FASB issues guidance on stock compensation modification accounting

From the House Financial Services Committee

Financial Choice Act Passed in Committee

After several days of discussions and changes, the House Financial Services Committee on May 4, 2017, approved a revised version of the Financial Choice Act (the Choice Act), a 600-page bill aimed at reforming parts of the extensive supervisory requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), providing regulatory relief for small community banks and credit unions, increasing penalties for wrongdoing on Wall Street, ending bank bailouts, and promoting economic growth.

Measures in the Choice Act include providing a qualified mortgage safe harbor to mortgage loans held in portfolio, tailoring supervision to banks’ risk profiles and business models, raising the small-bank holding company policy statement asset threshold to $10 billion, creating an independent exam appeals process, paring back data collection on small-business loans, expanding the short-form call report, and enhancing mortgage relief for smaller banks and smaller mortgage originators.

Further, the Choice Act describes plans to reform the Consumer Financial Protection Bureau (CFPB). Under the act, the CFPB no longer would possess examination powers and enforcement authority over unfair, deceptive, or abusive acts or practices. The Choice Act also would repeal the Durbin amendment, impose more stringent penalties for Wall Street in cases of fraud or deception, and repeal sections of Dodd-Frank including the Volcker rule. It also would bring the CFPB, Federal Deposit Insurance Corp. (FDIC), Office of the Comptroller of the Currency (OCC), Federal Housing Finance Agency, National Credit Union Administration (NCUA), and supervisory functions of the Federal Reserve Board (Fed) into the congressional appropriations process, mandate cost-benefit analyses of regulations, and require congressional approval for “major rules.”

Under the act, regulatory relief would be available for banks maintaining a 10 percent nonrisk weighted leverage ratio that elect into the alternative regime. Qualifying banks would be exempt from federal capital and liquidity requirements, blocks on capital distributions, systemic risk regulations, and limitations on mergers and acquisitions provided any new entity also maintains the minimum leverage ratio.

Another important component of the Choice Act is ensuring no institution is “too big to fail” by replacing Dodd-Frank’s orderly liquidation authority provision with a new bankruptcy code designed to accommodate the failure of a large, complex financial institution. Additionally, it significantly restricts the Fed’s ability to make discounted loans or bail out financial firms or creditors.

The bill will next move to the full U.S. House of Representatives for a vote.

From the Federal Financial Institution Regulators

New Retail Lending Exam Guidance Issued

On April 12, 2017, the OCC issued a new booklet on retail lending as part of its Comptroller’s Handbook. The new material examines the risks associated with retail lending and provides a framework for examiners to evaluate retail credit risk management activities. It supplements the core assessment sections of the Comptroller’s Handbook booklets on supervision of large banks, community banks, and federal branches and agencies.

New Acting Comptroller of the Currency Designated

After completing his five-year term on April 9, 2017, Comptroller of the Currency Thomas Curry stepped down on May 5, 2017. He was replaced by Keith Noreika, who will serve as acting Comptroller of the Currency until President Donald Trump appoints and the Senate confirms a new comptroller.

Noreika most recently was a partner in the financial institutions practice at Simpson Thacher & Bartlett LLP and was a member of the Trump transition team for the Treasury Department. Throughout his career, he has focused on banking regulation and financial institution compliance with the Volcker rule, CFPB regulations, and Bank Secrecy Act and anti-money laundering rules. He also has represented national banks before the Supreme Court.

De Novo Handbook Released

The FDIC released, on May 1, 2017, the final version of its handbook, “Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions,” to help de novo banks apply for deposit insurance. The handbook provides information to new banks on prefiling activities, the de novo application process, and preopening activities. Although it does not establish new policy or guidance or modify existing guidance, the handbook provides greater transparency on the FDIC’s review and approval processes. This final version of the handbook incorporates clarifications provided during the comment period on the draft version.

The release of the handbook is the latest in a series of FDIC actions aimed at encouraging new bank charters. Previously, the FDIC reduced the initial de novo period from seven years to three years, updated its guidance on regulatory expectations for new banks, and hosted outreach meetings to help prospective institutions gain a better understanding of the application process.

From the Consumer Financial Protection Bureau (CFPB)

Corrections to Home Mortgage Disclosure Act Final Rule Proposed

On April 13, 2017, the CFPB proposed technical corrections and clarifications to the information lenders are required to collect and report under the Home Mortgage Disclosure Act final rule (Regulation C). Most provisions of the rule take effect Jan. 1, 2018, and lenders would have to comply with the new changes, when finalized, by the same effective date.

Among other changes, the proposal would create transition rules for loan purpose and the unique identifier for the loan originator, and if the loan was purchased and originated before the effective date of the final rule, this change would allow lenders to report “not applicable.” The proposal also clarifies terms such as “temporary financing” and “automated underwriting system,” creates a new exception for certain loans originated under a New York state program, and provides an online geocoding tool for reporting the census tract of the property securing a covered loan.

