FDIC, Fed Extend Comment Period for Input on CAMELS Ratings

| 1/22/2020
FDIC, Fed Extend Comment Period for Input on CAMELS Ratings
Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

FDIC proposes rule on brokered deposit restrictions

The Federal Deposit Insurance Corp. (FDIC), on Dec. 12, 2019, issued a notice of proposed rulemaking to update brokered deposit regulations to reflect industry changes and better meet customer needs. The proposed rule would implement a new framework to determine whether deposits qualify as brokered deposits, reflecting banks’ use of new technologies to interact with customers. The proposal also would revise certain definitions and codify staff opinions to clarify the process for determining what qualifies as a brokered deposit.

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

FDIC and OCC propose CRA revisions

On Dec. 12, 2019, the FDIC and the Office of the Comptroller of the Currency (OCC) proposed rules to update Community Reinvestment Act (CRA) regulations to reflect changes in the banking industry, including increases in digital banking. The proposal would clarify and expand activities that qualify for CRA credit, including loans and investments in tribal lands and minority depository institutions, increasing the qualifying threshold for loans to small businesses and small farms to $2 million. As part of the proposal, the FDIC and OCC would publish a list of qualifying activities. The proposed rules also include requirements to identify additional assessment areas based on where deposits are located.

Comments are due March 9, 2020.

FDIC and Fed extend deadline for comments on CAMELS ratings

The FDIC and the Federal Reserve Board (Fed) announced on Dec. 31, 2019, that they are extending the deadline for comments on the use of the Uniform Financial Institutions Rating System, often called the CAMELS system (for capital, assets, management, earnings, liquidity, and sensitivity to risk). As originally requested in October 2019, the agencies are looking specifically for input on the consistency of ratings and how ratings are used in enforcement actions and bank applications.

The extended deadline for comments is Feb. 28, 2020.

NCUA releases 2020 supervisory priorities

On Jan. 7, 2020, the National Credit Union Administration (NCUA) issued a letter to credit unions outlining supervisory priorities for 2020, including the following:

  • Bank Secrecy Act and anti-money laundering regulations
  • Consumer financial protection, including compliance with Regulation E, the Fair Credit Reporting Act, privacy regulations, small-dollar lending (including payday lending) rules, Regulation Z, the Military Lending Act, and the Servicemembers Civil Relief Act
  • Cybersecurity
  • Credit risk and liquidity risk
  • Plans for implementing the current expected credit losses (CECL) standard
  • Plans for the transition from the London Interbank Offered Rate (LIBOR) as the benchmark for setting interest rates

The letter also includes an update on the NCUA’s modernization efforts, a summary of recent regulatory updates, and guidance on serving hemp businesses.

From the Capitol

Congress passes legislation on CECL study

During late December 2019 Congress passed, and the president signed on Dec. 20, 2019, a legislative package of spending bills (H.R. 1158 and H.R. 1865) funding the federal government through Sept. 30, 2020. The accompanying conference report includes a directive to the U.S. Department of the Treasury to conduct a study of the impact of the CECL standard on capital requirements for financial institutions.

Senate Report 116-111 includes the following directive:

Current Expected Credit Loss. – The Committee is aware of concerns regarding the potential adverse effects on the U.S. economy from the Financial Accounting Standards Board’s Current Expected Credit Loss [CECL] standard, especially during times of recession or economic crisis. The Committee directs the Department of the Treasury, in consultation with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration, to conduct a study on the need, if any, for changes to regulatory capital requirements necessitated by CECL, and to submit the study to the Committee within 270 days of the date of enactment of this act .

Congress chose to focus this study on capital requirements rather than a broader economic impact.

This legislation does not delay the effective date for CECL, which first applies to March 31, 2020, interim financial statements for calendar year-end SEC filers, excluding smaller reporting companies.

From the Financial Accounting Standards Board (FASB)

FASB clarifies relationships between accounting standards

On Jan. 16, 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force).” The ASU clarifies the interaction between the ASU on recognition and measurement of financial instruments and the ASU on equity method investments.
ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. 

In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. 

For public business entities, the ASU is effective for fiscal years beginning after Dec. 15, 2020, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after Dec. 15, 2021. Early adoption is permitted, and the amendments are to be applied prospectively.

FASB simplifies accounting for income taxes

On Dec. 18, 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” to reduce the cost and complexity in accounting for income taxes in Topic 740.

