Financial Institutions Executive Briefing

Oct. 16, 2013

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

Updated Bank Accounting Advisory Series Issued by OCC
On Oct. 10, 2013, the Office of the Comptroller of the Currency (OCC) issued its updated “Bank Accounting Advisory Series” (BAAS), dated September 2013, which is presented topically in a Q-and-A format. While the BAAS does not represent official rules or regulations of the OCC, it does represent the interpretations of the OCC’s Office of the Chief Accountant (OCA) of U.S. generally accepted accounting principles (GAAP) and regulatory guidance based on the facts and circumstances presented. The revised material contains a list of the new and updated Q-and-As.

Some of the new and updated topics include troubled debt restructurings (TDRs), acquired loans, allowance for loan and lease losses (ALLL), other real estate owned (OREO), transfers of financial assets and servicing, and fair value accounting.

Revised OREO Booklet Issued by OCC
The OCC published a revised “Other Real Estate Owned” booklet for its “Comptroller’s Handbook” on Sept. 13, 2013, to replace a similarly titled booklet issued in 1990. The new publication provides examiners and bankers with updated guidance on the acquisition, reporting, management, and disposition of OREO. Major changes from the previous edition address interagency appraisal and evaluation guidance, managing and renting foreclosed residential properties, third-party service providers, borrower redemption periods after foreclosure, and the exchange of participation interests in OREO.

Interim Final Rules Issued on Basel III Regulatory Capital Reforms
The Federal Reserve (Fed) issued two interim final rules on Sept. 24, 2013, with the goal of clarifying how banks should incorporate the Basel III regulatory capital reforms into their capital and business projections during their next cycle of capital plan submissions and stress tests.

One interim final rule, “Regulations Y and YY: Application of the Revised Capital Framework to the Capital Plan and Stress Test Rules,” applies to banks with $50 billion or more in total consolidated assets. It makes clear that these banks must incorporate the revised capital framework into their capital planning projections and stress tests using the transition paths established in the Basel III final rule. In addition, it clarifies that capital adequacy will continue to be assessed against a minimum 5 percent tier 1 common ratio for the upcoming cycle. This will be calculated in the same manner as it has been under previous stress tests and capital plan submissions.

The other rule, “Annual Company-Run Stress Tests at Banking Organizations With Total Consolidated Assets of More Than $10 Billion But Less Than $50 Billion; One-Year Transition Period to Revised Regulatory Capital Framework for 2013-2014 Stress Test Cycle,” applies to most banks with total consolidated assets between $10 billion and $50 billion and provides a one-year transition period. During the upcoming stress test, these banks will calculate their stress-test projections using the current regulatory capital rules, giving the banks time to adjust their internal systems to the revised capital framework.

Both interim final rules are effective immediately, but the Federal Reserve will be accepting comments through Nov. 25, 2013, and the rules could be revised in response to the comments it receives.

Fed Chairman Speaks on Community Banking

In a speech opening the Community Banking in the 21st Century conference on Oct. 2, 2013, Ben Bernanke, chairman of the Federal Reserve, emphasized the importance of the community bank relationship-based business model.

Bernanke said, “Community bankers live in the localities they serve; their customers are their neighbors and friends. Their direct, personal knowledge of the local economy enables them to tailor products and services to meet their communities' needs. They can look beyond credit scores and other model-based metrics to make lending decisions in part based on more qualitative information that large regional or national financial institutions are less well suited to consider.” He also discussed some of the significant challenges facing community banks and noted that the Federal Reserve is “committed to crafting supervisory policies and regulations that are appropriately scaled to banks' size and complexity.”

