FASB tentatively delays standards effective dates for some entities

| 7/24/2019
Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

Agencies finalize regulatory capital simplification rule

The Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC), and the Board of Governors of the Federal Reserve System (Fed), on July 9, 2019, jointly issued a final rule to simplify the Basel III regulatory capital calculations for all banking organizations that do not use the “advanced approaches” capital framework (generally banks with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure). The final rule simplifies the treatment of assets subject to common equity tier one capital (CET1) threshold deductions and limitations on minority interest.

The comprehensive final rule effectively increases the CET1 threshold deduction for mortgage servicing assets (MSAs), certain deferred tax assets (DTAs) arising from temporary differences, and investments in the capital of unconsolidated financial institutions that individually exceed 25% of CET1. The final rule also simplifies the calculation for the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties (often referred to as a minority interest) that is includable in regulatory capital. Any MSAs or temporary difference DTAs not deducted from capital are subject to 250% risk weighting.

The final rule takes effect April 1, 2020.

Agencies finalize Volcker rule/proprietary trading exemption for community banks

The OCC, FDIC, Fed, Commodity Futures Trading Commission (CFTC), and Securities and Exchange Commission (SEC) on July 9, 2019, jointly issued a final rule to amend the regulations implementing the Bank Holding Company Act’s prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds (the Volcker rule). The revisions were required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).

To qualify for the exemption, community banks and their controlling entities must have $10 billion or less in total consolidated assets and total trading assets and liabilities equal to 5% or less of total consolidated assets.

The agencies confirmed that a bank or savings association can rely on its most recent call report and holding companies on their FR Y-9C to determine eligibility for the exclusion. In addition, no other action is required by the agencies for the exclusion to take effect.

The rule took effect July 22, 2019.

FDIC introduces new publication on consumer compliance supervision

On June 13, 2019, the FDIC released the first publication of “Consumer Compliance Supervisory Highlights,” which is intended to give FDIC-supervised institutions and the public information related to the agency’s consumer compliance supervision activities.

Among the consumer compliance issues identified by the FDIC are disclosure issues with overdraft protection programs, Real Estate Settlement Procedures Act violations, noncompliance with and misapplications of Regulation E, inadequate disclosures associated with deferred payment loan programs, and institutions not accurately calculating or properly disclosing finance charges associated with certain lines of credit.

OCC rescinds guidance on higher-LTV loan programs

The OCC, on June 19, 2019, rescinded OCC Bulletin 2017-28, “Mortgage Lending: Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization,” issued Aug. 21, 2017. In its new bulletin, the OCC acknowledges, “banks have engaged in responsible, innovative lending strategies that are different from that bulletin’s specific program parameters while being consistent with its goals.”

The OCC encourages banks interested in making higher-loan-to-value (LTV) loans in communities targeted for federal, state, or municipal governmental entity revitalization to:
  • Refer to the core lending principles provided in the bulletin.
  • Review plans to offer higher-LTV loans with their OCC supervisory office before implementation, specifically if the loans deviate substantially from the bank’s existing strategic or business plans.

Agencies propose changes to HVCRE treatment of single-family land development loans

On July 12, 2019, the FDIC, OCC, and Fed jointly issued a notice of proposed rulemaking (NPR) on the treatment of loans that finance land development for purposes of the one- to four-family residential properties exclusion in the definition of high-volatility commercial real estate (HVCRE) exposure in the agencies’ regulatory capital rule. This proposal would expand on the agencies’ Sept. 28, 2018, NPR, which proposed to revise the definition of HVCRE exposure in the regulatory capital rule as required by EGRRCPA Section 214.

After reviewing the comments related to lot development loans from the September 2018 NPR, the agencies determined that they needed to further consider and clarify the regulatory capital treatment of such loans before finalizing the HVCRE exposure definition. This latest NPR addresses the treatment of loans financing the development of land for one- to four-family residential properties. The agencies are seeking input on whether such loans should be excluded from the definition of HVCRE in their final regulatory capital rules.

The proposal would revise the language of an HVCRE exposure to provide that the one- to four-family residential property exclusion would not include credit facilities that finance activities solely for land development, such as the laying of sewers and water pipes without any construction of one- to four-family structures.

Comments are due Aug. 22, 2019.

NCUA proposes delaying risk-based capital rule

At its June 20, 2019, meeting, the National Credit Union Administration (NCUA) board approved a proposed rule delaying the effective date of the agency’s risk-based capital rule to Jan. 1, 2022. In the announcement, the NCUA indicated that the proposed delay would give the NCUA board time to consider additional improvements to credit union capital standards, such as subordinated debt authority, capital treatment for asset securitization, and a community bank leverage ratio equivalent for credit unions. The NCUA also said the delay would give the agency time to change the rule before it goes into effect.

