FASB to Issue CECL Q&A and Hold Public Roundtable

Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

FDIC issues “Quarterly Banking Profile” for third-quarter 2018

The Federal Deposit Insurance Corp. (FDIC) issued, on Nov. 20, 2018, its “Quarterly Banking Profile,” covering the third quarter. According to the report, FDIC-insured banks and savings institutions reported $62 billion net income, an increase of $14 billion (29.3 percent) from a year ago. The increase in earnings can be attributed to higher net operating revenue and a lower effective tax rate.

The report provides these additional third-quarter statistics:

• Net interest income increased 7.5 percent from the previous year, totaling $137.1 billion. The average net interest margin increased 15 basis points from the previous year, as average asset yields outpaced average funding costs. 
• Noninterest income grew 3.8 percent, driven by servicing and investment banking fees. 
• Average return on assets rose 29 basis points to 1.41 percent, the highest quarterly level since the FDIC began reporting “Quarterly Banking Profile” data in 1986. 
• Net charge-offs rose 1.6 percent from a year ago, while the number of loans that were 90 or more days past due fell 3.4 percent from the previous quarter.
• Community banks earned $6.8 billion during the third quarter, up 21.6 percent from the same period last year.

The total number of FDIC-insured commercial banks and savings institutions declined to 5,477 from 5,542 the previous quarter. The number of institutions on the FDIC’s problem bank list fell from 82 for the second quarter to 71 for the third quarter, the lowest number since 2007.

NCUA issues third-quarter 2018 performance data

The National Credit Union Administration (NCUA) reported, on Dec. 6, 2018, quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the third quarter of 2018. Highlights include:

• The number of federally insured credit unions declined to 5,436 from 5,642 in the third quarter of 2017. In the third quarter of 2018, 3,421 federal credit unions and 2,015 federally insured, state-chartered credit unions existed. 
• Total assets reported for federally insured credit unions rose by 5.6 percent to $1.44 trillion, up from $1.36 trillion a year ago. 
• Net income at an annual rate totaled $13.6 billion, up $3.1 billion (30 percent) from the previous year. 
• Compared to one year earlier, the return on average assets increased from 79 to 96 basis points. 
• The credit union system’s net worth ratio increased from 10.89 the previous year to 11.21 percent in the third quarter of 2018. 

FDIC issues request for information on small-dollar loans

On Nov. 14, 2018, the FDIC issued a request for information (RFI) to seek input on issues related to small-dollar lending, including encouraging FDIC-supervised institutions to offer small-dollar credit products reactive to customers’ needs that also are responsibly underwritten and structured. Specifically, the RFI seeks comments on the consumer demand for small-dollar credit products, the supply of small-dollar credit products presently offered, and how the FDIC can help banks offer responsible credit products.

The FDIC also seeks feedback on the obstacles that banks currently encounter in offering small-dollar credit products, how technology can play a role in offering these credit products and assessing the creditworthiness of potential borrowers, and what efforts the FDIC could undertake to enable banks to better serve this market. 

Comments are due Jan. 22, 2019.

Agencies propose raising residential real estate appraisal threshold 

The FDIC, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Board (Fed) issued a notice of proposed rulemaking on Nov. 20, 2018, that would raise the threshold for residential real estate transactions requiring an appraisal from $250,000 to $400,000. Under this proposal, residential real estate transactions exempted by the new threshold would be required to obtain an evaluation consistent with safe and sound banking practices.

The evaluations, which give an estimate of the market value of real estate, could be less demanding than appraisals because the agencies’ appraisal regulations do not require evaluations to be processed by state-certified or state-licensed appraisers. Evaluations also tend to be less costly and detailed than appraisals. Since the 1990s, evaluations have been required for transactions exempted from the appraisal requirement by the current $250,000 residential threshold.

Comments are due Feb. 5, 2019.