The amendments remove the following exceptions from Topic 740:

  • Exception to the incremental approach for intraperiod tax allocation
  • Exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment becomes a subsidiary
  • Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses

In addition, the amendments simplify and improve guidance within Topic 740 related to the following:

  • Franchise taxes that are based partially on income
  • Transactions that result in a step up in the tax basis of goodwill
  • Separate financial statements of legal entities that are not subject to tax
  • Enacted changes in tax laws in interim periods
  • Employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method

For public business entities, the amendments are effective for fiscal years beginning after Dec. 15, 2020, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption is permitted.

FASB names next chair

Richard R. Jones will be the next chair of the FASB, as announced on Dec. 19, 2019. Jones will succeed Russell G. Golden when Golden’s appointment ends on June 30, 2020, and Jones is expected to join the FASB early in 2020 to facilitate a smooth transition in leadership. Jones, who has spent his entire career at Ernst & Young, is currently chief accountant and partner in the firm’s national office.

From the Securities and Exchange Commission (SEC)

SEC issues statement on audit committee’s role in financial reporting

On Dec. 30, 2019, SEC leadership (SEC Chairman Jay Clayton, Chief Accountant Sagar Teotia, and Corporation Finance Director William Hinman) issued “Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities.”

The statement acknowledges the vital role of audit committees in financial reporting and oversight in the preparation and review of financial information for investors and markets. It addresses potential focus areas for audit committees for the 2019 calendar year-end financial reporting process. The statement’s observations are intended to help audit committees carry out their year-end work, including promoting constructive dialogue among audit committees, management, and independent auditors. Financial reporting and auditing topics highlighted in the statement include the audit committee’s role in setting the tone at the top, responsibility for auditor independence, implementation of new significant accounting standards, and communications with the audit committee.

Additionally, the statement provides more specific observations on the audit committee’s responsibilities related to non-GAAP measures, reference rate reform, and critical audit matters.

SEC identifies 2020 examination priorities

The SEC’s Office of Compliance Inspections and Examinations (OCIE) revealed, on Jan. 7, 2020, its 2020 examination priorities. Annually, the OCIE publishes its examination priorities to provide transparency into its examination program and insights into its risk-based approach, including the areas that might present risks to investors and U.S. capital market integrity.

The OCIE’s 2020 examination priorities are categorized as follows:

  • Protection of retail investors, including seniors and those saving for retirement
  • Market infrastructure with specific focus on the security and resiliency of entities’ systems
  • Information security
  • Focus areas related to investment advisers, investment companies, broker-dealers, and municipal advisers
  • Anti-money laundering programs
  • Financial technology and innovation, including digital assets and electronic investment advice
  • Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board operations

In the release, the SEC says that the “published priorities for FY 2020 are not exhaustive and will not be the only areas OCIE focuses on in its examinations, risk alerts, and investor and industry outreach.”

SEC proposes to update auditor independence framework

The SEC announced, on Dec. 30, 2019, a proposal to codify certain staff consultations and update parts of its auditor independence framework. Since the rules were most recently revised in 2003, capital markets and market participants have changed significantly. The proposed amendments would let audit committees and SEC staff focus more on relationships and services that might pose threats to an auditor’s objectivity and impartiality and less on those that might trigger nonsubstantive rule breaches or time-consuming audit committee review of nonsubstantive matters.

Comments are due March 16, 2020.

SEC proposes to update accredited investor definition

The SEC, on Dec. 18, 2019, issued for public comment proposed amendments to the definition of “accredited investor.” The updated definition would help to better identify institutional and individual investors with the knowledge and expertise to participate in the private capital markets. The proposed amendments would add new categories of natural persons and entities that may qualify as accredited investors, which would permit more investors to participate in private offerings.

Comments are due March 16, 2020.

SEC staff issues disclosure guidance for international intellectual property and technology risks

On Dec. 19, 2019, the staff in the SEC’s Division of Corporation Finance (Corp Fin) issued CF Disclosure Guidance: Topic No. 8, “Intellectual Property and Technology Risks Associated With International Business Operations.” The guidance presents Corp Fin’s views of disclosures that companies should consider for intellectual property and technology risks that might arise during the companies’ participation in international operations.

