Financial Institutions Executive Briefing
The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe Horwath LLP. 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
Additional Guidance Issued on the Internal Audit Function
The Federal Reserve System (Fed) issued Supervision and Regulation (SR) Letter 13-1, “Supplemental Policy Statement on the Internal Audit Function and Its Outsourcing,” on Jan. 23, 2013. Building on the guidance in SR Letter 03-5, issued in 2003, this policy statement addresses the characteristics, governance, and operational effectiveness of the internal audit function of financial institutions.
SR Letter 13-1 applies to Fed-supervised institutions with more than $10 billion in total consolidated assets. These organizations include state member banks, domestic banks and savings and loan holding companies, and U.S. operations of foreign banking organizations.
The new guidance addresses the following topics:
- Enhanced internal audit practices. Discusses the enhancements that an institution should incorporate into its internal audit function based on observations of the effectiveness of internal audit functions during the recent financial crisis
- Internal audit function. Encourages institutions to incorporate professional standards such as the Institute of Internal Auditors (IIA) guidance into their overall internal audit architecture and provides additional guidance not specifically articulated in the IIA guidance
- Internal audit outsourcing arrangements. Provides further clarification of the responsibilities of the board of directors and senior management to provide oversight of internal audit outsourcing
- Independence guidance for the independent public accountant. Addresses certain changes to Section 36 of the Federal Deposit Insurance Act, which was enacted after SR Letter 03-05 was issued
- Examination guidance. Covers the supervisory assessment of an institution’s internal audit function and the reliability of work performed by internal audit
Two Final Rules Issued on Mortgage Servicing Standards
On Jan. 17, 2013, the Consumer Financial Protection Bureau (CFPB) issued final rules amending the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z). The comprehensive Regulation X rule implements sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). It addresses servicers’ obligations to correct errors asserted by mortgage loan borrowers, provide certain information requested by such borrowers, and provide protections to such borrowers in connection with force-placed insurance. In addition, this final rule addresses servicers’ obligations to establish reasonable policies and procedures to achieve certain delineated objectives, provide information about mortgage loss mitigation options to delinquent borrowers, establish policies and procedures for providing delinquent borrowers with continuity of contact with servicer personnel who can perform certain functions, and evaluate borrowers’ applications for available loss mitigation options.
The Regulation Z final rule implements Dodd-Frank sections that address initial rate adjustments for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts. This rule also amends current rules governing the scope, timing, content, and format of disclosures to consumers about interest-rate adjustments to their variable-rate transactions.
Both of these new rules are effective Jan. 10, 2014.
A summary, prepared by the CFPB, of the new rules and links to resources to increase understanding of the amendments and their implications are available on the CFPB website.
Final Rule Issued on Mortgage Loan Originator Compensation Standards
Separately, on Jan. 20, 2013, the CFPB issued its final rule to implement requirements and restrictions imposed by Dodd-Frank concerning loan originator compensation, qualifications of loan originators, registration or licensing of loan originators, compliance procedures for depository institutions, mandatory arbitration, and financing of single-premium credit insurance.
A summary, prepared by the CFPB, of the new rule and links to resources to help understand the amendments and their implications are available on the CFPB website.
Final Rule Issued on Appraisals for Higher-Priced Mortgage Loans
A final rule that establishes new appraisal requirements for higher-priced mortgage loans was issued jointly on Jan. 18, 2013, by the Fed, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), CFPB, Federal Housing Finance Agency (FHFA), and National Credit Union Administration (NCUA). Under Dodd-Frank, mortgage loans are priced higher if they are secured by a consumer’s home and have interest rates above certain thresholds. For higher-priced mortgages, the new rule requires, among other things, that creditors use a licensed or certified appraiser to prepare a written appraisal report based on a physical visit to the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of the appraisal report.
Additional requirements in the rule are intended to address fraudulent property flipping by seeking to make sure that the value of the property has increased legitimately. Several types of loans are specifically exempted from the new rule, which will become effective Jan. 18, 2014.
Final Regulations Issued to Implement FATCA
The U.S. Department of the Treasury and the Internal Revenue Service have issued final regulations implementing the Foreign Account Tax Compliance Act (FATCA). The provisions in the regulations target noncompliance by U.S. taxpayers using foreign accounts. They establish a common intergovernmental approach to combating tax evasion and finalize the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions, other foreign entities, and U.S. withholding agents.
Under the final regulations, the timelines for due diligence, reporting, and withholding will be phased in over an extended transition period in order to provide financial institutions sufficient time to develop necessary systems. To limit market disruption and reduce administrative burdens, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities.
The final regulations became effective Jan. 28, 2013.