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

From the Financial Accounting Standards Board (FASB)

Meeting of the FASB’s Transition Resource Group (TRG) for Credit Losses Scheduled

The TRG for Credit Losses, which last  met on April 1, 2016, is scheduled to meet, according to the FASB’s calendar, on June 12, 2017.

The purpose of the TRG for Credit Losses is to consider issues that arise during the implementation of the FASB’s credit loss standard, which introduces the current expected credit loss (CECL) model, and to inform the FASB of those issues. The TRG also provides a forum to learn about guidance from others involved with implementation.

Share-Based Payment Modification Accounting Guidance Issued

The FASB issued Accounting Standards Update (ASU) 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” on May 10, 2017, to provide guidance for which share-based payment award changes require modification accounting and address diversity in practice. Today, some entities evaluate whether changes are substantive, some apply modification accounting for any change unless it’s purely administrative, and others apply modification accounting when the change results in a change to the fair value, vesting, or classification.
 
Under the ASU, modification accounting will apply unless all of the following are the same immediately before and after the modification:

• The award’s fair value – or calculated value or intrinsic value, if an alternative method is used (Note: If the modification does not affect any inputs to the valuation of the award, estimating the value immediately before and after the modification is not required.)
• The award’s vesting provisions
• The award’s classification as an equity instrument or a liability instrument

Current disclosure requirements in Topic 718 apply whether or not an entity is required to use modification accounting.
 
The amendments are effective for fiscal years beginning after Dec. 15, 2017, and interim periods within, for all entities, which first applies to March 31, 2018, interim financial statements for calendar year-end entities. Early adoption is permitted, including in an interim period, for 1) public business entities for reporting periods for which financial statements have not yet been issued and 2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments should be applied prospectively to awards modified on or after the effective date.

From the Securities and Exchange Commission (SEC)

New SEC Chair Sworn In

On May 4, 2017, Jay Clayton was sworn in as the new SEC chair. Clayton comes from the law firm Sullivan & Cromwell LLP, where he was a partner advising clients on capital raising and trading matters in the United States and abroad.

Major Standards and Internal Controls Addressed by SEC Chief Accountant

In his remarks at the 2017 Baruch College Financial Reporting Conference on May 4, 2017, SEC Chief Accountant Wesley R. Bricker discussed implementation of the major accounting standards, internal control, operating metrics, and auditor independence.

He urged preparers not to delay implementation efforts for the new disclosures required under the revenue recognition standard, and he cautioned preparers that the disclosures may be among the most challenging tasks in adopting the standard.

On internal controls over financial reporting, he asked those who use the Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control framework to adopt the updated 2013 “Internal Control – Integrated Framework” issued by COSO if they have not already done so. He also requested that COSO monitor the evolution of business and operating environments to determine whether further updates are necessary.

He mentioned not-often-discussed operating metrics and forecasts and stated that lessons learned on the presentation of non-generally accepted accounting principles (non-GAAP) measures could be applied to reporting of other types of financial information. He offered the following recommendations:

• Understand how the financial information is defined.
• Ensure that robust disclosure controls and procedures are in place.
• Consider insight from outside the finance and investor relations functions of the company.

Finally, on the topic of auditor independence, he mentioned a recent consultation about an auditor proposing (prior to dismissal) on prohibited nonaudit services to be performed after the end of the audit and professional engagement period, and he noted the SEC staff’s view that this potentially could impair an auditor’s independence. In addition, he noted that while the firm is still the auditor, the proposal could adversely affect the auditor’s professional skepticism.

Non-GAAP Measures and Disclosures About Major Standards Discussed by Corporation Finance (Corp Fin) Chief Accountant

In his remarks before the 2017 Baruch College Financial Reporting Conference, Corp Fin Chief Accountant Mark Kronforst focused primarily on non-GAAP disclosures and the disclosure of recently issued accounting standards.

He opened by noting recent improvements in non-GAAP disclosures under Regulation G as issuers have re-evaluated their non-GAAP disclosures in response to the updated Compliance & Disclosure Interpretations released in May 2016. After observing an implementation period for the new guidance, Corp Fin sent registrants comment letters related to non-GAAP disclosures, primarily focused on the following areas:

• Non-normal cash expenses – A non-GAAP adjustment for non-normal cash expenses should not include recurring cash expenses, such as advertising and marketing. That is, recurring cash expenses should be considered “normal” cash expenses.
• Cherry-picking – Non-GAAP disclosures that adjust for unusual or one-time charges also should be adjusted for unusual or one-time gains.
• Accelerating revenue – The acceleration of revenue should be included in non-GAAP disclosures only if new or changing accounting standards would cause a change in revenue recognition.
• Per share liquidity measures – Cash flow per share disclosures are prohibited.
• Income taxes – If the non-GAAP disclosures present an alternative calculation of net income, the non-GAAP disclosures should include the income tax effects on that amount.