FFIEC releases cybersecurity resource guide 

The Federal Financial Institutions Examination Council (FFIEC) has released its “Cybersecurity Resource Guide for Financial Institutions,” offering resources to assist in financial sector resilience. The guide includes information on the Financial Sector Cyber Exercise Template, which is designed to aid smaller financial sector companies in strengthening their cybersecurity posture by providing a template for carrying out internal cybersecurity exercises, and Sheltered Harbor, an industrywide effort to improve sectorwide stability. Resources in the guide are not endorsed by the FFIEC, and the guide does not include any new regulatory guidance.

FFIEC issues statement on cyberrelated sanctions risk 

FFIEC members issued a joint statement on Nov. 5, 2018, highlighting actions the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has taken under its cyberrelated sanctions program. In addition, the statement alerts financial institutions to the potential impact such sanctions may have on risk management programs.

Risks and issues financial institutions should consider regarding the effect of sanctions on their operations and the implications of continuing to use a sanctioned entity’s products or services are described in the statement. Additional resources, including OFAC resources and the FFIEC’s IT Examination Handbook, can offer information about OFAC-related compliance and operational risk management expectations and requirements.

FFIEC provides update on examination modernization effort

On Nov. 27, 2018, the FFIEC issued an update on progress made in its project to identify and assess ways to improve efficiency, quality, and effectiveness of community financial institutions’ safety and soundness examination processes, specifically using technology more frequently. This project is part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 to help reduce any unnecessary regulatory burden on community financial institutions.

This update focuses on regulatory efforts to tailor examination plans and procedures based on the risk profiles of individual institutions. Common risk tailoring principles and practices include understanding that minimum examination procedures might be sufficient in some low-risk areas in institutions; allocating more examination resources to higher-risk areas; using call report data for monitoring risks and complexities; taking advantage of available information; customizing requests based on risk profiles, complexity, and business model; and contacting and following up with institutions between examinations.

FinCEN and regulatory agencies encourage innovation in BSA/AML compliance

On Dec. 3, 2018, the Fed, the FDIC, the Financial Crimes Enforcement Network (FinCEN), the NCUA, and the OCC issued a joint statement encouraging banks and credit unions to meet Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations by considering, evaluating, and, where appropriate, implementing innovative approaches. 

The regulatory agencies acknowledge that private sector innovation might help banks in identifying and reporting terrorist financing, money laundering, and other illicit financial activity by improving the efficiency and effectiveness of BSA/AML compliance programs. Such innovation includes using existing tools in new ways or adopting new technologies.

Banks that maintain effective BSA/AML compliance programs consistent with their risk profiles but choose not to pursue or implement innovative approaches will not be penalized or criticized. Further, the agencies do not encourage banks to use a particular method or technology to comply with BSA/AML requirements.

OCC report highlights risks for federal banking system 

In its “Semiannual Risk Perspective for Fall 2018,” released on Dec. 3, 2018, the OCC identified credit, operational, compliance, and interest-rate risks as key risks for the federal banking system. Information is presented in five areas: 

• Operating environment
• Bank performance
• Special topics in emerging risk
• Trends in key risks
• Supervisory actions, focusing on matters that may result in threats to OCC-regulated financial institutions

FDIC announces Deposit Insurance Fund Reserve Ratio exceeds minimum 

On Nov. 28, 2018, in Financial Institution Letter FIL-78-2018, the FDIC announced that on Sept. 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. This exceeded the statutorily required minimum reserve ratio of 1.35 percent before the Sept. 30, 2020, deadline set under the Dodd-Frank Wall Street Reform and Consumer Protection Act. FDIC regulations provide that, upon reaching the required minimum:

• Surcharges will cease on insured depository institutions with consolidated assets of $10 billion or more (large banks).
• Small banks will receive assessment credits for the portion that contributed to the growth in the reserve ratio from between 1.15 and 1.35 percent, which will be applied when the reserve ratio is at or above 1.38 percent.

