Financial Institutions Executive Briefing 2-17-2016

| 2/17/2016


The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.

From the Federal Financial Institution Regulators

Extended Exam Cycle for Small Banks Approved

On Jan. 21, 2016, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Fed), and Federal Deposit Insurance Corp. (FDIC) issued and requested comments on interim final rules, effective upon issuance, that extend the on-site exam cycle for banks with total assets less than $1 billion from 12 months to 18 months. Previously, the 18-month exam cycle was available only to institutions with total assets less than $500 million.

This change is a result of the Fixing America’s Surface Transportation Act (FAST Act), which was enacted on Dec. 4, 2015. The current estimated measure will qualify approximately 617 institutions for the extended exam cycle.

Comments are due 60 days after the date of publication.

Proposed Rule on Assessments for Banks Under $10 Billion Revised

The FDIC, on Jan. 21, 2016, issued a revised proposed rule for assessing deposit insurance premiums on banks with assets less than $10 billion that have been insured for at least five years. This proposal is designed to update the data and change the methodology used to determine risk-based assessments so that banks that take on more risk will pay more for deposit insurance. Revisions in this proposal include:
  • An assessment penalty for funding with reciprocal deposits or Federal Home Loan Bank advances would be eliminated.
  • Core deposit funding would not factor into assessments.
  • Funding with brokered deposits – excluding reciprocal deposits for well-capitalized banks with CAMELS  ratings of 1 or 2 – in excess of 10 percent of assets would lead to higher assessments.
  • The existing “brokered deposit adjustment” would be eliminated.
Additionally, the proposal would adopt a fairer standard for assessing growth: Assets would have to grow more than 10 percent over a one-year period to trigger higher assessments, meaning that fewer banks would be penalized for well-managed growth. Furthermore, the proposal would cap assessment rates by CAMELS rating, potentially limiting the impact of the loan portfolio factor and the weighting for the tier 1 core capital ratio.

The FDIC has posted a calculator for bankers to test the impact on their assessments under the revised proposal.

Comments are due 30 days after publication in the Federal Register.

2016 Stress-Test Scenarios, Instructions Released

On Jan. 28, 2016, the Fed released the three economic and financial market scenarios that it will use in the next round of capital planning and stress testing for banking institutions with assets of more than $10 billion. The three scenarios of baseline, adverse, and severely adverse include 28 variables such as unemployment, exchange rates, stock market prices, and interest rates.

Under the baseline scenario, the economy would experience moderate expansion including real gross domestic product increasing a little under 2.5 percent a year, unemployment falling to 4.5 percent, steadily rising short-term Treasury rates, and steadily growing housing prices. The adverse scenario includes a moderate recession and mild deflation. Under the severely adverse scenario, banks would face a severe global recession with increased unemployment rates to 10 percent and negative yields for short-term Treasury securities.

Bank holding companies with assets of $50 billion or more are subject to the stress tests as part of the Fed’s Comprehensive Capital Analysis and Review program. This program involves the nation’s 33 largest financial institutions. Of these banks, six with large trading operations will participate in an additional test of reactions to a global market shock, and eight will be required to include a counterparty default scenario. Capital plans are due to the Fed by April 5, and the Fed will announce stress-test results before June 30.

Additionally, the OCC, on Jan. 28, 2016, and the FDIC, on Feb. 9, 2016, issued their instructions and scenarios for stress tests conducted by the banks under their supervision with assets of more than $10 billion.

Basel Guidance on External Audits for Large Banks Supported

The FDIC, OCC, and Fed issued on Jan. 15, 2016, a joint advisory supporting the Basel Committee on Banking Supervision’s March 2014 external audit guidance for large, internationally active banks, which are defined as institutions with assets equal to or greater than $250 billion or institutions with on-balance-sheet foreign exposure of $10 billion or more. The advisory offers recommendations for addressing the differences between U.S. standards and practices and those specified by the Basel external audit guidance.

According to the recommendations, these banks should consider whether their audit committees have policies in place to address the criteria for putting an external audit contract out for bid, ensure that the external auditors consider regulatory capital ratios in planning and performing the audit and understand how the external auditors account for those ratios in their determination of materiality, and request written feedback on the bank’s internal audit function from the external auditor.

