Current financial reporting, governance, and risk management topics
The Federal Deposit Insurance Corp. (FDIC) issued, on Feb. 27, 2018, its “Quarterly Banking Profile,” covering the fourth quarter of 2017. According to the report, FDIC-insured banks and savings institutions earned $25.5 billion, down 40.9 percent from the industry’s earnings a year before. The significant decline was primarily the result of the new tax reform law, which resulted in one-time tax effects. FDIC Chairman Martin rel="noopener noreferrer" Gruenberg shared in his press statement, “Notwithstanding the one-time impact of the new tax law, the overall performance of the industry continued to be positive. Net operating revenue rose, loan balances increased, net interest margins improved, and the number of ‘problem banks’ fell below 100.”
The report provides these additional fourth-quarter statistics:
- Net interest income of $129.5 billion was earned, rising 8.5 percent as compared to the same quarter in 2016.
- Total loans and leases increased by 1.7 percent from third-quarter 2017, up $164.1 billion. Total loans and leases increased 4.5 percent year over year.
- Banks set aside $13.6 billion in loan-loss provisions, up $1.1 billion from a year prior.
- Community banks earned $4.1 billion in net income, down 14.2 percent from the same time last year.
Consistent with the consolidation in the industry, the number of FDIC-insured commercial banks and savings institutions declined from 5,913 on Dec. 31, 2016, to 5,670 on Dec. 31, 2017. The number of institutions on the problem bank list dropped to 95, the fewest since 2008, and the Deposit Insurance Fund balance increased to $92.7 billion during the fourth quarter.
On March 5, 2018, rel="noopener noreferrer" the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the fourth quarter of 2017. Here are some highlights:
- The number of federally insured credit unions continued to drop – from 5,642 at the end of the third quarter to 5,573 at the end of the fourth quarter, a decrease of 212 from a year earlier.
- Net income at an annual rate was $10.4 billion, up 9.2 percent or $870 million from 2016.
- Total assets were $1.38 trillion, 6.7 percent greater than a year ago.
- Compared to one year earlier, the return on average assets has increased slightly from 76 to 78 basis points for the fourth quarter of 2017.
- Outstanding loan balances increased 10.1 percent year over year, to $957.3 billion.
- Insured deposits (shares) grew $59 billion (5.7 percent) year over year, to $1.09 trillion.
In a Feb. 26, 2018, speech at a Financial Services Roundtable event in Washington, D.C., Board of Governors of the Federal Reserve System (Fed) Vice Chairman for Supervision Randal Quarles discussed cybersecurity as a top priority for the Fed. The vice chairman provided an example of where the solutions intended to improve critical services resiliency creates the potential of replicating bad data across data centers, which may contribute to a cyber event. Quarles discussed the need for collaboration among public and private sector stakeholders in identifying and managing cyberrisks and in sharing threat information. Additionally, he said that the Fed is working with other financial agencies on coordinating cyberrisk supervisory activities and setting expectations consistent with existing industry best practices.
During the speech, Quarles also reminded bankers that the opportunity exists to “improve the efficiency, transparency, and simplicity of regulation” and said that there are clear ways to improve regulatory reforms.
On Feb. 27, 2018, the FDIC and the Fed in conjunction with the Financial Accounting Standards Board, the Securities and Exchange Commission, and the Conference of State Bank Supervisors (CSBS) hosted a webinar, “Ask the Regulators: CECL Teleconference for Bankers: Practical Examples of How Smaller, Less Complex Community Banks Can Implement CECL.” The webinar provided regulatory perspectives on current expected credit losses (CECL) approaches for community banks and focused on the following:
- Loss rate methods – including a snapshot/open pool method, a remaining life method, and a vintage method – and a discussion of challenges for loss rate methods
- Data needs and data sources rel="noopener noreferrer"
- Process and control considerations
The archived webinar is now available online (registration required). Additionally, the CSBS has a “CECL Readiness Tool” to help institutions set internal goals for the different implementation steps.
On Feb. 12, 2018, the CFPB released its strategic plan for 2018-22. In the release, the CFPB said, “The plan draws directly from the Dodd-Frank Wall Street Reform and Consumer Protection Act [Dodd-Frank] and refocuses the Bureau’s mission on regulating consumer financial products or services under existing federal consumer financial laws, enforcing those laws judiciously, and educating and empowering consumers to make better informed financial decisions.”
In this second five-year strategic plan issued by the CFPB since its creation in 2010, the CFPB identifies three goals and details approaches for meeting those goals. Included among the strategies for achieving the goals is giving financial institutions and service providers tools and resources they need to implement and comply with consumer financial protection laws and regulations.