From the Financial Accounting Standards Board (FASB)

FASB to hold credit losses public roundtable in January

At the Dec. 19, 2018, board meeting, FASB Chair Russ Golden announced the FASB plans to hold a public roundtable in January. He noted the roundtable will cover credit losses implementation issues as well as these two items: 

• Vintage disclosures: gross writeoffs and gross recoveries. At its Nov. 7, 2018, meeting, the board decided to clarify that gross recoveries and gross writeoffs should be presented by vintage year and by class of financing receivable within vintage disclosure described in paragraph 326-20-50-6 of Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326).” This issue was raised in response to the illustrative disclosure in example 15 in the ASU. The board initially decided to proceed with a separate proposed ASU with a 60-day comment period. Since that time, the board directed the staff to perform additional research. Inclusion in the roundtable is one vehicle to obtain additional input. 
• Agenda request to present a portion of credit losses in accumulated other comprehensive income (AOCI) rather than earnings. On Nov. 5, 2018, a group of primarily regional banks submitted an agenda request to the FASB. The proposed approach would retain the allowance for credit losses under the current expected credit loss (CECL) methodology on the balance sheet but would allocate credit loss expense between earnings and AOCI.

The board will coordinate with preparers to determine a date for the public roundtable, taking into account the fact that many will be busy with year-end closing.

FASB to issue Q&A on credit losses implementation issues

The FASB staff announced the planned early January issuance of a question-and-answer (Q&A) document to address ongoing questions about the acceptability of using the weighted average remaining maturity (WARM) method to comply with the CECL model. The Q&A will provide examples of the WARM method, including discussion of which portfolios might be appropriate candidates for this method and how to use qualitative factors. 

The Q&A will be housed on the FASB’s implementation portal for credit losses.

FASB extends comment letter deadline for financial instruments proposal

On Nov. 19, 2018, the FASB issued an exposure draft, “Codification Improvements – Financial Instruments,” which proposes changes to ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”; ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”; and ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The 22 changes are covered in the  November 2018 Crowe Financial Institutions Executive Briefing under “FASB issues proposed ASU for changes to ASU 2016-13, ASU 2016-01, and ASU 2017-12.”

The board received two comment letters requesting an extension of the deadline to 60 days and, at its Dec. 19 meeting, decided to extend the deadline. Stakeholders expressed a need for additional time to perform an appropriate analysis of the many implications and potential consequences of the proposal. While the board initially attempted to avoid a January deadline given the focus on financial reporting matters during that time, the requests for additional time came from preparers, which prompted the decision.

Comments will be due Jan. 18, 2019. 

FASB proposes clarifications to leases guidance for lessors that are financial institutions

On Dec. 19, 2018, the FASB released a proposal, “Leases (Topic 842): Codification Improvements for Lessors,” that would provide two clarifications for lessors that are not manufacturers or dealers – generally for financial institutions and captive finance companies. The proposed clarifications relate to the following:

• Fair value of the leased property. Topic 840 provided an exception for lessors that are not manufacturers or dealers to measure the value of leased property at the underlying asset’s cost, reflecting any volume or trade discounts, instead of applying Topic 820 for fair value measurement (that is, exit price). Topic 842 does not currently provide this exception, and those lessors have noted their belief that it was not the board’s intention to change their financial reporting for the leased property values. The proposal would carry the exception from Topic 840 over to Topic 842 and allow lessors that are not manufacturers or dealers to measure the value of leased property at cost, reflecting any volume or trade discounts that may apply. If a significant lapse of time occurs between the asset acquisition and lease commencement, the exception would not apply, and the definition of fair value in Topic 820 would apply.
  
  
• Presentation of principal payments received from leases under sales-type and direct financing leases for financial institutions. Conflicting guidance on the presentation of these cash flows exists in Topic 942 (requires investing classification) and Topic 842 (requires operating classification). The proposal would require lessors in the scope of Topic 942 (that is, depository and lending institutions) to present cash flows for principal payments received from sales-type and direct financing leases in investing activities, which would be consistent with how they are presented by these institutions prior to the application of Topic 842.  

Comments are due Jan. 15, 2019.

