November financial reporting, governance, and risk management

| 11/18/2020
November 2020 financial reporting, governance, and risk management

Message from Mike Percy, Managing Partner, Financial Services

Dear FIEB readers,

With certain states tightening restrictions due to the rise in infection rates, I hope this message finds you, your friends, your family, and your colleagues safe.

Third quarter financial reporting results are now largely complete. For roughly 400 public banks filing with the SEC, there were only a handful of goodwill impairments. Other than goodwill, there were approximately 30 impairments recorded, with the most common being for mortgage servicing rights. Other impairments included debt securities, right of use assets, and long-lived assets. Nonperforming loans remained comparable to the second quarter. For the quarterly provision for credit losses over average loans, third quarter was less than the second quarter. However, CECL adopters saw a significant decline, while incurred-loss banks saw a slight decline.

As we move through the fourth quarter, I wish you, your family, and your friends a delightful Thanksgiving, whether it’s in person or virtually.


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Takeaways from the 2020 AICPA online conferences on credit unions and banks

AICPA holds online credit union conference

The AICPA Online Conference on Credit Unions was held virtually Oct. 19-21, 2020, and covered accounting and auditing topics relevant to credit unions. Focusing largely on the COVID-19 pandemic, the conference covered issues affecting credit unions both from an economic outlook and related to an ever-changing financial reporting landscape. Crowe has issued a comprehensive report covering key takeaways from the conference and insights on economic, accounting, and regulatory updates, as well as other industry hot topics.

AICPA holds online banking conference

In case you missed it, Crowe issued a comprehensive report from the 2020 AICPA Online Conference on Banking, which was held Sept. 14-16, 2020.

Matters of importance from the financial regulators

OCC’s “Semiannual Risk Perspective” focuses on financial impact from COVID-19

On Nov. 9, 2020, the Office of the Comptroller of the Currency (OCC) released its “Semiannual Risk Perspective” for fall 2020. The COVID-19 pandemic and efforts to contain its spread in the United States caused a historic economic downturn in early 2020. Economic activity rebounded in the third quarter, but there is significant ongoing financial risk. In the report, the OCC recognizes that banks remain in strong condition with sound capital and liquidity levels; however, bank profitability is stressed due to low interest rates and increasing levels of provisions for problem loans. Credit risk is increasing, operational and compliance risks are elevated, and strategic risk is an emerging issue due to low interest rates and increasing levels of provision for credit losses.

The report notes credit risk is increasing and evolving as government assistance programs expire and unemployment levels remain elevated, and assistance programs have suppressed past-due levels. Additionally, financial institutions are adjusting to a changing cyber landscape to protect their operations and customers from cyber criminals and fraud while many employees are working remotely. Banks adjusted operating models to accommodate large-scale telework but are having to manage the complexities of unique security and internal control challenges.

In addition, the report highlights elevated compliance risk stemming from expedited implementation of a number of assistance programs designed to address the COVID-19 crisis. These programs include the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Paycheck Protection Program and other federal, state, and bank-initiated forbearance and deferred payment programs. The report notes these programs can create challenges for full and accurate implementation of bank policies to meet Bank Secrecy Act (BSA), consumer protection, and fair lending requirements. Finally, the report highlights rapid changes in the payment processing landscape and banks’ need to maintain effective controls and sound risk management while addressing the needs of bank customers.

NCUA to consider proposed rule allowing capitalization of interest

On Nov. 19, 2020, the National Credit Union Administration (NCUA) is slated to meet to discuss, among other items, a proposed rule change to Part 741, Appendix B, “Interpretive Ruling and Policy Statement on Loan Workouts, Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans,” allowing for the capitalization of interest. Appendix B currently states that a credit union’s loan workout policy “must provide that in no event may the credit union authorize additional advances to finance unpaid interest and credit union fees.” The proposed rule change comes after credit unions have raised concerns about deferred interest for loans modified under the CARES Act or the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised).” In letters to the NCUA and Congress, many anticipate borrowers will need more relief in the coming months due to COVID-19, and the issuance of this proposed rule would allow credit unions to work with borrowers in a safe and sound manner. Once the proposed rule is published in the Federal Register, it will be available for comment period.

Agencies propose supervisory guidance regulation

On Oct. 29, 2020, the Federal Reserve Board (Fed), Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corp. (FDIC), NCUA, and OCC requested public comment on a proposal to codify the interagency statement clarifying the role of supervisory guidance, originally issued in September 2018. That statement clarified the differences between regulations and guidance. The proposed rule would confirm that the agencies intend to continue to follow the statement.