On Feb. 19, 2018, the Basel Committee on Banking Supervision (BCBS) published “Sound Practices: Implications of Fintech Developments for Banks and Bank Supervisors.” In the document, the BCBS uses potential scenarios and case studies to highlight developments, risks, and opportunities across the challenging environment of financial technology (fintech) and rapid innovation in the banking industry.
Based on feedback from outreach conducted in August 2017, the BSBC elaborates on 10 key implications and related considerations on supervisory issues. Among the implications and considerations identified are the requirement to ensure safety and soundness in the banking industry without impeding innovation; identification of fintech risks for banks including operational, cyber, and compliance risks; adaptation of supervisory skill sets; and implications of increased use of third parties through outsourcing and partnerships.
On March 14, 2018, the Senate passed S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, by a vote of 67 to 31. The bill now will move to the House of Representatives for a vote. If signed into law, the Senate-passed bill will provide regulatory relief to community and regional banks from a number of provisions of Dodd-Frank. Some of the more important reform provisions in the bill include:
- Simplifying capital calculations for banks with less than $10 billion in assets
- Amending the Bank Holding Company Act to exempt banks with assets less than $10 billion from the Volcker rule
- Increasing the threshold for the Fed’s small-bank holding company policy statement from $1 billion to $3 billion
- Raising the threshold for the 18-month exam cycle from banks with $1 billion in assets to those with $3 billion in assets
- Designating all mortgages held in portfolio as qualified mortgages for banks with less than $10 billion in assets
- Extending the eligibility of short form call reports to banks with $5 billion in assets
- Ending required company-run stress tests for banks with less than $250 billion in assets and allowing regulators to design tailored supervisory stress tests for banks with between $100 billion and $250 billion in assets
- Raising the threshold for designation as a systemically important financial institution from $50 billion to $250 billion in assets
FASB Issues Recognition and Measurement Clarifications for Certain Equities and Financial Liabilities
With the issuance of Accounting Standards Update (ASU) 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” on Feb. 28, 2018, the FASB clarifies its previous ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Specifically, ASU 2018-03 provides four clarifications for the measurement alternative for certain equity securities without a readily determinable fair value and two clarifications for financial liabilities for which the fair value option (FVO) is elected.
The four clarifications for the measurement alternative for equity securities without a readily determinable fair value are as follows:
- An entity is permitted to irrevocably change from the measurement alternative to a recurring fair value method consistent with Topic 820, “Fair Value Measurement.”
- Valuation adjustments to reflect observable transactions for a similar security should be made as of the date that the observable transaction took place.
- Remeasurement of the entire value of forward contracts and purchased options is required when an observable transaction on the underlying equity investment occurs.
- The prospective transition approach of adoption is required only when the measurement alternative is applied, and further transition guidance is provided for insurance entities applying the measurement alternative.
The two clarifications for financial liabilities for which the FVO has been elected are as follows:
- Separate presentation in other comprehensive income (OCI) of the portion of the total change in the fair value of the liability that results from a change in the instrument-specific credit risk regardless of whether the FVO was elected under Accounting Standards Codification (ASC) 825-10 for financial instruments or ASC 815-15 for embedded derivatives is required.
- For FVO financial liabilities denominated in a foreign currency, the fair value change for instrument-specific credit risk should first be measured in the currency of denomination when separately presented in OCI. Then, both fair value change components (for instrument-specific credit risk and for foreign currency) should be remeasured into the functional currency of the reporting entity.
For public business entities (PBEs) with fiscal years beginning between Dec. 15, 2017, and June 15, 2018, adoption is not required until the interim period beginning after June 15, 2018, which first applies to the Sept. 30, 2018, interim financial statements for calendar year-ends. For PBEs with fiscal years beginning between June 15, 2018, and Dec. 15, 2018, adoption of this ASU is not required before ASU 2016-01. The board’s intention is to allow entities to continue with their current adoption plans for ASU 2016-01. The ASU also provides transition guidance for entities that early adopted ASU 2016-01.
For all other entities, the effective date is the same as the effective date in ASU 2016-01, which is for fiscal years beginning after Dec. 15, 2018.
Early adoption is permitted for fiscal years beginning after Dec. 15, 2017, rel="noopener noreferrer" including interim periods within, as long as ASU 2016-01 has been adopted.
On March 13, 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)” to codify Staff Accounting Bulletin (SAB) No. 118.
