQ)

CAQ issues CECL tool for audit committees

On May 7, 2019, the CAQ released “Preparing for the New Credit Losses Standard: A Tool for Audit Committees.” This new tool is designed to assist audit committees with their oversight responsibilities in implementing the current expected credit loss (CECL) model under ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

The tool has four sections:

  1. “Understanding the Standard,” which provides an overview of the standard
  2. “Evaluating the Company’s Impact Assessment,” which offers questions for audit committees to consider when discussing the standard’s impact with management and auditors
  3. “Evaluating the Implementation Plan,” designed to help audit committees understand and evaluate management’s implementation plan
  4. “Other Important Implementation Considerations,” which covers matters such as transition methods and new disclosure requirements
The tool also includes a list of resources produced by leading auditing firms.
 

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