FASB issues lease accounting improvements for lessors

The FASB issued ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” on Dec. 10, 2018, to provide the following improvements to the lease accounting guidance for lessors:

• Lessors are allowed, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs and, instead, to account for those costs as if they are lessee costs by excluding them from lease revenue and expense.
• Lessors will exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. Additionally, lessors will account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by lessees as variable payments. Furthermore, lessors will record the reimbursed costs as revenue. 
• Lessors will allocate, rather than recognize (as initially required by Topic 842), variable payments to lease and nonlease components. The variable payments allocated to lease components will be recognized in accordance with Topic 842; those allocated to nonlease components will be recognized in accordance with other guidance, including “Revenue From Contracts With Customers (Topic 606).”

For entities that have not adopted Topic 842, this ASU has the same effective date as ASU 2016-02, “Leases” (for example, March 31, 2019, interim financial statements for calendar year-end public business entities). For entities that have adopted Topic 842, this ASU is effective at the original effective date of Topic 842 for the entity. Early adoption is allowed either in the first reporting period ending after the issuance of this ASU or in the first reporting period beginning after its issuance; for calendar year-end entities that would be either the reporting period ending Dec. 31, 2018, or the period beginning Jan. 1, 2019.

From the Securities and Exchange Commission (SEC)

SEC seeks comments on changes to quarterly reports and earnings releases

On Dec. 18, 2018, the SEC released a request for public comment, “Request for Comment on Earnings Releases and Quarterly Reports,” on potential changes to earnings releases and quarterly reports. The SEC is exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication that companies disclose and examining how such changes could reduce costs and affect capital formation while enhancing, or at least maintaining, appropriate investor protection.

The release also seeks comment on whether the SEC should provide companies, or certain classes of companies, with flexibility as to the frequency of their periodic reporting. Last, the SEC is seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance may affect corporate decision-making and strategic thinking, whether positive or negative, and whether the result is an inefficient outlook by focusing on short-term results.

The comment period will remain open for 90 days following publication in the Federal Register.

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

The annual American Institute of CPAs (AICPA) Conference on Current SEC and PCAOB Developments took place in Washington, D.C., on Dec. 10-12, 2018. The following SEC representatives delivered remarks:

• Wesley Bricker, chief accountant – Statement on matters discussed with Julie Erhardt, Jenifer Minke-Girard, Marc Panucci, and Sagar Teotia during a deputy chief accountant panel, including those related to the financial reporting structure, FASB standard-setting activities, Public Company Accounting Oversight Board (PCAOB) oversight, accounting consultations, monitoring the International Financial Reporting Standards Foundation’s activities, and monitoring the Public Interest Oversight Board’s activities 
• Tom W. Collens, professional accounting fellow – Remarks on internal control over financial reporting (ICFR), specifically on the evaluation of control deficiencies
• Emily L. Fitts, professional accounting fellow – Remarks on ICFR, including the evaluation of operating effectiveness of controls and preparation of material weakness disclosures
• Sarah N. Esquivel, associate chief accountant – Remarks on revenue recognition consultations, including identifying performance obligations and evaluating the existence of a significant financing component
• Sheri L. York, professional accounting fellow – Remarks on revenue recognition consultations, including the application of the principal versus agent guidance and the identification of performance obligations
• Andrew W. Pidgeon, professional accounting fellow – Remarks on lease accounting, including lessee transition for minimum rental payment composition policies, lessee transition for minimum rental payment measurement policies, and certain lessee and lessor costs
• Rahim M. Ismail, professional accounting fellow – Remarks on the CECL model implementation and a consultation on the shift away from the London Interbank Offered Rate (LIBOR)
• Kevin L. Vaughn, senior associate chief accountant – Remarks on accounting consultations in general and subsequent events in the CECL model

SEC releases public statement on digital asset transactions

On Nov. 16, 2018, the SEC’s corporation finance, investment management, and trading and markets divisions released “Statement on Digital Asset Securities Issuance and Trading.” It covers recent enforcement actions and the interaction of existing federal securities laws with the innovative technologies used for digital asset securities transactions. It addresses offers and sales of digital asset securities and investment vehicles investing in digital asset securities (such as managers of hedge funds that invest in digital asset securities). For those involved in trading digital asset securities, the statement addresses both exchange and broker-dealer registration requirements.