Comments are due Jan. 4, 2021.

Agencies seek comment on proposed changes to BSA

On Oct. 23, 2020, the Financial Crimes Enforcement Network (FinCEN) and the Fed requested public comment on proposed amendments to the BSA requirements related to funds transfer recordkeeping and travel rule regulations. The proposed rule would lower thresholds for international transactions from $3,000 to $250.

Comments are due Nov. 27, 2020.

Agencies outline operational resilience sound practices for large banks

On Oct. 30, 2020, the Fed, FDIC, and OCC released a paper outlining sound practices to strengthen operational resilience. The paper includes guidelines related to governance, operational risk management, business continuity management, third-party risk management, scenario analysis, information system management, and surveillance and reporting. It is intended for larger banks, including those with more than $250 billion in assets or those with more than $100 billion in assets with other risk characteristics.

Agencies finalize rule to strengthen large-bank resilience

On Oct. 20, 2020, the Fed, FDIC, and OCC issued a final rule requiring large banks to maintain a minimum level of stable funding – relative to assets, derivatives, and commitments – over a one-year period to help strengthen resilience. The rule establishes a net stable funding ratio and applies to banks with assets of $100 billion or more.

The final rule is effective July 1, 2021.

Agencies issue final rule to limit impact of large-bank failures

As part of their efforts to limit interconnectedness among large banking organizations, on Oct. 20, 2020, the Fed, FDIC, and OCC jointly issued a rule that would discourage the global systemically important bank (GSIB) holding companies from purchasing large amounts of total loss-absorbing capacity (TLAC) debt by requiring such banks to hold additional capital against substantial holdings of TLAC debt. The agencies also would require GSIB holding companies to report their outstanding TLAC debt. This increased capital requirement should help reduce the impact on the financial system in the event of a GSIB failure.

The final rule is effective on April 1, 2021.

OCC issues final “true lender” rule

On Oct. 27, 2020, the OCC issued a final rule to address uncertainty around lending relationships between banks and third parties. The rule indicates that a bank is the true lender if, as of the date of origination, it is either named as the lender in the loan agreement or funds the loan. If one bank is named as the lender in the loan agreement and another bank funds that loan, the bank that is named as the lender in the loan agreement is deemed to be the true lender. The true lender retains the compliance obligations associated with the origination of that loan.

CFPB finalizes rule implementing Fair Debt Collection Practices Act

On Oct. 30, 2020, the CFPB issued a final rule to clarify amendments to Regulation F, the implementing regulation for the Fair Debt Collection Practices Act (FDCPA), which currently contains only limited requirements related to the FDCPA. The final rule both implements the existing provisions of the FDCPA and provides clarifications related to newer communication technologies that did not exist at the time the FDCPA was originally passed in 1977. The FDCPA applies to “debt collectors,” which generally are defined as anyone collecting debt for another party or anyone collecting their own debts using a different name.

The rule also includes the following:

  • How consumers can limit debt collection communications, including opt-out provisions for certain communications
  • Clarification that general prohibitions on harassing, oppressive, or abusive conduct apply to telephone calls, email, and text messages equally
  • Reinforcement of existing prohibitions regarding false, deceptive, or misleading representations or means, and unfair or unconscionable means
  • Provisions related to disputes and record retention

The CFPB also indicated that it intends to issue a second debt collection final rule focused on consumer disclosures in December 2020.

The final rule is effective one year after publication in the Federal Register.

CFPB seeks input regarding consumer access to financial records

The CFPB issued, on Oct. 22, 2020, an advance notice of proposed rulemaking (ANPR) requesting information to assist in developing implementing regulations for Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provides for consumer rights to access financial records. The ANPR seeks information on costs and benefits of consumer data access, competitive incentives, standard-setting, access scope, consumer control and privacy, and data security and accuracy.

Comments are due Feb. 4, 2021.

CFPB finalizes rule to extend GSE patch

On Oct. 20, 2020, the CFPB issued a final rule to extend the government-sponsored enterprise (GSE) patch for Fannie Mae and Freddie Mac loans, which was set to expire in January 2021. The GSE patch will be extended until the mandatory compliance date of the yet-to-be-issued final rule amending the general qualified mortgage (QM) definition. The GSE patch creates the assumption that a loan is a QM if eligible for purchase or guarantee by one of the GSEs, regardless of other factors.