From the Consumer Financial Protection Bureau (CFPB)

Modifications to Mortgage Rules Finalized
On Sept. 13, 2013, the CFPB approved a final rule amending its mortgage rules that take effect in January 2014. The revisions in this final rule amend and clarify the mortgage rules issued by the CFPB in January 2013 under the Equal Credit Opportunity Act (Regulation B), the Real Estate Settlement Procedures Act (Regulation X), and the Truth in Lending Act (Regulation Z). Some of the revisions include:

  • Clarification about which servicer activities are prohibited in the first 120 days of delinquency
  • Modifications that will facilitate servicers’ offering of short-term forbearance plans to delinquent borrowers needing only temporary relief without going through a full loss-mitigation evaluation process
  • Rules to facilitate lending in rural or underserved areas by small creditors while the CFPB re-examines its definitions of “rural” and “underserved”
  • Clarification of the definition of a “loan originator” to exclude tellers and other staff who are engaging in routine customer service activities
  • Clarification of the points and fees threshold and loan-originator compensation rules for employees of manufactured housing retailers under the ability-to-repay and high-cost mortgage rules

The CFPB maintains a regulatory implementation website that consolidates all of the 2013 mortgage rules and related implementation materials.

From the Financial Accounting Standards Board (FASB)

Chairman Comments on FASB Priorities for the Future
In a speech at the FASB@40 Conference in New York on Sept. 12, 2013, celebrating the FASB’s first 40 years, Russell Golden, chairman of the FASB, commented on the future of independent standard setting. He identified five issues he believes should be priorities as the FASB begins its next 40 years:

  • Improving the efficiency and effectiveness of operations of the FASB
  • Reducing the complexity and cost of accounting standards
  • Improving the way the FASB communicates information about standards
  • Increasing collaboration with the Financial Accounting Foundation and the Governmental Accounting Standards Board (GASB)
  • Articulating a vision for the FASB’s future as a standard setter, including completing joint projects with the International Accounting Standards Board (IASB), developing a new model for global relationships, and determining a new, updated agenda

Golden noted that for the remainder of 2013 and 2014, the board’s top priority will be to complete the major convergence projects. He anticipates that a final standard on revenue recognition will be issued before the end of 2013 and that final standards on the classification and measurement and the impairment portions of the financial instruments project will be finalized in 2014. The board also hopes to complete its project on leasing in 2014 and to finalize decisions on the insurance project thereafter.

On the future of international accounting standards convergence, Golden said, “I envision a long-term, global standard-setting environment in which the FASB, the IASB, and other major capital market standard setters co-exist and cooperate with the stated goal of issuing converged standards, while also addressing the specific needs of the capital markets for which they set standards.”

FASAC 2013 Stakeholder Survey Results Released

On Sept. 17, 2013, the Financial Accounting Standards Advisory Council (FASAC) announced the results of its recent survey, which solicited stakeholder views about the FASB’s future agenda. The survey provided FASB stakeholders with the opportunity to share their opinions about the projects and areas they believed were the most important for the FASB to address during the next three to five years.

The top six projects that the respondents thought the FASB should address were:

  • Disclosure framework
  • Accounting for financial instruments: hedging
  • Conceptual framework
  • Financial instruments with characteristics of equity
  • Financial statement presentation (tied for fifth)
  • Pensions (tied for fifth)

A need for simplification, a need for better information, and a current lack of decision-useful information were some of the reasons respondents gave for why the FASB should make these issues high priorities.

Consolidated Collateralized Financing Entities: Comment Deadline Extended
At its Sept. 11, 2013, meeting, the FASB decided to extend the comment deadline on its proposed ASU “Consolidation (Topic 810): Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity” an additional 30 days. Comments are now due Oct. 17, 2013.

The proposed guidance is intended to resolve diverse practices in the accounting for the difference upon initial consolidation between the fair value of assets and the fair value of liabilities of a collateralized financing entity. The guidance would apply to reporting entities that are required to consolidate a collateralized financing entity under the variable interest entity (VIE) subsections of FASB Accounting Standards Codification (ASC) Subtopic 810-10. A collateralized financing entity is an entity that holds financial assets, issues beneficial interests in those financial assets, and has no more than nominal equity.

From the Securities and Exchange Commission (SEC)

Presentation Slides From AICPA Bank Conference Published
The SEC staff published slides from a presentation given on Sept. 18, 2013, at the American Institute of Certified Public Accountants (AICPA) National Conference on Banks and Savings Institutions. The presentation is an update from the Division of Corporation Finance (Corp Fin) and the OCA and was delivered by Stephanie J. Ciboroski and Mark Shannon of Corp Fin and Matthew Schell of the OCA. In addition to providing an overview of each division, the slides cover areas of frequent staff comments on accounting and disclosure matters for banks and savings institutions.