Dallas Fed Releases Report on “Too Big to Fail”
The Federal Reserve Bank of Dallas (Dallas Fed) has issued a report, “Financial Stability: Traditional Banks Pave the Way,” which advocates breaking up large banks into multiple business entities to ensure an end of “too big to fail.” The report is composed of five essays by Dallas Fed financial experts and an introductory letter from Richard Fisher, the Dallas Fed’s president and CEO.
The text of a Jan. 16, 2013, speech by Fisher promoting the proposal is available on the Federal Reserve Bank of Dallas website.
Article Looks at Future of the Payments Industry
The January 2013 issue of The Credit Line, a digital newsletter about credit card industry trends and services published by the American Bankers Association, features a group of articles on the payments industry’s future. Multiple articles in the “2013 Outlook” section include insights from industry experts, survey data on what consumers want to see in 2013, and the seven trends predicted to have the greatest impact on U.S. financial institutions in the coming year.
Remarks Made by the Comptroller of the Currency
Comptroller of the Currency Thomas Curry spoke at the annual Bank Director Magazine Conference on Jan. 28, 2013, in Scottsdale, Ariz. In his presentation, Curry discussed the vital role community bank directors play in the governance of national banks and savings institutions.
The remarks included references to OCC resources available to community bank directors, including the planned publication in the next few weeks of a new booklet, “A Common Sense Approach to Community Banking.” According to Curry, the publication is intended to “provide a clear and concise overview of the fundamental practices that distinguish community institutions that flourish through all kinds of economic cycles from those that just get by or – worse – that ultimately cannot survive as an independent institution.”
The booklet will highlight three time-tested concepts that all financial institutions should understand and apply to their business:
- Accurately identifying and monitoring risks
- Mapping out a vision and business plan that include sufficient capital support
- Understanding how the supervisory process works and how to extract helpful information from that process
From the Financial Accounting Standards Board (FASB)
Fair Value Disclosure Clarified for Private Entities
The FASB issued Accounting Standards Update (ASU) No. 2013-03, “Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities,” on Feb. 7, 2013
In ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” the FASB established a new requirement for public companies to disclose the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3) for items that are not measured at fair value in the statement of financial position but for which fair value is disclosed in accordance with the guidance in “Financial Instruments,” Topic 825 of the FASB Accounting Standards Codification (ASC). The topic is formerly known as FASB Statement No. 107, “Disclosures About Fair Value of Financial Instruments.”
The board did not intend for this requirement to apply to private entities. However, several stakeholders advised the FASB that the amendments, as codified in the ASC, seemed inconsistent with the board’s intention and recommended that the board clarify whether the new disclosure applies to private entities. This ASU clarifies the board’s original intention for this disclosure to apply only to public companies.
The ASU was effective upon issuance.
More Guidance Issued on Reporting Comprehensive Income
On Feb. 5, 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”
One of the requirements of ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” was to disclose reclassification adjustments for items that are reclassified from other comprehensive income (OCI) to net income, commonly referred to as “recycling.” The requirement was to disclose on the face of the financial statement or statements where the components of net income and OCI are presented. Stakeholders raised concerns that the new presentation requirements would be costly for preparers and add unnecessary complexity to financial statements. As a result of the concerns, the board decided to reconsider the requirement. The issuance of ASU 2013-02 is the culmination of that reconsideration.
The ASU does not change the current requirements for reporting net income or OCI in the financial statements. All of the information required by the standard already is required to be disclosed elsewhere in the financial statements. ASU 2013-02 requires an entity to:
- Present, either on the face of the statement where net income is presented or in the notes, the effects on the line items of net income of significant amounts reclassified out of accumulated OCI – but only if the item is required to be reclassified to net income in its entirety in the same reporting period.
- Cross-reference to other currently required disclosures for other items that are not required to be reclassified directly to net income in their entirety in the same reporting period – for example, when a portion transferred out of accumulated OCI is initially transferred to a balance sheet account instead of directly to income or expense.
The amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after Dec. 15, 2012, for public companies and after Dec. 15, 2013, for nonpublic entities.
The FASB prepared a “FASB in Focus” article, a brief recap of ASU 2013-02.
Scope Clarification Issued for Disclosing Offsetting Assets and Liabilities
The FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities,” on Jan. 31, 2013. The new guidance clarifies the scope of transactions that are subject to the disclosures about offsetting required by ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities.” The board undertook this clarification in response to concerns expressed by stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, some entities realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to users of financial statements.
Instead of requiring the disclosure for derivatives, financial assets, and financial liabilities, ASU No. 2013-01 specifies that ASU No. 2011-11 applies only to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria or subject to a master netting arrangement or similar agreement. Ordinary trade receivables and other receivables are not within the scope of ASU No. 2011-11.