Paycheck Protection Program (PPP)

SBA seeks comment on PPP forms, including borrower necessity questionnaires for loans of $2 million or more

On Oct. 26, 2020, the Small Business Administration (SBA) published a notice, “Reporting and Recordkeeping Requirements Under OMB Review,” in the Federal Register. The notice covers the collection of information for 11 forms related to the PPP, including borrower initial application (Form 2483), lenders application (Form 2484) and agreements (Forms 3506 and 3507), and forgiveness applications for borrowers (Forms 3508, 3508S, 3508EZ) and lender reporting requirements.

The notice also introduces two new forms for borrowers with loans greater than $2 million: SBA Form 3509, “Loan Necessity Questionnaire (For-Profit Borrowers),” and SBA Form 3510, “Loan Necessity Questionnaire (Non-Profit Borrowers).” According to the forms, each borrower, including its affiliates, that received PPP loans with an original principal amount of $2 million or greater is required to complete this form and submit it, with the required supporting documents, to the lender servicing the loan. The form is sent by the lender to the borrower. The borrower has 10 business days to submit the completed form to the lender. Both questionnaires are nine pages and cover the following:

The notice is to collect comments on the following for all of the forms: “(a) whether the collection of information is necessary for the agency to properly perform its functions; (b) whether the burden estimates are accurate; (c) whether there are ways to minimize the burden, including through the use of automated techniques or other forms of information technology; and (d) whether there are ways to enhance the quality, utility, and clarity of the information.”

Comments are due by Nov. 25, 2020.

Main Street Lending Program (MSLP)

Fed continues to update FAQs

The Fed updated the MSLP frequently asked questions document on Oct. 30, 2020, to provide additional guidance on the program as well as other topics. The Fed added questions and answers addressing regulatory treatment.

On Oct. 30, 2020, the Fed also updated its Main Street for Nonprofit Organizations frequently asked questions.

From the Financial Accounting Standards Board (FASB)

FASB issues codification improvements

The FASB issued Accounting Standards Update (ASU) 2020-10, “Codification Improvements,” on Oct. 29, 2020. This ASU results from the FASB’s perpetual project to make updates for technical corrections, clarifications, wording and structure simplifications, and other minor improvements. The amendments in this ASU affect a wide range of codification topics and are separated into two sections: B and C.

The Section B amendments improve codification consistency by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements or on the face of the financial statements appears in the applicable disclosure section as well as the other presentation matters sections, reducing the chance that the requirement would be missed. These amendments are not expected to change current practice.

The amendments in Section C clarify guidance for more consistent application. Section C addresses retirement benefits (Topic 715), interim reporting (Topic 270), receivables (Topic 310), guarantees (Topic 460), income taxes (Topic 470), and imputation of interest (Topic 835), among other topics.

The amendments are effective for annual periods beginning after Dec. 15, 2020, for public business entities (PBEs). For all other entities, the amendments are effective for annual periods beginning after Dec. 15, 2021, and interim periods within annual periods beginning after Dec. 15, 2022. Early application is permitted, and the amendments should be applied retrospectively.

FASB issues update to reflect SEC guarantor financial disclosures

The FASB issued ASU 2020-09, “Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762,” which amends and supersedes various Securities and Exchange Commission (SEC) paragraphs to reflect SEC Release No. 33-10762. That release amends the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. These changes are intended to both improve the quality of disclosure and increase the likelihood that issuers will conduct debt offerings on a registered basis.

FASB clarifies guidance for nonrefundable fees and other costs related to receivables

The FASB issued, on Oct. 15, 2020, ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs,” to clarify that for each reporting period an entity should reevaluate whether a callable debt security is within the scope of Accounting Standards Codification paragraph 310-20-35-33. If the security is within the scope, any premium should be amortized to the earliest call date rather than maturity.

For PBEs, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2020, and early application is not permitted. 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, and early application is permitted after Dec. 15, 2020.

The amendments in ASU 2020-08 are to be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities, and they do not change the effective dates for ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.”

FASB proposes to clarify scope of reference rate reform guidance

The FASB issued, on Oct. 29, 2020, a proposed ASU, “Reference Rate Reform (Topic 848): Scope Refinement,” that would clarify the scope of ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides temporary, optional expedients and exceptions for applying GAAP to certain contract modifications and hedging relationships that reference the London Interbank Offered Rate or another reference rate expected to be discontinued.

