FASB clarifies CECL non-PBE effective dates; CAQ releases CAMs tool

Current financial reporting, governance, and risk management topics

From the federal financial institution regulators

Federal regulators propose changes to Volcker rule regulations

On July 17, 2018, the federal banking agencies published in the Federal Register proposed changes to the regulations implementing Section 13 of the Bank Holding Company Act (BHC Act) that restrict the ability of a banking entity to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. These restrictions, commonly known as the Volcker rule, were added to the BHC Act in 2010 by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Jointly proposed by the Board of Governors of the Federal Reserve System (Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and the Commodities Futures Trading Commission, the changes are intended to clarify what activities are prohibited and to improve supervision and implementation of Section 13.

The proposal would tailor the rule by focusing its restrictions on proprietary trading and investments in covered funds on banks with “significant” and “moderate” trading activities. Additionally, banks with limited trading assets and liabilities of less than $1 billion would have a rebuttable presumption of compliance with the Volcker rule.

This proposal follows a provision in the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) that generally exempts banks with less than $10 billion in assets from Volcker rule requirements.

Comments are due Sept. 17, 2018.

Fed launches new consumer compliance publication for bank senior executives

In July 2018, the Fed introduced a new publication, the “Consumer Compliance Supervision Bulletin,” which highlights current consumer compliance issues for senior executives in banking organizations and supplements its outreach program for Fed-supervised institutions. The bulletin also will provide practical steps for banks to consider as they address consumer compliance risks.

The inaugural issue includes the Fed’s supervisory observations regarding fair lending in the areas of redlining, pricing, and underwriting. It also covers certain unfair or deceptive acts or practices that examiners have observed involving student financial products and services, overdraft practices, and loan officer misrepresentations. The issue wraps up with regulatory and policy developments such as the new Uniform Interagency Consumer Compliance Rating System and changes to the implementing regulations for the Military Lending Act.

OCC updates Comptroller’s Handbook on capital and dividends

On July 23, 2018, the OCC published a revised “Capital and Dividends” booklet of the Comptroller’s Handbook. This booklet includes guidance for bank examiners to assess capital adequacy and compliance with requirements for capital and dividends.

The revisions include:

• Regulatory capital rule changes
• Integration of the Office of Thrift Supervision into the OCC
• Expanded exam procedures for capital, dividends, and capital adequacy
• An internal control questionnaire and verification procedures
• Information from OCC Bulletin 2012-16, “Capital Planning: Guidance for Evaluating Capital Planning and Adequacy"

OCC issues statement on fintech charters

In a release on July 31, 2018, the OCC announced that it will begin accepting applications from nondepository financial technology (fintech) companies engaged in the business of banking for national bank charters and for special purpose national bank charters. According to Comptroller of the Currency Joseph Otting, “The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America. Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”

Concurrent with the announcement, the OCC issued a policy statement and a supplement to the Comptroller’s Licensing Manual. The policy statement and the supplement emphasize the following:

• Evaluation of each application will consider its unique facts and circumstances.
• The OCC will supervise fintech companies that receive special purpose national bank charters as it supervises similarly situated national banks, including capital, liquidity, and financial inclusion commitments.
• Fintech companies must provide an acceptable contingency plan to address significant financial stress that could threaten their viability, outlining strategies for restoring financial strength and options for selling, merging, or liquidating in the event the recovery strategies are not effective.
• Expectations for promoting financial inclusion will depend on the company’s business model and the types of products, services, and activities that are planned.
• As with other de novo banks, new fintech companies that become special purpose national banks will be subject to heightened supervision in the first few years of operation.

From the Financial Accounting Standards Board (FASB)

FASB clarifies effective date of CECL for non-PBEs

On July 25, 2018, the FASB voted to clarify the effective date guidance for Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses, Topic 326” regarding current expected credit loss (CECL), to illustrate the original FASB intent of the standard that non-public business entities (non-PBEs) have more time to adopt the standard than non-SEC filer PBEs. The FASB decision formalizes that non-PBEs must adopt CECL in fiscal years beginning after Dec. 15, 2021, and interim periods within those fiscal years (that is, in the Dec. 31, 2022, annual financial statements for calendar year-end non-PBEs). A proposed ASU to amend CECL for the clarification will be issued with a 30-day comment period.

