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
FDIC Corporate Governance Publication Issued
The Federal Deposit Insurance Corp. (FDIC) on April 5, 2016, issued a special corporate governance edition of its “Supervisory Insights” titled “A Community Bank Director’s Guide to Corporate Governance: 21st Century Reflections on the FDIC Pocket Guide for Directors
.” To assist board members in doing their job effectively, this publication reviews the Pocket Guide, incorporates recent guidance and technical resources, and describes the roles and responsibilities of the board and senior management. Other topics include significant governance concepts and FDIC examiners’ evaluation of community bank governance, independence, and business objectives. The report also lists resources with links to regulations, guidance, and training materials.
Guidance on Oil and Gas Lending Updated
On March 16, 2016, the Office of the Comptroller of the Currency (OCC) updated its “Comptroller’s Handbook” with a revised booklet
on oil and gas exploration and production lending. The updated handbook presents expanded guidance on prudent risk management practices for banks making oil and gas exploration and production loans and outlines regulatory expectations, with special attention on lending to upstream oil and gas businesses.
Guidance on CIPs for Prepaid Cards Issued
On March 21, 2016, the FDIC, Federal Reserve (Fed), OCC, National Credit Union Administration (NCUA), and Financial Crimes Enforcement Network jointly published “Interagency Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards
” aimed at informing depository institutions about how to apply requirements of customer identification programs (CIPs) to the prepaid cards they issue. The guidance is applicable to banks, savings associations, credit unions, and U.S. branches and agencies of foreign banks.
The guidance does not change or add to existing expectations. Rather, it clarifies that an institution’s CIP should apply to holders of certain prepaid cards if those cards qualify as accounts. Prepaid cards qualify as accounts if they are reloaded or if credit or overdraft features are accessed. They can be issued directly by a financial institution or sold under arrangements with third-party program managers that sell, distribute, promote, or market the cards on the institution’s behalf. As described in the guidance and as required by the CIP rule, when prepaid cards qualify as accounts, institutions should obtain information to verify the identity of the cardholder, including at least the name, date of birth, address, and identification number.
March Issue of “The NCUA Report” Published
The NCUA posted the March 2016 issue of “The NCUA Report
” on March 22, 2016. This latest issue includes a column from the NCUA board chair, articles on NCUA initiatives, and information on supervisory, regulatory, and compliance issues that are relevant to all federally insured credit unions.
Articles in this month’s report include:
- “NCUA Board Approves Modernized Member Business Lending Rule”
- “Chairman’s Corner: New Era of Regulatory Relief”
- Vice Chairman Rick Metsger’s perspective: “You Say You Want a Devolution ...”
- Board member J. Mark McWatters’ perspective: “It Is Time to Consider an 18-Month Examination Cycle”
- “Board Actions: Share Insurance Fund Continues Strong Positive Trends”
- “2015: A Strong Year for Credit Unions Overall”
- “It’s Not Just About Financial Literacy – It’s Also About Financial Well-Being”
New Member Business Lending Video Resource Provided
On March 14, 2016, the NCUA released
a new video resource about the advantages of member business lending for credit unions. The video presents the main elements of an effective member business lending program and illustrates how such a program could be a benefit to credit unions as well as their members and communities.
This video is a resource to understand the member business lending final rule that the NCUA board approved in February 2016. The final rule allows credit unions to customize their member business lending programs to match their strategic goals and members’ needs.
Most of the provisions of the final rule are effective Jan. 1, 2017.
From the Basel Committee on Banking Supervision
Changes to Capital Risk Weights Proposed for Largest Banks
The Basel Committee on Banking Supervision released
, on March 24, 2016, “Reducing Variation in Credit Risk-Weighted Assets – Constraints on the Use of Internal Model Approaches,” a proposed framework applicable to banks using advanced approaches under Basel III. This framework would limit some of the flexibility that these largest banks – defined as banking organizations with total consolidated assets of $250 billion or more or total consolidated on-balance sheet foreign exposure of $10 billion or more – have in calculating risk weights for certain kinds of assets. The proposed changes are designed to reduce the regulatory framework’s complexity and improve its comparability as well as to address excessive variability in the capital requirements for credit risk.
To address these items, the proposal includes:
- Removing the option to use the internal ratings based (IRB) approaches for certain exposures, when it is determined that the model parameters cannot be estimated in a manner reliable enough for purposes of regulatory capital
- For portfolios when IRB approaches remain available:
- Ensuring a minimum level of conservatism by adopting exposure-level, model-parameter floors
- Reducing risk-weighted asset variability by providing increased specification of parameter estimation practices
Comments on the proposed framework are due June 24, 2016.