The proposed ASU addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform, commonly referred to as the “discounting transition.”

The proposed amendments would clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition.

Comments were due Nov. 13, 2020.

FASB proposes clarifications to the issuer’s accounting for certain modifications of freestanding equity-classified forwards and options

On Oct. 26, 2020, the FASB issued a proposed ASU, “Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Forwards and Options (a Consensus of the Emerging Issues Task Force).” The proposed ASU would clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified forwards and options, such as warrants, that remain equity classified after modification. It addresses how an issuer would measure and recognize the effects of these transactions. The proposed ASU provides a principles-based framework to determine whether an issuer would recognize the modification or exchange as an adjustment to equity or an expense.

Comments are due Dec. 28, 2020.

FASB proposes three targeted improvements to the leases standard

On Oct. 20, 2020, the FASB issued a proposed ASU, “Leases (Topic 842): Targeted Improvements,” intended to improve three areas of the leases guidance.

The amendments in the proposed ASU target the following areas:

  • For lessors, it would amend lease classification requirements for leases in which the lease payments are predominantly variable by requiring lessors to classify and account for those leases as operating leases.
  • For lessees, it would provide the option to remeasure lease liabilities for changes in a reference index or a rate affecting future lease payments at the date that those changes take effect.
  • For both lessees and lessors, it would provide that when a separate lease component within a contract is terminated and the economics of the remaining lease components remain substantially the same as before the partial termination of that contract, a lessee or lessor would not apply modification accounting to the remaining lease components.

Comments are due Dec. 4, 2020.

Securities and Exchange Commission (SEC) need to know

SEC improves exempt offering framework

The SEC voted, on Nov. 2, 2020, to amend its rules to address gaps and complexities in the exempt offering framework. The amendments are designed to promote capital formation and expand investment opportunities while preserving or improving investor protections as well as increasing access to capital for issuers.

In general, the amendments:

  • Establish – in one broadly applicable rule – the ability of issuers to move from one exemption to another
  • Expand the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and adjust certain individual investment limits
  • Provide specific rules governing certain offering communications, including permitting some “test-the-waters” and “demo day” activities
  • Standardize certain disclosure and eligibility requirements and bad actor disqualification provisions

The final rules are effective 60 days after publication  in the Federal Register, except for certain rules and the amendments to the introductory paragraph in the “Optional Question and Answer Format for an Offering Statement” section of Form C, which are effective from the earlier of the date of publication in the Federal Register or March 1, 2021, until March 1, 2023.

SEC’s Division of Enforcement issues 2020 annual report

The SEC’s Division of Enforcement published its 2020 annual report on Nov. 2, 2020, providing a comprehensive view of its accomplishments over the past year, including significant actions, areas of strategic change, and enforcement efforts related to COVID-19.

According to the report, during fiscal year 2020, the division took positive steps to prevent potential fraud related to the COVID-19 pandemic and pursue actions against those who attempted to capitalize on it. At the same time, it maintained focus on the vast number of existing and new enforcement issues not related to COVID-19. Additionally, the report describes the division’s strategic changes to improve its operations specifically related to the whistleblower program and the pace of investigations.

The hundreds of enforcement actions brought during 2020 addressed a wide range of issues such as issuer disclosure and accounting violations, foreign bribery, investment advisory issues, securities offerings, market manipulation, insider trading, and broker-dealer misconduct.

Corp Fin provides transitional guidance on Regulation S-K Items 101, 103, and 105

The SEC’s Division of Corporation Finance (Corp Fin) issued, on Nov. 5, 2020, “Transitional FAQs Regarding Amended Regulation S-K Items 101, 103, and 105,” addressing guidance on the disclosure requirements and related rules adopted in the “Modernization of Regulation S-K Items 101, 103, and 105” final rule (Securities Act  Release No. 33-10825). The amendments to modernize the description of business (item 101), legal proceedings (item 103), and risk factor disclosures (item 105) are effective Nov. 9, 2020. Corp Fin’s guidance answers three questions and provides views on transition to these new rules. Corp Fin also released, on Nov. 6, 2020, a Small Entity Compliance Guide that summarizes and explains the final rule requirements.

Statistical disclosures for banking registrants final rule becomes effective

The final rule “Update of Statistical Disclosures for Bank and Savings and Loan Registrants” became effective Nov. 16, 2020, and applies to years ended on or after Dec. 15, 2021. Early compliance will be permitted provided the final rule is applied in its entirety from the date of early compliance. This final rule modernizes statistical disclosures of banking registrants currently provided in Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.” The final rule rescinds Guide 3 and relocates required disclosures to new Subpart 1400 of Regulation S-K.