During the delay, the NCUA’s current prompt corrective action requirements are expected to remain in effect.

Comments are due July 26, 2019.

From the Financial Accounting Standards Board (FASB)

FASB tentatively delays effective dates of major accounting standards

At its July 17, 2019, public meeting, the FASB tentatively decided to delay the effective dates of three accounting standards for certain SEC filers, public business entities (PBEs), and private companies. These affected Accounting Standards Updates (ASUs) are:
  • ASU 2016-02, “Leases (Topic 842)”
  • ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”
  • ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” 
The leases accounting proposal would retain the current effective date for PBEs, not-for-profit conduit bond obligors, and employee benefit plans that file or furnish financial statements with the SEC of fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years, and extend the effective date for all entities, other than PBEs, to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

The proposal for hedging would retain the existing effective date for PBEs, which is fiscal years beginning after Dec. 15, 2018, including interim periods within those fiscal years, and defer the effective dates for entities other an PBEs to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.

The proposal for credit losses would maintain the current effective date for SEC filers excluding smaller reporting companies (SRCs) of fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. The proposal for credit losses will be effective for all other entities, including SRCs, in fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years.

The FASB also voted to delay the effective date of ASU 2018-12, “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts,” for all entities. The proposed effective date will be fiscal years beginning after Dec. 15, 2021, and interim periods within those fiscal years for SEC filers excluding SRCs. All other entities will adopt the proposed change in fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024.

The FASB plans to issue two proposed ASUs in the near future to expose the tentative decisions for public comment. The comment period is expected to last 30 days.

More details can be found at crowe.com.

FASB proposes ASU on negative allowances for PCD assets and other clarifications

On June 27, 2019, the FASB issued a proposed ASU, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” to make improvements to the credit losses standard. Most significantly the proposal would permit 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 board decided to retain existing guidance that prohibits entities from recognizing a negative allowance on available-for-sale debt securities.

Other technical improvements include:
  • For troubled debt restructurings, FASB provided transition relief 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 proposal would clarify the scope and methodology for estimating credit losses when applying the collateral maintenance practical expedient in paragraph 326-20-35-6.

Comments are due July 29, 2019.

FASB issues second Q&A on expected credit losses standard and plans CECL workshops

On July 17, 2019, the FASB staff issued its second question-and-answer (Q&A) document focusing on ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Within the Q&A document, the staff provides answers to 16 frequently asked questions on the development of an estimate of expected credit losses. Topics covered include modeling requirements, using historical loss information, internal and external data sources, developing reasonable and supportable forecasts, the reversion to historical loss information, and qualitative factor adjustments among other topics.

Additionally, the board authorized the FASB staff to plan a series of current expected credit losses standard (CECL) educational workshops to be held around the country. More information about the workshops will be available on the FASB website.

FASB discusses accounting relief from reference rate reform

At the June 19, 2019, board meeting, the FASB addressed reference rate reform to facilitate the effects of the London Interbank Offered Rate (LIBOR) transition on financial reporting, which is one of the FASB’s top priorities. The board’s tentative decisions represent a significant move toward approving accounting relief for entities that will be required to modify contracts as a result of new global reference rates. The tentative decisions included that for a contract (including loans, debt, leases, and other arrangements) that meets specific criteria, a change in the contract’s terms that are either essential to or related to the replacement of an interest rate would qualify for the relief from evaluation under certain accounting guidance. Examples include the assessment to determine whether a modification of a loan or debt instrument is a troubled debt restructuring, modification, or extinguishment among other relief areas.

The FASB has a broad project to address potential accounting concerns expected to develop from the transition away from LIBOR, and, in late 2018, the board added the secured overnight financing rate as a permissible benchmark rate for hedge accounting purposes. At a public meeting on July 17, 2019, the FASB discussed other reference rate issues including hedging-specific relief, transition method, disclosures, and the proposed end date for relief.

FASB requests public company input on segment reporting

The FASB, on June 25, 2019, announced that it is looking for public companies to take part in a study on potential improvements to the segment disclosure requirements. The board is collecting information – all of which will be kept confidential – on the operability of potential improvements to the segment disclosure requirements and identification of potential unintended consequences.

The FASB plans to use the feedback to help inform the board about the costs and benefits of the various improvement ideas being considered. A summary of the findings will be presented to the board at a future public board meeting.

The study, which is expected to last no more than four months, is the FASB’s second study on segment reporting. In 2018, the first study focused on improving the aggregation criteria and determining the reportable segments.

Interested public companies can register for the study on the FASB website.