From the Consumer Financial Protection Bureau (CFPB)
Additional TRID Guidance to Be Provided
During a March 16, 2016, congressional hearing, “The Semi-Annual Report of the Bureau of Consumer Financial Protection
,” CFPB Director Richard Cordray indicated that the CFPB will provide further guidance to the financial and housing industries on complying with the Truth in Lending Act – Real Estate Settlement Procedures Act
(TILA-RESPA) integrated disclosure (TRID) rules that became effective in October 2015. Additionally, Cordray stressed that the CFPB’s enforcement of TRID remains “corrective and diagnostic” for lenders making good faith efforts to comply with the new disclosure requirements.
In an April 12 webinar
, the Fed and CFPB addressed common industry questions on the TRID interpretation and implementation.
From the U.S. Government Accountability Office (GAO)
Report on U.S. Financial Regulatory Structure Issued
The GAO publicly released on March 28, 2016, a report titled “Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness
.” The GAO finds that overlap and fragmentation among regulators have resulted in inefficient regulatory processes – including inconsistencies in the oversight of similar institutions and in consumer protection – that the GAO believes are likely to be resolved only through congressional action.
In the report, the GAO recommends that Congress work to coordinate collaboration among the Financial Stability Oversight Council, the Treasury Department’s Office of Financial Research, and the Fed with respect to monitoring systemic risk.
From the Financial Accounting Standards Board (FASB)
Transition Resource Group for Credit Losses Meeting Held on April 1
The first public meeting of the FASB Transition Resource Group (TRG) for Credit Losses was held on April 1, 2016, and a recording of that meeting is publicly available on the FASB’s Meetings page
. The main objective was to seek feedback on whether the guidance in the draft of the forthcoming credit losses standard clearly communicates the board’s decisions and expectations for implementation.
As Crowe announced in the March 30, 2016, article “FASB’s Current Expected Credit Losses (CECL) Model to Be Discussed on Friday
,” the FASB posted, on March 29, meeting materials
, which include portions of the draft of the standard relating to expected credit losses.
Revenue Recognition Issues for Financial Institutions Addressed at April 18 Meeting
The FASB TRG for Revenue Recognition met on April 18, 2016, to discuss scoping issues specific to financial institutions, and a recording of that meeting is publicly available on the FASB’s Meetings page
. The TRG’s meeting handout specific to financial institutions, “Scoping Considerations for Financial Institutions
,” also is publicly available and begins by addressing issues that were identified by the industry.
The following financial institution-specific topics are addressed in the TRG’s meeting handout and were discussed at the TRG meeting:
- Mortgage servicing income – The view of the FASB staff is that the income that is in the scope of Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing,” is not in the scope of the new revenue recognition standard. The TRG agreed with the staff’s view.
- Deposit-related fees – The view of the FASB staff is that these fees are in the scope of the new revenue recognition standard. The TRG agreed with the staff’s view.
- Financial guarantee fees – The view of the FASB staff is that these fees are outside the scope of the new revenue recognition standard. The TRG agreed with the staff’s view that guarantees in the scope of ASC 460, “Guarantees,” or ASC 815, “Derivatives and Hedging,” are not in the scope of the new revenue recognition standard.
New Standard on Identifying Performance Obligations and Licensing in Revenue Contracts Issued
The FASB, on April 14, 2016, issued Accounting Standards Update (ASU) No. 2016-10, “Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing
,” to add guidance for identifying performance obligations. The ASU clarifies that an entity does not have to identify performance obligations involving goods and services that are immaterial. It also provides guidance for evaluating the criterion of “separately identifiable.”
In addition, the ASU clarifies the licensing implementation guidance and clarifies the scope for a sales-based or usage-based royalty promised in exchange for an intellectual property license.
The effective date for this ASU is consistent with the revenue recognition standard (ASU No. 2014-09, “Revenue From Contracts With Customers (Topic 606)”), which was deferred by one year with ASU No. 2015-14, “Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date.”
New Standard on Employee Share-Based Payment Accounting Issued
The FASB, on March 30, 2016, issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
,” to simplify and improve the accounting for employee share-based payments for all organizations that issue these awards to their employees as follows:
- Income taxes for vesting or settlement of awards
- All excess tax benefits and tax deficiencies will be recognized consistently in the income statement as income tax expense or benefit. Under existing generally accepted accounting principles (GAAP), excess tax benefits are recognized in additional paid-in capital (APIC), and tax deficiencies are recognized either as an offset to accumulated excess tax benefits or in the income statement.