SEC staff releases guidance on confidential treatment applications

Corp Fin, on Dec. 19, 2019, issued CF Disclosure Guidance: Topic No. 7, “Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2,” detailing how and what companies should submit when filing an application objecting to public release of information that otherwise is required to be filed under the Securities Act and the Securities Exchange Act. This guidance replaces and supersedes the guidance provided in Staff Legal Bulletins 1 and 1A.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB shares audit committee insights

On Dec. 18, 2019, the PCAOB posted “Conversations With Audit Committee Chairs: What We Heard & FAQs,” which provides insights gathered from conversations with almost 400 audit committee chairs into topics such as what is working well to enhance audit quality, the basics of the PCAOB inspection process, quality of the audit engagement teams, relationship and communication with the auditor, new auditing and accounting standards, and technology-driven changes.

FAQs answered in the document include:

  • Does the PCAOB have resources, educational training, or events for audit committee members?
  • Does the PCAOB do a cost-benefit analysis of standards?
  • What is the PCAOB’s view of audit quality indicators, and how does the PCAOB see them being used?

PCAOB issues concept release on quality control standards

To address the significant changes in the auditing environment, the PCAOB issued, on Dec. 17, 2019, a concept release, “Potential Approach to Revisions to PCAOB Quality Control Standards.” The release seeks public comment on the approach and on what types of future changes could be proposed to strengthen the PCAOB’s requirements for audit firms’ quality control systems.

Based on information gathered through its oversight, outreach, and research activities, the PCAOB determined that changes to the quality control standards should be based on an integrated risk-based framework, such as the recently proposed International Auditing and Assurance Standards Board’s (IAASB) firm-level quality management standard. The potential approach described in the concept release is based on the IAASB’s proposed standard with specific changes suitable for firms subject to PCAOB standards and rules.

To accompany the concept release, the PCAOB issued “Fact Sheet: Quality Control Concept Release,” which provides details on the concept release and on the IAASB’s proposed standard

Comments are due March 16, 2020.

PCAOB names new director of enforcement

On Dec. 17, 2019, the PCAOB named Patrick Bryan as director of the Division of Enforcement and Investigations. As director, Bryan will lead investigations and litigation of violations of PCAOB rules and other securities regulations. Bryan most recently served as the assistant general counsel for enforcement at the Fed. Prior to that, he served as a supervisory assistant chief litigation counsel in the SEC’s Division of Enforcement.

PCAOB names new general counsel

The PCAOB announced on Dec. 17, 2019, that Kenneth Lench was named general counsel of the PCAOB. In this position, Lench will be responsible for providing legal advice and counsel on all PCAOB operations and activities. Lench is a partner with Kirkland & Ellis LLP, where he specializes in securities law.

From the American Institute of Certified Public Accountants (AICPA)

AICPA issues digital assets practice aid

The AICPA issued, on Dec. 16, 2019, a practice aid, “Accounting for and Auditing of Digital Assets,” which offers nonauthoritative guidance on accounting for and auditing digital assets under GAAP and generally accepted auditing standards for financial statement preparers and auditors. The guidance currently includes accounting content, with auditing guidance to be added at a later date. Also, as additional accounting topics are identified and completed the practice aid will be updated.

According to the practice aid, digital assets are defined broadly as “digital records, made using cryptography for verification and security purposes, on a distributed ledger” and may be described in various terms. No matter the terms used, the accounting treatment will be determined by the specific terms, form, underlying rights, and obligations of the specific digital asset.

The accounting guidance currently addresses the following areas:

  • Classification and measurement when an entity purchases crypto assets
  • Recognition and initial measurement when an entity receives digital assets that are classified as indefinite-lived intangible assets
  • Accounting for digital assets classified as indefinite-lived intangible assets
  • Measurement of cost basis of digital assets that are classified as indefinite-lived intangible assets
  • Derecognition of digital asset holdings that are classified as indefinite-lived intangible assets
  • Recognition of digital assets when an entity uses a third-party hosted wallet service

AICPA issues new TQAs on deferred taxes

In December 2019, the AICPA issued Technical Questions and Answers (TQAs) under Section 3300, “Deferred Taxes.” The new TQA section provides guidance relating to the limitation on interest deductibility for certain companies adopted under Section 163(j) of the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act of 2017, which in general limits deductions of net interest expense to 30% of adjusted taxable income. Section 163(j) was effective for tax years beginning after 2017. The TQAs also describe how an entity should assess realizability of its existing deferred tax assets related to disallowed interest deductions when there are 1) reversing deferred tax liabilities, and 2) an expectation of future interest expense that also will be limited under Section 163(j).

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