January Issue of “The NCUA Report” Published

The National Credit Union Administration (NCUA) posted the January 2016 issue of the “The NCUA Report” on Jan. 19, 2016. This latest issue includes a column from the NCUA board chairman, articles from various NCUA offices on NCUA initiatives, and information on supervisory, regulatory, and compliance issues that are relevant to all federally insured credit unions.

Articles in this month’s report include:
  • “Welcome to the New Interest Rate Environment?”
  • “Chairman’s Corner: Year of Regulatory Relief Yields Real Results”
  • Board Member J. Mark McWatters’ perspective: “Exam Appeals: Credit Unions Deserve a Better Process – Part 2”
  • “Board Approves Expanded Insurance Coverage on Escrow Accounts”
  • “Determining Impairment in TDRs”
  • “Understanding the Challenges Facing Minority Credit Unions”
  • “New Associational Common-Bond Rule Already Providing Relief”

From the Consumer Financial Protection Bureau (CFPB)

TRID Resources for Construction Loans Released

During January 2016, the CFPB released a fact sheet covering the basics of using the Truth in Lending Act – Real Estate Settlement Procedures Act integrated disclosures (TRID) for construction loans. The fact sheet provides information on which construction loans are covered by the integrated disclosures and specifically notes that construction loans that are open-end transactions or loans for commercial purposes are not covered. In addition, the fact sheet addresses existing provisions for construction loan disclosures and offers guidance on disclosures for loans with permanent financing as either one or two loans.

From the Financial Accounting Standards Board (FASB)

Public Roundtable on Credit Losses Held by FASB

On Feb. 4, 2016, the FASB held a public roundtable to discuss its current expected credit loss (CECL) model and concerns expressed by community bankers and credit unions. In addition to representatives from community banks and credit unions, all seven FASB board members as well as representatives from the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and federal financial institution regulators participated.

The two-part audio recording, "Public Meeting on the FASB Project on Accounting for Financial Instruments: Impairment," is available on the FASB’s website, typically for about 30 days after the meeting.

Amendments to Cash Flow Presentation Proposed

The FASB issued, on Jan. 29, 2016, a proposed Accounting Standards Update (ASU), “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in practice over how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The proposed ASU focuses on eight cash flow issues for which there is unclear guidance or no guidance on the classification.

These areas are addressed in the proposal:
  • Debt prepayment or debt extinguishment costs
  • Settlement of zero-coupon bonds
  • Contingent consideration payments made after a business combination
  • Proceeds from the settlement of insurance claims
  • Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies
  • Distributions received from equity method investees
  • Beneficial interests in securitization transactions
  • Separately identifiable cash flows and application of the predominance principle
Comments are due March 29, 2016.

Proposals for Pension and Other Postretirement Benefit Plans Issued

The FASB issued on Jan. 26, 2016, two proposed ASUs related to defined benefit pension and other postretirement benefit plans.

The first proposed ASU, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans,” would eliminate certain disclosure requirements including the amount of the pension accumulated benefit obligation (ABO), the aggregate pension ABO and aggregate fair value of plan assets for plans with ABOs in excess of plan assets, and the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. It also proposes to add disclosures such as a description of the nature of the benefits provided, the employee groups covered, and the type of benefit plan formula, as well as a description of the basis for significant gains and losses affecting the benefit obligation or plan assets amount.

The second proposed ASU, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” is designed to improve guidance related to defined benefit costs in the income statement. The service cost component would be separate from the other components of net benefit cost for presentation purposes, with detailed guidance on how to present these components in the income statement. Additionally, the proposed ASU would allow only the service cost component of net benefit cost to be eligible for capitalization when applicable (for example, as part of deferred costs relating to loan originations).

Comments on both proposed ASUs are due April 25, 2016.

From the Securities and Exchange Commission (SEC)

FASB Urged to Reconsider Materiality Proposal

On Jan. 21, 2016, the SEC’s Investor Advisory Committee (IAC) approved and submitted a letter to the FASB, urging it to reconsider and possibly re-propose amendments to the core financial accounting concept of “materiality.” The FASB’s proposals include amendments to the conceptual framework for financial reporting and guidance on accounting standards for notes to financial statements focused on determining whether an identified matter for disclosure has reached a level of materiality that would require disclosure.