- The tax benefit no longer has to be realized in the current period in order to recognize the excess tax benefit.
- The tax effects of exercised or vested awards should be treated as discrete items in the period in which they occur.
- Forfeitures accounting policy election: Entities can elect to either estimate forfeitures or account for forfeitures when they occur. If the latter is elected, the entity must disclose information about unvested awards rather than awards expected to vest. This is a change from existing GAAP, which currently requires an estimate of expected forfeitures to accrue compensation based on awards that are expected to vest.
- Minimum statutory withholding requirements: The existing requirement that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements for an equity-classified award is revised. The threshold for equity classification is raised, and withholding up to the maximum individual statutory rate in the applicable jurisdiction is permitted.
- Cash flow statement presentation
- Excess tax benefits will be presented in operating activities, which is a change from existing GAAP that requires classification in financing activities.
- Employee taxes paid will be presented in financing activities when an employer withholds shares to meet minimum statutory tax withholding requirements. This may be a change for some entities given that existing GAAP contains no related guidance.
For nonpublic entities, the amendments also provide the following simplifications:
- A practical expedient may be applied to estimate the expected term for all awards with certain performance or service conditions.
- If vesting depends only on a service condition, the expected term is estimated as the midpoint between the requisite service period and the contractual term of the award.
- If vesting depends only on a performance condition, the expected term is estimated by first determining whether the performance condition is probable of being achieved.
- If it is probable of being achieved, then the entity shall estimate the expected term as the midpoint between the requisite service period and the contractual term.
- If it is not probable of being achieved, the entity shall estimate the expected term as either: 1) the contractual term if the service period is implied; or 2) the midpoint between the requisite service period and the contractual term if the service period is stated explicitly.
- A one-time election may be made to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value.
For public business entities (PBEs), the amendments are effective for annual periods beginning after Dec. 15, 2016, and interim periods within those annual periods, which first apply to March 31, 2017, interim financial statements for calendar year-end PBEs. For all other entities, the amendments are effective for annual periods beginning after Dec. 15, 2017, and interim periods within annual periods beginning after Dec. 15, 2018, which first apply to Dec. 31, 2018, annual financial statements for calendar year-end entities. Early adoption is permitted.
The changes to the recognition and measurement of share-based payment transactions generally will transition through a modified retrospective approach with a cumulative-effect adjustment to equity as of the beginning of the annual period in which the guidance is adopted. The amendments for the recognition of excess tax benefits and tax deficiencies in the income statement, as well as the practical expedient for estimating the expected term, will be applied prospectively. The changes to the classification on the statement of cash flows will be applied retrospectively, with the option to adopt the presentation of excess tax benefits on the cash flow statement prospectively.
From the Securities and Exchange Commission (SEC)
Concept Release on Regulation S-K Approved
The SEC approved, on April 13, 2016, concept release 33-10064, “Business and Financial Disclosure Required by Regulation S-K
,” which seeks public comment on business and financial disclosure that currently is required in SEC filings by Regulation S-K. This marks the latest step in the disclosure effectiveness project led by the SEC’s Division of Corporation Finance (Corp Fin). The project aims to review and improve disclosure requirements for the benefit of investors and SEC registrants.
This concept release seeks comments specifically on ways to improve a subset of the concepts contained in Regulation S-K that apply to domestic registrants’ periodic filings (such as Forms 10-Q and 10-K). The SEC is interested in comments from investors, registrants, and other market participants on the following topics and queries, among others:
- Selected Financial Data (Item 301)
- Is it beneficial to have the five-year information in one table?
- Should the full five years be required only in certain instances?
- Selected Quarterly Financial Data (Item 302(a))
- Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Item 303)
- What requirements are important to investors?
- How can the MD&A, Results of Operations, and Liquidity and Capital Resources disclosure requirements be improved?
- Should auditor involvement with the reliability of MD&A be required?
- Are short-term borrowings disclosure requirements adequate?
- Do off-balance sheet disclosure requirements result in duplicative information?
- Should the contractual obligations table continue to be required, or is other U.S. GAAP disclosure, in various parts of a registrant’s filings, sufficient?
- Should critical accounting estimates be a required disclosure in Regulation S-K given that Item 303 does not specifically address these estimates or policies?