According to the presentation, the following issues, among others, are frequent subjects of comments:

  • Loans and allowances
  • Fair value
  • Troubled debt restructurings
  • Interest-rate risk
  • Other real estate owned
  • Goodwill impairment testing

Renewal Approved for Advisory Committee on Small and Emerging Companies
On Sept. 24, 2013, the SEC announced the renewal for an additional two years of its Advisory Committee on Small and Emerging Companies. The committee was formed in 2011 to provide the SEC with advice on its rules, regulations, and policies. Its focus is emerging companies or privately held businesses and publicly traded companies with less than $250 million in public market capitalization.

Pay Ratio Disclosure Rules Proposed
With a 3-2 vote, the SEC approved on Sept. 18, 2013, a proposed new rule requiring public companies to disclose the ratio of the compensation of its CEO to the median compensation of all of its other employees. Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to amend existing rules to require the compensation-related disclosures contained in the proposed new rule.

The proposed rule does not prescribe a specific method to calculate the pay ratio. In addition, emerging growth companies, smaller reporting companies, and foreign private issuers are exempted from the proposed new disclosures. The SEC’s announcement includes a fact sheet about the proposal.

Comments on the proposal are due Dec. 3, 2013.

Small-Entity Compliance Guide on “Bad Actor” Disqualification Published

The SEC published a compliance guide for small entities, “Disqualification of Felons and Other ‘Bad Actors’ From Rule 506 Offerings and Related Disclosure Requirements,” on Sept. 19, 2013. The guide is intended to help filers understand and comply with paragraphs (d) and (e) of Regulation D, which the SEC adopted in July 2013. Topics discussed in the guide include:

  • A summary of the Rule 506 “bad actor” disqualification and disclosure requirements
  • A discussion of the persons subject to the rules
  • Events triggering disqualification of persons under the rules
  • Reasonable-care exceptions from the disqualification rules

EDGAR Filer Manual Updated
The SEC published a final rule adopting revisions to the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system filer manual. The revisions reflect updates in the EDGAR system, including those made to support updates to Form D when filed to use an exemption under Regulation D to offer and sell securities without having to register the offering with the SEC. The revisions also support updates to submission form types 13F-HR and 13F-HR/A, used by institutional investment managers to report holdings.

From the American Institute of Certified Public Accountants (AICPA)

COSO Toolkit Available
The Private Companies Practice Section (PCPS) of the AICPA has released a 2013 COSO Toolkit to help CPA firms and their clients understand the recently updated “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The 2013 COSO toolkit components include:

  • A learning and implementation plan that includes a checklist to help identify what is different in the updated framework and links to additional resources to help in the implementation process
  • A guide to the changes and impacts for your clients and your practice that includes an introduction to the primary updates and ideas for services CPAs can provide to their nonattest clients
  • A staff training Microsoft® PowerPoint® template
  • Templates for client communications letters, newsletters, and firm websites

White Paper Published on Assurance Services
With its white paper “Assurance Services: A White Paper for Providers and Users of Business Information,” the Assurance Services Executive Committee of the AICPA aims to educate providers and users of business information on the value of independent, third-party assurance services and thus increase their confidence in reported information. The paper, published on Sept. 10, 2013, explains factors that should be considered when choosing a quality assurance provider.

Definition Proposed for “Those Charged With Governance”

The AICPA’s Professional Ethics Executive Committee issued an exposure draft, “Proposed Definition of Those Charged With Governance,” on Sept. 10, 2013. The proposed definition, to be included in the AICPA Code of Professional Conduct, is substantially equivalent to the definition used by the Auditing Standards Board, the International Standards on Auditing, and the International Ethics Standards Board for Accountants.

Comments on the exposure draft are due Nov. 10, 2013.



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Sydney K. Garmong
Office Managing Partner, Washington, D.C.