SEC announces departure of Corp Fin director

On Oct. 27, 2020, the SEC announced that William Hinman, director of Corp Fin, plans to leave the SEC later this year. Since joining Corp Fin in May 2017, Hinman has led and directed a number of significant initiatives including modernizing the offering process and enhancing investor protections, improving disclosures to investors while reducing unnecessary compliance cost, providing guidance on emerging issues, and modernizing and updating the proxy process. Upon Hinman’s departure, Shelley Parratt, current deputy director of Corp Fin, will serve as the division’s acting director.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB posts audit committee resource on new estimates and specialists requirements

On Nov. 12, 2020, the PCAOB released a new resource, “Audit Committee Resource: New PCAOB Requirements Regarding Auditing Estimates and Use of Specialists,” to help audit committees increase their understanding of the new requirements, which are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020. This resource provides the basics of the new requirements, important takeaways for audit committees, and questions to consider asking auditors.

PCAOB releases report on initial impact of critical audit matter requirements

The PCAOB, on Oct. 29, 2020, issued an interim analysis report and two accompanying white papers related to the initial impact of critical audit matter (CAM) requirements.

The interim analysis report provides insights and the perspectives of the PCAOB on the initial impact of CAM requirements on the primary audit process stakeholders. Findings highlighted in the report include:

  • Significant investments were made by audit firms to support initial implementation of CAM requirements.
  • Investor awareness of CAMs communicated in the auditor’s report continues to develop; however, some investors already find the CAMs information helpful.
  • Evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year has not been identified.

The PCAOB staff white paper titled “Stakeholder Outreach on the Initial Implementation of CAM Requirements” presents results from surveys of engagement partners and audit firms, structured interviews with audit committee chairs and financial statement preparers, an investor survey, and a public request for comment.

The PCAOB staff white paper titled “Econometric Analysis on the Initial Implementation of CAM Requirements” is based on analysis of data gathered from a number of sources, including the PCAOB’s inspection program and third parties.

PCAOB releases preview of 2019 inspection observations

The PCAOB issued, on Oct. 8, 2020, a publication, “Spotlight: Staff Update and Preview of 2019 Inspection Observations,” that provides observations from the 2019 inspections of audits of issuers prior to issuance of the inspection reports, which audit committees might find useful when engaging with their auditors. The report highlights an update on PCAOB inspection transformation activities, observations on good practices, activities of the target team focusing on current audit risks and emerging topics, recurring observed deficiencies, the effect of technology, and audit committee communications. While recurring deficiencies are similar to those in prior years, one area identified for improvement is accounting estimates, specifically related to allowance for loans loss.

From the American Institute of Certified Public Accountants (AICPA)

AICPA updates digital assets practice aid

To address the quickly evolving ecosystem of digital assets, the AICPA released, on Oct. 8, 2020, an updated practice aid, “Accounting for and Auditing of Digital Assets,” adding 13 new questions and answers to the aid originally issued in December 2019.

The practice aid provides nonauthoritative guidance for financial statement preparers and auditors on accounting and auditing under GAAP and generally accepted auditing standards for digital assets, which are defined broadly as “digital records that are made using cryptography for verification and security purposes, on a distributed ledger.”

The new questions and answers address the following areas:

  • Meeting the definition of an investment company when engaging in digital asset activities
  • Accounting by an investment company for digital assets it holds as an investment
  • Recognition, measurement, and presentation of digital assets specific to broker-dealers
  • Considerations for crypto assets that require fair value measurement
  • Accounting for stablecoin holdings

From the Center for Audit Quality (CAQ)

CAQ releases “2020 Audit Committee Transparency Barometer” report

On Oct. 13, 2020, the CAQ and Audit Analytics issued the “2020 Audit Committee Transparency Barometer,” which tracks S&P 1500 proxy disclosures to evaluate transparency regarding audit committee oversight of the external auditor and other important financial reporting topics.

This edition reports positive trends in audit firm evaluation and supervision and in disclosures of risk oversight in cybersecurity, COVID-19, and discussion of CAMs. However, disclosures related to auditor compensation and explanations for changes in fees paid to the external auditor have remained stagnant and provide opportunity for improvement. The publication also provides disclosure examples.

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