- Risk Factors (Item 503(c))
- Quantitative and Qualitative Disclosures About Market Risk (Item 305)
- Do the market risk disclosure requirements elicit market risk and risk management practice disclosures that are important to investors?
- How can the requirements be revised to better link the discussion of material market risks to the financial statements and other key financial metrics?
- Industry guides, such as “Industry Guide 3 – Statistical Disclosure by Bank Holding Companies”
- Should the Industry Guides be codified as part of Regulation S-K even though they currently are not part of Regulation S-K or any other rule or regulation?
- Should the Industry Guides be updated to omit obsolete disclosure?
- Whether public policy and sustainability matters should be included in required disclosure and, if so, what those requirements should look like
- Whether the exhibit requirements in Item 601, including preferability letters, should be modified
- Whether incorporation of information by reference in one SEC filing to another should be further expanded, limited, or otherwise modified
- Whether hyperlinks to external websites should be allowed in filings and to what extent
- Whether presentation and formatting of disclosure should be further specified, and how to improve the quality of structured disclosures such as eXtensible Business Reporting Language (XBRL)
Comments are due 90 days after the concept release is posted in the Federal Register, which means they will be due in mid- to late July.
Office of Risk and Strategy for SEC National Exam Program Created
On March 8, 2016, the SEC announced
the creation of the Office of Risk and Strategy as part of its Office of Compliance Inspections and Examinations (OCIE). To provide operational risk management and organizational strategy for OCIE, the new office combines the OCIE’s risk assessment, market surveillance, and quantitative analysis teams. The office will be responsible for guiding the SEC’s National Exam Program’s “risk-based, data-driven, and transparent approach to protecting investors,” according to OCIE Director Marc Wyatt.
Compliance Outreach National Seminar for Investment Companies and Investment Advisers Scheduled
The SEC, on March 9, 2016, opened registration for its compliance outreach program’s national seminar for investment companies and investment advisers
. Aimed at helping investment companies’ chief compliance officers and other senior personnel enhance their compliance programs to protect investors, the seminar includes discussion of OCIE’s 2016 program priorities, private fund adviser issues, compliance, and rulemaking.
Jointly sponsored by the SEC’s OCIE, the Division of Investment Management, and the Asset Management Unit of the Division of Enforcement, the outreach program was scheduled for April 19, 2016, and more information can be found on the SEC’s website
2016 PCAOB Budget and Accounting Support Fee Approved by SEC
The SEC approved
both the 2016 budget of the Public Company Accounting Oversight Board (PCAOB) and the related annual accounting support fee on March 14, 2016. According to the SEC, the PCAOB budget totals $257.7 million for 2016, an increase of approximately 3 percent over 2015, and will be funded primarily by the collection of an accounting support fee of $253.3 million, representing an increase of approximately 12 percent as compared to 2015. In addition, 2015 underspending will carry over to fund the 2016 budget. The support fee will be allocated between public companies ($220.9 million) and broker-dealers ($32.4 million).
Guidance on Describing Shareholder Proposals on Proxy Cards Provided
On March 22, 2016, the Corp Fin staff published new guidance in its Compliance and Disclosure Interpretations, “Exchange Act Rule 14a-4(a)(3)
.” Rule 14a-4(a)(3), in general, requires that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon.” The new guidance provides views on specifically how a registrant must describe a Rule 14a-8 shareholder proposal on its proxy card.
The interpretations provided in the guidance reflect the views of the Corp Fin staff and are not rules, regulations, or statements of the SEC.
From the Institute of Internal Auditors (IIA)
CBOK Report on Motivating Audit Team Published
The IIA Research Foundation published, on March 8, 2016, a report in its “Common Body of Knowledge” (CBOK) series, “GREAT Ways to Motivate Your Staff: Shaping an Audit Team That Adds Value and Inspires Business Improvement
Based on the most recent CBOK Global Practitioner Survey, the report examines ways that an organization can develop and retain a competent and motivated audit team and provides ideas on how chief audit executives can establish goals that motivate and inspire their teams to deliver relevant insights, increase productivity, and address generational differences.
In the report, detailed strategies are presented for the following:
- Establishing goals by aligning the goals of the internal auditors to departmental goals and organizational strategies
- Retaining audit talent in a highly competitive marketplace and changing internal audit and business needs
- Providing employees with the capability and capacity for internal audit
- Assessing the internal auditors’ performance against the overall performance of the department
- Providing incentives for and recognition of success of internal auditors