FASB requests comment on certain identifiable intangible assets and subsequent accounting for goodwill

The FASB issued, on July 9, 2019, an Invitation to Comment (ITC) that asks for stakeholder input on the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. In conjunction with this ITC, the FASB released a video that provides a background on the accounting and an overview of ITC.

Topics for consideration in the ITC include 1) whether to change the subsequent accounting for goodwill, 2) whether to modify the recognition of intangible assets in a business combination, 3) whether to add or change disclosures about goodwill and intangible assets, and 4) comparability and scope issues. Private companies and not-for-profit organizations currently have accounting alternatives for accounting for certain identifiable intangible assets and goodwill that are not available to PBEs. Prior feedback has been missed; therefore, the staff is seeking additional input from a broad base of stakeholders if changes need to be made by the board.

Comments are due Oct. 7, 2019. After that, the FASB plans to host a formal roundtable on this topic.

From the Securities and Exchange Commission (SEC)

SEC staff releases statement on LIBOR transition and potential risks

On July 12, 2019, the SEC staff published a statement on LIBOR transition that encourages market participants to proactively manage their transition away from LIBOR. The statement identifies several areas that warrant increased attention during the transition period and provides guidance on certain items. Areas addressed in the statement include: 
  • Identification of existing contracts that extend past 2021 to determine their exposure to LIBOR
  • Consideration of whether contracts entered into in the future should reference an alternative rate to LIBOR or include effective fallback language
  • Guidance for how registrants might respond to other business risks associated with the discontinuation of LIBOR such as those related to strategy, products, processes, and information systems
  • Questions to consider to understand and mitigate the risks related to the transition from LIBOR
  • Potential alternative reference rates that may be used
  • Guidance from several SEC divisions on responding to risks resulting from the impact of the discontinuation of LIBOR

It is expected that parties reporting information used to set LIBOR will stop doing so after 2021.

The SEC staff warns, “For many market participants, waiting until all open questions have been answered to begin this important work likely could prove to be too late to accomplish the challenging task required.”

SEC staff holds roundtable on short-termism

The SEC’s Division of Corporation Finance (Corp Fin) hosted a public roundtable on July 18, 2019, to gather information from investors, issuers, and other market participants about the impact of short-termism on capital markets and whether the SEC reporting system and regulations should be modified to address these concerns.

The agenda had these panel discussion topics:
  • “Impact of a Short-Term Focus on Our Capital Markets,” to explore the causes and effects of a short-term focus on capital markets, and identify potential market practices and regulatory changes that could encourage long-term thinking and investment.
  • “Our Periodic Reporting System’s Role in Fostering a Long-Term Focus,” to discuss the SEC’s periodic reporting system and what specific regulatory changes could foster a longer-term focus in the system.

SEC announces departure of deputy chief accountant

The SEC announced, on July 9, 2019, that Julie A. Erhardt, deputy chief accountant (technology and innovation) in the Office of the Chief Accountant, plans to leave the SEC in July.

During her 14 years at the SEC, Erhardt worked on high-quality international accounting, auditing, and disclosure standards through policy-making, interpretative, consultative, and outreach activities. In addition, she assessed and advised on financial reporting risk and internal SEC risk.

Allison Herren Lee sworn in as SEC commissioner

The SEC announced that on July 8, 2019, Allison Herren Lee was sworn into office as an SEC commissioner with a term ending June 5, 2022. President Donald Trump nominated Lee, who was unanimously confirmed by the U.S. Senate. Chairman Jay Clayton said that Lee’s “expertise in securities law, including from her prior tenure at the Commission, will be invaluable to our efforts to advance the interests of investors and our markets.”

Commissioner Lee has more than 20 years of experience practicing securities law and has written, lectured, and taught courses internationally on financial regulation and corporate law. She served previously for more than 10 years in several roles at the SEC, including as counsel to Commissioner Kara Stein and as senior counsel in the Division of Enforcement’s Complex Financial Instruments Unit.

SEC announces Sagar Teotia as chief accountant

On July 3, 2019, the SEC announced that it has named Sagar Teotia to be chief accountant, after he has recently served as acting chief accountant. In the position, Teotia will be the principal adviser on accounting and auditing matters, and he will direct the 45 staff members in the SEC’s Office of the Chief Accountant. He will also assist the SEC in its oversight of the FASB and the Public Company Accounting Oversight Board. Prior to this position, Teotia served as deputy chief accountant since 2017.

Corp Fin updates Financial Reporting Manual

Corp Fin published an updated Financial Reporting Manual on July 1, 2019. The manual provides informal internal guidance from the Corp Fin staff on various accounting topics, financial reporting topics, and SEC rules.