The FASB’s decision resolves questions raised by stakeholders about how the effective date of CECL applies to non-PBEs. Specifically, many believed it was the FASB’s intention to provide additional implementation time for non-PBEs compared to non-SEC filer PBEs. The CECL transition guidance required all entities to adopt with a cumulative effect to opening retained earnings as of the beginning of the fiscal year (that is, as of Jan. 1, 2021, for calendar year-end non-SEC filer PBEs and non-PBEs); so, both populations of entities would have been required to have appropriate reporting systems and internal controls as of that date. Further complexity existed given the regulator reporting required for non-PBE banks and credit unions to file three call reports using the incurred loss model during 2021 and then reverse nine months of incurred loss accounting and record 12 months of CECL in the fourth quarter of 2021. 

Based on the forthcoming proposal, these would be the clarified effective dates for CECL:

• For PBEs that are SEC filers, the CECL standard is effective for fiscal years beginning after Dec. 15, 2019, including interim periods within those fiscal years.
• For PBEs that are not SEC filers, the standard goes into effect for fiscal years beginning after Dec. 15, 2020, including interim periods within those fiscal years.
• For non-PBEs, the standard is effective for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years.

Early adoption is permitted for all entities in fiscal years beginning after Dec. 15, 2018.

FASB issues transition and component separation improvements for leases

The FASB issued, on July 30, 2018, ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” to provide an optional transition method for adopting the new leases guidance in Topic 842 that will eliminate comparative period reporting under the new guidance in the year of adoption. This option addresses preparer feedback about the related costs of presenting comparative periods. Under the optional transition method, only the most recent period presented will reflect the adoption with a cumulative-effect adjustment to the opening balance of retained earnings, and the comparative prior periods will be reported under the previous guidance in Topic 840.

In addition, the ASU offers lessors a practical expedient that mirrors the practical expedient already provided to lessees in ASU 2016-02, “Leases (Topic 842).” The new practical expedient will allow lessors to elect, by class of underlying asset, to not separate nonlease components from the associated lease component when specified conditions are met. The practical expedient must be applied consistently for all lease contracts.

For lessors electing the practical expedient related to separating components of a contract, the effective date and transition requirements are the same as the requirements for Topic 842 issued in ASU 2016-02. For entities that have early adopted Topic 842, the ASU provides specific transition guidance for lessors electing the practical expedient.

FASB provides improvements to leases standard

On July 18, 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which corrects inconsistencies in the guidance and clarifies how to apply certain provisions of the leases standard. The amendments in ASU 2018-10 target 16 issues:

• Residual value guarantees
• Rate implicit in the lease
• Lessee reassessment of lease classification
• Lessor reassessment of lease term and purchase option
• Variable lease payments that depend on an index or a rate
• Investment tax credits
• Lease term and purchase option
• Transition guidance for amounts previously recognized in business combinations
• Recognition of certain transition adjustments in earnings rather than equity
• Transition guidance for leases previously classified as capital leases under Topic 840
• Transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840
• Transition guidance for sale and leaseback transactions
• Impairment of net investment in the lease
• Unguaranteed residual asset
• Effect of initial direct costs on rate implicit in the lease
• Failed sale and leaseback transaction

ASU 2018-10 amends the guidance in Topic 842 issued in ASU 2016-02, and the effective date and transition requirements are consistent with ASU 2016-02. For entities that early adopted ASU 2016-02, the amendments are effective upon issuance.