Kronforst also noted that if a prospective non-GAAP measure is provided in the disclosures, then a GAAP measure and a reconciliation between the two measures should be presented. He further noted, however, that Regulation G includes an exception that allows issuers to provide only prospective non-GAAP measures if the reconciliation and corresponding prospective GAAP measure would require “unreasonable efforts.” Kronforst stated Corp Fin has not issued comment letters challenging issuers who have used the unreasonable efforts exception and has no plan to focus on it in the future.

Kronforst noted that Regulation G requires issuers to present GAAP measures with at least equal prominence to non-GAAP measures. The SEC’s position is that equal prominence requires that GAAP measures be disclosed before non-GAAP measures, because presenting non-GAAP measures first inherently gives less prominence to the GAAP measures.

Finally, he noted that Corp Fin has begun issuing comments on the topic of Staff Accounting Bulletin (SAB) 74 requirements pertaining to the disclosure of recently issued accounting standards. SAB 74 disclosures should include not only cumulative effects of adoption of the standards but also changes to disclosures and new material information that will be provided in the financial statements as a result of the adoption of the standard.

Revenue Recognition Observations Made

Sylvia E. Alicea, professional accounting fellow in the SEC’s Office of the Chief Accountant, delivered the keynote address at the Bloomberg BNA Conference on Revenue Recognition on May 8, 2017. She covered matters related to implementation of the new revenue recognition standard, including:

• Observations from recent consultations about application of the standard
• Reminders on transition disclosures
• Responsibilities of management and audit committees related to internal control over financial reporting (ICFR) when implementing new GAAP standards

Alicea’s observations included the need to identify and evaluate all relevant contractual terms when identifying the contract, because the terms may affect accounting conclusions. She also noted that identifying “performance obligations” is a new concept under the revenue standard. Highlighting the new disclosure requirements, she stated, “[t]he pertinent facts and related reasonable judgments related to a registrant’s contracts with customers, including the significant judgments made in applying the principles of the new revenue standard, should be disclosed to better inform investors’ decisions.”

Regarding transition disclosures, Alicea reminded preparers of the SAB 74 disclosure guidance. The design process for those controls should contemplate the nature and objective of the transition disclosures as well as the status of the company’s implementation efforts. She emphasized that the new disclosures might be material even if the dollar impact to the balance sheet or income statement is not material. Disclosure on the impact of the new standard should reflect consideration of recognition, measurement, presentation, and disclosure. She clarified that the SAB 74 reference to financial statements also covers the notes to the financial statements.

Corp Fin Director Named

On May 9, 2017, SEC Chair Jay Clayton announced that William H. Hinman will be the new director of Corp Fin. Hinman recently retired as a partner at Simpson Thacher & Bartlett LLP, where he advised public and private companies, including issuers and underwriters, on capital-raising transactions and acquisitions.

From the American Institute of CPAs (AICPA)

Cybersecurity Risk Management Reporting Framework Announced

On April 26, 2017, the AICPA announced the release of a voluntary reporting framework that addresses risk management and reporting of cybersecurity threats. With the announcement, two sets of criteria under the framework were released:

• “Description criteria – For use by management in explaining its cybersecurity risk management program in a consistent manner and for use by CPAs to report on management’s description.
• “Control criteria – Used by CPAs providing advisory or attestation services to evaluate and report on the effectiveness of the controls within a client’s program.”

The attest guide, “Reporting on an Entity’s Cybersecurity Risk Management Program and Controls,” is expected to be released in May.

From the Center for Audit Quality (CAQ)

Updated External Auditor Assessment Tool Released

The Center for Audit Quality (CAQ), in conjunction with the Audit Committee Collaboration, released, on April 18, 2017, an updated version of its “External Auditor Assessment Tool: A Reference for U.S. Audit Committees,” to help audit committees, particularly those serving public companies, evaluate the external auditor, including appointing, overseeing, and determining compensation. The tool does not offer a “one size fits all” approach; instead, it is a comprehensive yet scalable resource that encourages proactive efforts by audit committees.

The tool includes sample questions in three areas:

• The auditor’s quality of services and sufficiency of resources
• The auditor’s quality of communication and interaction
• The auditor’s independence, objectivity, and professional skepticism

A sample form and rating scale are included and can be used to collect input from company personnel about the external auditor. Additional resources are aimed at audit committees and others charged with governance.

The tool was last issued in June 2015; updates in the 2017 edition address:

• Changes in accounting standards and potential risk areas, such as implementation of the new revenue recognition standard
• Use of non-GAAP financial information
• Ongoing cybersecurity concerns