The updated sections are marked “Last updated: 7/1/2019.” Among them:
  • Section 1610. Certain guidance on the effect of adopting new accounting standards on selected financial data is removed.
  • Topic 2, 2020.1. Application of Rule 3-13 and Note 5 to Rule 8-01 of Regulation S-X is clarified.
  • Sections 2030.1, 2030.3. Guidance has been removed. Requests to omit financial statements should be submitted through the Rule 3-13 waiver process.
  • Section 5240. Information is consolidated with note to Topic 2.
  • Section 10110. Revenue threshold for emerging growth companies (EGCs) is updated pursuant to SEC Release 33-10332.

SEC announces new executive staff members

The SEC released, on June 26, 2019, a roster of Chairman Jay Clayton’s executive staff, including several individuals who have joined the office recently. The executive staff advises the chairman on all matters before the SEC, works with agency staff, and helps Clayton perform all day-to-day operations needed to fulfill the SEC’s mission.

Positions listed in the announcement include chief of staff, deputy chief of staff, director of administration, chief counsel, and several senior advisers.

SEC amends auditor independence rules

The SEC adopted, on June 18, 2019, a final rule, “Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships,” that amends the SEC’s auditor independence rules about the analysis that must be done to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Provision). The amendments will do the following:
  • Focus the analysis on beneficial ownership rather than on both record and beneficial ownership.
  • Replace the existing 10% bright-line shareholder ownership test with a “significant influence” test.
  • Add a “known through reasonable inquiry” standard for identifying beneficial owners of the audit client’s equity securities.
  • For the definition of “audit client,” for a fund under audit, exclude any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

The amendments are effective Oct. 3, 2019.

SEC seeks comment on changes to private securities offering exemptions

With the intention of expanding investment opportunities and promoting capital formation, the SEC issued, on June 18, 2019, a request for public comment on ways to simplify, harmonize, and improve the exempt offering framework.

The SEC is looking for input on possible changes to the exemptions for both companies and investors, including identifying potential overlap or gaps within the framework. The release considers limitations on who can invest in certain exempt offerings, or the amount they can invest; steps to assist in the transition from one offering to another or to a registered offering; expanding an entity’s ability to raise capital through pooled investment funds; and revising exemptions covering the secondary trading of securities initially issued in exempt offerings.

Comments are due Sept. 24, 2019.

Leaders of SEC, CFTC, and FCA release statement on credit derivatives markets

On June 24, 2019, SEC Chairman Jay Clayton, CFTC Chairman J. Christopher Giancarlo, and U.K. Financial Conduct Authority (FCA) Chief Executive Andrew Bailey issued a joint statement concerning the credit derivatives markets:

“The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as ‘manufactured credit events,’ may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally. These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.”

According to the leaders, each of their agencies will work together to prioritize the exploration of avenues to address these concerns and promote transparency, accountability, integrity, good conduct, and investor protection in these markets.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB releases new resources on CAMs

The PCAOB released, on July 11, 2019, two new resource documents that give audit committees and investors information about the requirement for auditors to communicate critical audit matters (CAMs) in the auditors’ reports. The new resources are “Audit Committee Resource: Critical Audit Matters” and “Investor Resource: Critical Audit Matters.”

The audit committee resource is intended to inform audit committees in engaging with their auditors on the CAMs requirements. It includes an overview and basics of CAMs as well as PCAOB staff responses to frequently asked questions. It also provides questions audit committees might consider asking their auditors.

The investor resource gives investors information about changes to the auditor’s report and understanding the auditor’s report, includes FAQs about CAMs, and covers the implementation of the standard.

SEC approves new PCAOB standards on estimates and using the work of specialists

On July 1, 2019, the SEC approved PCAOB adoption of 1) the new standard to enhance the requirements that apply when auditing accounting estimates, including fair value measurements, and 2) amendments to the auditing standards to strengthen requirements for auditors using the work of specialists in an audit.

The SEC also approved the application of both standards to the audits of EGCs as necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.

The new standard and amendments are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020. The PCAOB has created implementation pages addressing the new estimates standard and the amendments on the auditor’s use of the work of specialists.

PCAOB announces new chief economist

On June 17, 2019, the PCAOB announced that Dr. Nayantara Hensel has been appointed as the PCAOB’s chief economist and the director of the Office of Economic and Risk Analysis. Hensel will be responsible for advancing the PCAOB’s economic analyses, research programs, and policy analyses. The research and analyses will help guide several PCAOB activities, including standard-setting, inspection, and enforcement.

Hensel most recently served as an associate director at the Federal Housing Finance Agency, and prior to that she served as the Department of the Navy’s chief economist.

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Sydney Garmong
Sydney Garmong
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