FASB issues codification improvements

The FASB issued ASU 2018-09, “Codification Improvements” on July 16, 2018. The ASU contains 30 improvements to the codification, including the following:

• Clarifies that a financial institution must disclose the required and actual amounts of regulatory capital for each measure of regulatory capital for which the entity must comply
• Clarifies income tax accounting for certain quasi reorganizations
• Clarifies debt extinguishment guidance when the fair value option is elected
• Revises an example to align with guidance that prohibits the combination of freestanding financial instruments in the scope of ASC 480-10 with noncontrolling interest, unless the combination is required by Topic 815
• Clarifies that excess tax benefits should be recognized in the period when the tax deduction for compensation expense is taken on the tax return
• Eliminates the three tax allocation methods from ASC 805-740-25-13 because they are not systematic, rational, and consistent as required by Topic 740
• Clarifies that the intent to set off criteria is not required to offset derivative assets and liabilities when recognized at fair value and executed with the same counterparty under a master netting agreement
• Clarifies how to consider transfer restrictions for fair value measurement
• Clarifies balance sheet offsetting for broker-dealers

The effective dates vary by issue, as specified in the ASU. Some improvements were effective upon issuance, which was July 16, 2018, for both PBEs and non-PBEs. For year-end PBEs, other improvements are effective in the March 31, 2018, interim financial statements, and the rest are effective one year later. For year-end non-PBEs, other improvements are effective in the Dec. 31, 2019, annual financial statements, and the rest are effective one year later.

Early adoption is permitted, including in an interim period.

From the Securities and Exchange Commission (SEC)

SEC provides guidance on transitioning to revised SRC definition

On Aug. 10, 2018, the SEC released guidance on transitioning to the revised Smaller Reporting Company (SRC) definition, which is included in the small Entity Compliance Guide for Issuers. When determining SRC status under the revised definition after Sept. 10, 2018, a company should use the date it measures its public float. Newly qualified SRCs have the option to use the SRC scaled disclosure accommodations in filings as follows:

• in the next periodic or current report due after Sept.10, 2018; or
• for transactional filings without a due date, in filings or amended filings made on or after Sept. 10, 2018.

A calendar-year-end reporting company newly qualified as a SRC under the revised definition and using public float and annual revenue amounts as of June 29, 2018 may use the SRC scaled disclosure accommodations in its Form 10-Q for the nine months ending Sept. 30, 2018.

SEC proposes disclosure simplifications for guarantor registered debt offerings

On July 24, 2018, the SEC proposed amendments to Rules 3-10 and 3-16 of Regulation S-X to simplify the requirements for financial disclosure that apply to registered debt offerings for guarantors and issuers of guaranteed securities and for affiliates whose securities collateralize a registrant’s securities. The proposed simplifications are intended to result in the registration of additional debt offerings and, in turn, provide additional investor protections as compared with unregistered offerings.

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

SEC issues final rule and seeks comments on compensatory securities offerings

On July 18, 2018, the SEC issued a final rule for nonreporting companies that amends Securities Act Rule 701(e) as mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The rule expands the securities registration exemption for compensatory securities issued by nonreporting companies by increasing the value of exempt equity securities from $5 million to $10 million. It was effective on July 23, 2018.

Also, the SEC issued a concept release to request feedback on whether the rules for compensatory offerings (employee benefit plans) should be expanded further as well as modernized.

Comments on the concept release are due by Sept. 24, 2018.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB seeks comment on five-year plan

On Aug. 10, 2018, the PCAOB released a draft of its five-year strategic plan and, for the first time ever, is seeking public comment on the plan.

The draft plan contains five strategic 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"

Comments are due Sept. 10, 2018.

From the Center for Audit Quality (CAQ)

CAQ releases resource for understanding critical audit matters

On July 24, 2018, the CAQ released a resource, “Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements,” to help audit committees, investors, and other users understand critical audit matters (CAMs). CAMs will be included in the auditor’s report for large accelerated filers in fiscal years ending on or after June 30, 2019, and for other public companies (except for emerging growth companies, brokers and dealers reporting under Exchange Act Rule 17a-5, investment companies other than business development companies, and benefit plans) in fiscal years ending on or after Dec. 15, 2020.

The CAQ states that “many audit firms are performing dry runs” with respect to CAM implementation in auditors’ reports, and this resource is “a first step in raising awareness about the underlying requirements of CAMs.” The publication addresses the identification and reporting of CAMs, and it includes answers to eight questions frequently asked by audit committees and others. 

In addition, an appendix compares the PCAOB CAMs and the International Auditing and Assurance Standards Board (IAASB) key audit matters (KAMs) in their respective expanded auditor reporting standards. The PCAOB has acknowledged similarities between CAMs and KAMs.