From the Public Company Accounting Oversight Board (PCAOB)

Director of inspections addresses the AICPA Conference on Current SEC and PCAOB Developments

On Dec. 12, 2018, PCAOB Director of Registration and Inspections George Botic addressed the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C. He covered changes at the PCAOB under the new board that will affect the 2019 inspection cycle, including the PCAOB’s assessment of a firm's quality control system and control environment; engagement of U.S. company audit committee chairs to provide insight into the inspection process; and establishment of a program to share audit firm practices that promote or enhance audit quality. He also shared his expectation for changes to the inspection reports and the process for remediation. In the PCAOB’s information-gathering activities in 2019, the staff will consider which metrics may be predictive of audit quality (audit quality indicators), and Botic recommends that audit firms do the same.

Additional topics included:

• Frequent inspection findings for revenue, accounting estimates, and internal control over financial reporting
• Root cause analysis as a good audit firm practice
• Form AP
• Others areas of focus for 2019 inspections including technology risks and implementation of the new auditor’s reporting model including critical audit matters (CAMs)

PCAOB posts sample auditor’s report for the audit of a broker-dealer

On Dec. 17, 2018, the board posted a sample unqualified auditor’s report under Auditing Standard (AS) 3101 (which went into effect on Dec. 15, 2017) on the financial statements of a broker or dealer reporting under Rule 17a-5 of the Securities Exchange Act of 1934. The sample report includes marked changes that result from AS 3101.

PCAOB names Megan Zietsman as chief auditor

The PCAOB named Megan Zietsman as chief auditor on Dec. 13, 2018. Zietsman is expected to assume her role in early 2019. She will join the PCAOB from Deloitte, where she serves as a partner in its professional practice network. She has served on the International Auditing and Assurance Standards Board since 2014, currently as the deputy chair. She also served on the AICPA’s Auditing Standards Board from 2007 to 2011.

PCAOB posts auditor inspections outlook

The PCAOB posted the “Inspections Outlook for 2019” to its website on Dec. 6, 2018. The report includes key areas of focus for planned 2019 inspections of audits of issuers and brokers and dealers. It covers the following topics:

• System of quality control
• Independence
• Recurring inspection deficiencies
• External considerations
• Cybersecurity risks
• Software audit tools
• Digital assets
• Audit quality indicators
• Changes in the auditor’s report
• Implementation of new accounting standards

PCAOB board member speaks on quality control at audit firms

On Nov. 30, 2018, PCAOB member Kathleen M. Hamm addressed the Neel Corporate Governance Distinguished Speaker Series at the University of Tennessee. In her speech, “Quality Control: The Next Frontier,” she covered the new board’s focus on quality control at audit firms in the context of the PCAOB’s primary activities: registrations, inspections, standard-setting, and enforcement. She also provided her thoughts on five things that audit firms can do to improve quality control related to their strategy, governance, risk and control assessment, processes for monitoring audit quality, and periodic re-evaluations of quality control strategy and programs.

PCAOB approves strategic plan

On Nov. 15, 2018, the PCAOB approved its five-year strategic plan for 2018 through 2022, which emphasizes the PCAOB’s integrity, excellence, effectiveness, collaboration, and accountability.

The plan includes the following goals:

• “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 Center for Audit Quality (CAQ)

CAQ releases emerging technologies tool for audit committees

On Dec. 12, 2018, the CAQ released a new tool: “Emerging Technologies: An Oversight Tool for Audit Committees.” According to the CAQ, it “provides a framework and questions that audit committees may ask management and auditors to help inform their oversight of financial reporting as emerging technologies take hold.”

CAQ reports lessons learned from applying CAM guidance 

The CAQ released a publication, “Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example,” on Dec. 10, 2018, offering initial observations from applying the new PCAOB guidance related to CAMs. Included are lessons learned from the dry runs of applying the CAMs guidance related to:

• The determination of which matters are CAMs
• Auditor communication with management and the audit committee
• Planning and timing of implementation
• Challenges in drafting CAMs

It also offers 10 questions for audit committees to consider related to including CAMs in the auditor’s report as well as an illustrative example of a CAM disclosure.