After the president signed new tax legislation on Dec. 22, 2017, the SEC’s Office of the Chief Accountant and Division of Corporation Finance staff issued SAB 118, which includes interpretive guidance for public companies, auditors, and other stakeholders to consider as they contemplate disclosures for the accounting impacts of the tax act.
The SEC staff acknowledges that evaluating tax changes and accompanying financial reporting impacts of the act will take time for some entities. To that end, the guidance addresses the various levels of uncertainty in measuring the impact and allows an issuer to recognize provisional amounts, subject to certain criteria. It also addresses the disclosures that should accompany provisional amounts.
See more on SAB 118 in the Financial Institutions Executive Briefing dated Jan. 19, 2018.
On Nov. 29, 2017, the SEC staff issued SAB 117, to eliminate guidance in SAB Topic 5.M, “Other Than Temporary Impairment of Certain Investments in Equity Securities.” Because FASB ASC Topic 321, “Investments – Equity Securities,” (codified by ASU 2016-01) eliminates the AFS classification for investments in rel="noopener noreferrer" equity securities, the SEC guidance in SAB Topic 5.M on classification and measurement for that security type is no longer applicable. Subsequent to an SEC registrant adopting ASC Topic 321, SAB Topic 5.M no longer will apply.
On March 9, 2018, the FASB codified SAB 117 by issuing ASU 2018-04, “Investments – Debt Securities (Topic 320) and Regulated Operations rel="noopener noreferrer" (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update)."
On March 1, 2018, the FASB issued a proposal, “Intangibles rel="noopener noreferrer" – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements,” which is a follow-up to ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”
In ASU 2015-05, the FASB addresses whether fees paid in a CCA should be capitalized or expensed. The most common example of a CCA is software as a service (SaaS), which uses internet-based application software hosted by a service provider or third party. Stakeholders requested additional guidance on accounting for implementation costs associated with CCAs considered service contracts. Implementation costs include setup and other upfront fees to get the arrangement ready for use as well as training, creating or installing an interface, reconfiguring existing systems, and reformatting data.
Under the proposal, the accounting for implementation costs for CCAs that are service contracts would align with the requirements in ASC Subtopic 350-40 for internal-use software, and implementation costs incurred in a CCA would be accounted for as follows:
- Costs in the preliminary project and post-implementation operation stages would be expensed, so entities would need to determine the project stage for their CCAs.
- Costs for integration with on-premise software, coding, and configuration or customization would be capitalized, and the capitalized amounts would be amortized over the term of the hosting arrangement.
- Data conversion and training costs would be expensed.
The definition of a hosting arrangement would be revised to replace “licensing of” with “accessing and using,” which is expected to broaden the scope of contracts rel="noopener noreferrer" that would need to be assessed under the guidance.
Disclosure about implementation costs would be required.
Comments are due April 30, 2018.
In a statement on March 7, 2018, the SEC’s Division of Enforcement and Division of Trading and Markets signaled to entities involved directly or indirectly in online trading of digital (or virtual) assets that they might be subject to a gamut of securities regulation. For example, a trading platform that operates as an “exchange,” as defined by the federal securities laws, is required to register as a national securities exchange unless an exemption applies, and rel="noopener noreferrer" a platform that is not an exchange but offers other trading-related services might be required to register under the securities laws as a broker-dealer, transfer agent, or clearing agency.
The statement also provides resources for investors and other participants in the digital asset markets.
In a speech on March 7, 2018, SEC Commissioner Michael Piwowar addressed the 2018 RegTech Data Summit, providing his views on the SEC’s recent activity in the technology space. He covered the Enforcement Division’s report on decentralized autonomous organizations (the DAO report) that presented its view that the federal securities laws apply to virtual entities that issue securities by using distributed ledger or blockchain technology. Piwowar also discussed the use of extensible business reporting language (XBRL) data by various market stakeholders, HyperText Markup Language (HTML) hyperlinks in the exhibit index of rel="noopener noreferrer" SEC filings, the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) redesign program, and various technologies used by the SEC to monitor the securities markets.
On March 16, 2018, the CAQ released a new tool, “Non-GAAP Measures: A Roadmap for Audit Committees,” that public company audit committees can use to enhance their oversight of management’s use of non-GAAP measures. The road map includes themes that came up during a series rel="noopener noreferrer" of roundtables in 2017. It also presents leading practices for assessing whether a company’s use of non-GAAP measures provides a balanced perspective of its performance. When presented appropriately – that is, when they are transparent, consistent, and comparable to measures disclosed by other companies – information about non-GAAP measures is useful to investors.
To add context and give some real-life examples, the CAQ also released a companion video featuring interviews with audit committee chairs.