According to the letter, “The approach taken in the Proposals is explicitly designed to reduce disclosure and in doing so has the potential to adversely affect the quality of financial disclosure.” In the letter, the IAC notes that it supports efforts to improve the quality and transparency of financial disclosure but that the FASB’s proposals could have the opposite impact.

Updated Interpretations and FAQs Related to Interactive Data Disclosure Released

The SEC’s Division of Economic and Risk Analysis staff published updates, on Jan. 26, 2016, to interpretations and frequently asked questions developed to assist filers in understanding how to comply with the interactive data disclosure rules of the SEC.

These topics are addressed:
  • Validation
  • Presentation and rendering
  • Standard taxonomies
  • Company extensions and instances
  • Detail tagging
The answers provided are the opinions of the Division of Economic and Risk Analysis staff and do not represent SEC rules, regulations, or statements.

Rules Implementing FAST Act Provisions Adopted

On Jan. 13, 2016, the SEC announced approval of interim final rules, “Simplification of Disclosure Requirements for Emerging Growth Companies and Forward Incorporation by Reference on Form S-1 for Smaller Reporting Companies,” implementing two provisions of the FAST Act. These interim final rules revise financial reporting forms for emerging growth companies and smaller reporting companies.
In accordance with the FAST Act, Forms S-1 and F-1 have been revised to allow emerging growth companies to omit certain historical financial information prior to an offering if their registration statements include all required financial information at the time of the offering. Additionally, Form S-1 has been revised to permit smaller reporting companies to use incorporation by reference for future filings made under the federal securities laws after a registration statement becomes effective.

The interim final rules also seek comment on whether the rules should be extended to incorporate other registrants or forms.

The interim rules are effective Jan. 19, 2016, and comments are due Feb. 18, 2016.

From the Institute of Internal Auditors (IIA)

Changes to Internal Audit Standards Proposed

The IIA released on Feb. 1, 2016, proposed changes to its “International Standards for the Professional Practice of Internal Auditing.”

Three areas are targeted in the proposed changes: (1) improving current communications and quality assurance standards, (2) establishing new standards focused on objectivity in assurance and consulting roles as well as discussing new internal audit roles, and (3) aligning present standards to a new set of core principles that last year were incorporated into the “International Professional Practices Framework.”

The proposed changes are open for review and comment through April 30, 2016, via an online survey.

The modified standards will be announced on Oct. 1, 2016, and will become effective Jan. 1, 2017.

From the Center for Audit Quality (CAQ)

Audit Quality Indicators Highlighted in New Report

The CAQ issuedAudit Quality Indicators: The Journey and Path Ahead” on Jan. 12, 2016, summarizing its findings about a potential set of audit quality indicators (AQIs). The CAQ gathered these results at a global series of public roundtables in New York, Chicago, London, and Singapore during 2015.

These discussions, in conjunction with the results from initial testing of the “CAQ’s Approach to Audit Quality Indicators,” will help to identify the most effective way to assess audit quality. These findings are highlighted in the report:
  • Participants asked for information to help audit committees evaluate the qualitative aspects of the audit, such as the engagement team’s attitude toward professional skepticism and auditor judgment.
  • Audit committee members said they believe that AQIs can assist them in overseeing the quality of their external audit as one aspect of quality financial reporting.
  • Most participants supported a flexible approach permitting an audit committee, working with the external auditor, to tailor the selection and portfolio of AQIs to best meet its particular circumstances.
  • Some participants concluded they already have the tools necessary for them to evaluate their audit quality.
  • Audit committee members agreed that AQIs alone, out of context, do not sufficiently address factors relevant to any particular audit engagement or audit firm.
  • Participants agreed that the audit committee should drive the process of identifying and evaluating AQIs and that this process will require continuous evaluation and refinement to meet the fluctuating information needs of audit committees.
  • Audit committee members were concerned that public disclosure of engagement-level AQIs could lead to unintended consequences and therefore such disclosures should be voluntary. 

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Sydney Garmong
Sydney Garmong
Office Managing Partner, Washington, D.C.