The amendments in ASU No. 2013-01 should be applied for fiscal years beginning on or after Jan. 1, 2013, and interim periods within those annual periods (the same effective date as ASU No. 2011-11).
Exposure Draft Issued on Repurchase Agreements
On Jan. 15, 2013, the FASB issued for public comment a proposal to improve financial reporting about repurchase agreements and other transfers with forward agreements to repurchase transferred assets. The proposed ASU, “Transfers and Servicing (Topic 860): Effective Control for Transfers With Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings,” would clarify whether repurchase agreements and other transfers of financial assets with forward agreements to repurchase the assets should be accounted for as sales or on-balance-sheet secured borrowings.
Current accounting guidance distinguishes between repurchase agreements that settle at the same time as the transferred financial asset matures (commonly referred to as a “repurchase-to-maturity” agreement) and those that settle before the transferred financial asset matures. The proposed guidance would eliminate the distinction between the two types of repurchase agreements.
In addition, the proposed guidance would clarify the characteristics of assets that may be considered “substantially the same” and would eliminate the current requirement to assess whether a repurchase agreement entered into as a repurchase financing of a previously transferred asset should be linked with the initial transfer and accounted for on a combined basis.
The proposed ASU also introduces disclosure requirements for all repurchase agreements. For secured borrowings, a transferor would be required to disclose the gross amount of the total borrowing disaggregated based on the class of financial asset pledged as collateral. For agreements accounted for as sales only because the assets to be repurchased are not considered “substantially the same” as the initially transferred assets, the proposal would require a transferor to disclose the carrying amount of assets derecognized during the period.
Comments on the proposal are due March 29, 2013.
The FASB has issued a “FASB in Focus” article and a podcast providing a short recap of the proposal.
From the Financial Accounting Foundation (FAF)
Post-Implementation Review Report Issued on FAS 131
The FAF issued “Post-Implementation Review Report on FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information,” on Dec. 21, 2012. The FAF took on the post-implementation review process as part of its oversight responsibilities.
The report concluded that this accounting standard (now codified in ASC Topic 280, “Segment Reporting”), which was adopted in 1997 to improve the way public companies report financial information about their business segments, generally achieves that purpose and that the standard-setting process has worked well overall. The review team had no significant standard-setting process recommendations, but the report does identify some aspects of guidance that stakeholders believe could be improved.
To determine if further standard-setting guidance is warranted, the FASB will consider the report – as well as the results of the review by the International Accounting Standards Board (IASB) of International Financial Reporting Standard (IFRS) 8, “Operating Segments” (which is converged with FASB Statement No. 131). The IASB is expected to complete its review during 2013.
From the Securities and Exchange Commission (SEC)
Financial Reporting Manual Updated
On Jan. 18, 2013, the SEC Division of Corporation Finance (Corp Fin) issued an updated “Financial Reporting Manual,” reflecting changes through Sept. 30, 2012. The manual is intended as an internal reference document for SEC staff, but preparers and others might find it a useful reference source for financial reporting matters.
The latest version includes updates for issues related to significance testing for related businesses, auditor responsibility for cumulative period from inception amounts, Public Company Accounting Oversight Board (PCAOB) requirements for auditors of nonissuer financial statements, and other changes.
From the American Institute of Certified Public Accountants (AICPA)
Financial Reporting Framework Proposed for Small and Medium-Sized Entities
The comment period for the exposure draft “Proposed Financial Reporting Framework for Small- and Medium-Sized Entities” (FRF for SMEs) has closed; comments were due Jan. 30, 2013. Comment letters received by the AICPA can be viewed on the AICPA website.
Financial institutions might be interested in understanding the proposed framework in order to assess the acceptability for financial statement requirements in lending arrangements. The proposed framework, issued on Nov. 1, 2012, is designed for smaller privately owned enterprises that are not required to produce financial statements in accordance with U.S. generally accepted accounting principles (GAAP). Commonly referred to as an “other comprehensive basis of accounting” (OCBOA), the framework draws on a blend of traditional methods of accounting and accrual income tax accounting. Historical cost is the primary basis of measurement. The framework requires fewer disclosures, along with fewer adjustments needed to reconcile tax income with book income, than U.S. GAAP typically requires. It will not require complicated accounting for derivatives, hedging activities, or stock compensation.
The AICPA anticipates issuing implementation guidance in the form of application examples, illustrative financial statements, a disclosure checklist, and similar tools concurrently with the final issuance of the framework during the first half of 2013.
For More Information
Sydney K. Garmong
Dennis M. Hild