Financial Institutions Executive Briefing

 

Financial Institutions Executive Briefing – Aug. 16, 2017

Current financial reporting, governance, and risk management topics

From the Federal Financial Institution Regulators

Proposal to Ease Requirements for Appraisal on Commercial Real Estate (CRE) Transactions Released

On July 19, 2017, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Fed), and the Federal Deposit Insurance Corp. (FDIC) jointly issued a notice of proposed rule-making to increase the threshold for required appraisals for CRE from $250,000 to $400,000. The proposed rule would require that CRE transactions at or below the threshold receive – instead of an appraisal – an evaluation, which is less detailed than an appraisal and would not require a state-licensed or state-certified appraiser.

Earlier this year, in response to growing concerns over a lack of certified appraisers, primarily in rural areas, the agencies issued a reminder of two approaches that institutions may use to address appraiser shortages. The first approach allows state-certified or state-licensed appraisers to provide services in other states, subject to state law. The second approach allows temporary waivers of requirements to use a state-certified or state-licensed appraiser in situations where a documented appraiser shortage has led to significant delays in appraisals on federally related transactions in a specific geographic area.

Comments are due Sept. 29, 2017.

Bank Accounting Advisory Series (BAAS) Updated by OCC

The OCC released, on Aug. 15, 2017, an update to the “Bank Accounting Advisory Series,” a publication that includes the OCC’s interpretations of generally accepted accounting principles (GAAP) and regulatory guidance for national banks and federal savings associations. The update includes revisions to topics related to new accounting standards issued by the Financial Accounting Standards Board (FASB) on recognition and measurement of financial instruments, leases, and revenue recognition as well as other updates.

The “Message From the Chief Accountant” includes a list of the topics that have been updated. In addition, the message describes the OCC’s revised approach to include standards not yet effective that either must be adopted by public business entities (PBEs) in 2018 or can be early adopted.

Fed Reporting Streamlining for Bank Holding Companies Proposed

The Fed is seeking comments on a proposal, issued on July 18, 2017, to revise the FR Y-9 reports, which include standardized consolidated financial statements and parent company only financial statements, that bank holding companies are required to file with the Fed. The proposed changes are consistent with those made to the call report, effective March 31, 2017. They include eliminating several data items, such as the concept of extraordinary items that was eliminated from GAAP with Accounting Standards Update (ASU) No. 2015-01, and clarifying the reporting on specific activities, such as certain tax benefits related to continuing operations and loans held for investment rather than loans net of unearned income.

Comments are due Sept. 18, 2017.

FDIC Appeal Guidelines Expanded

The FDIC issued, on July 18, 2017, revised “Guidelines for Appeals of Material Supervisory Determinations,” which allow banks to appeal a determination of compliance with an existing formal enforcement action and a determination to initiate an informal enforcement action. The guidelines also make additional opportunities for appeal available and provide that a formal enforcement-related action or decision does not affect a pending appeal.

Additionally, the FDIC explains that material supervisory determinations include decisions to initiate formal enforcement actions and matters requiring board attention that may be appealed.

The guidelines were effective on July 18, 2017.

FDIC Exam Communication Guidance Updated

The FDIC on July 26, 2017, issued a revised “Risk Management Manual of Examination Policies,” which is available on its website. The revised manual includes changes to the Report of Examination (ROE) instructions to incorporate guidance from the FDIC board of directors to examiners regarding supervisory recommendations, including matters requiring board attention and deviations from safety and soundness principles underlying statements of policy. Instructions were added for new ROE schedules and updated for existing schedules, which are illustrated in a new Bank of Anytown sample ROE in Section 17.1 in the manual.

The updated manual also instructs examiners that supervisory recommendations must address meaningful concerns, be communicated to the bank clearly and in writing in an ROE or on official FDIC letterhead, and discuss corrective action.

Actions to Prepare for the Shorter Settlement Cycle Described

On July 26, 2017, the FDIC issued a Financial Institutions Letter, FIL-32-2017, describing actions that banks should take to prepare for the change in the Securities and Exchange Commission (SEC) rule governing the securities settlement cycle for securities transactions conducted by most broker-dealers. On March 22, 2017, the SEC adopted an amendment to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days (T+3) to two business days (T+2).

Actions described in the letter include identifying all lines of business, products, and activities that involve securities settlement and servicing; monitoring changes in systems; and determining what system and process changes or outreach may be necessary to transition to T+2 settlement.

Compliance is required beginning on Sept. 5, 2017.

Fintech Charter Discussed

In a speech before the Exchequer Club on July 19, 2017, acting Comptroller of the Currency Keith Noreika discussed continued support for the OCC’s plans to issue special-purpose national bank charters to financial technology (fintech) companies. He shared that the plan, which was introduced under former Comptroller Thomas Curry, upholds high standards similar to those that banks must meet and offers a level playing field.

Noreika stated, “I think it is a good idea that deserves the thorough analysis and the careful consideration we are giving it.” He continued, “On principle, companies that offer banking products and services should be allowed to apply for national bank charters so that they can pursue their businesses on a national scale if they choose, and if they meet the criteria and standards for doing so. Providing a path for these companies to become national banks is pro-growth and in some ways can reduce regulatory burden for those companies.”

Faster Payments Task Force’s Call to Action Issued

The Fed’s Faster Payments Task Force published, on July 21, 2017, part two of its final report, “The U.S. Path to Faster Payments,” a call to action detailing its long-awaited recommendations for accelerating real-time payments in the U.S. so that they are available at all payment service providers by 2020. The report highlights 10 recommendations, including some related to governance and regulation issues, payments infrastructure, and the sustainability and evolution of the payments system.

The task force calls for a voluntary, industry-led governance framework; a shared set of payments rules, standards, and baseline requirements; and changes to federal regulations to ensure they are up to date and reflect the goal of faster payments. For infrastructure, the task force calls for an inclusive working group to develop a “directory design for solutions to interoperate in the faster payments system,” for the Fed to develop enhanced 24/7 year-round settlement mechanisms, and for the Fed to explore its appropriate operational role in faster payments.

The report highlights the importance that the faster payments remain secure, common, and technologically up to date. To meet these goals, the task force recommends methods of fraud detection and information sharing, broad education and advocacy programs to promote adoption, more research to address gaps in cross-border payments, and continued investigation of emerging technologies.

A related video from the Federal Reserve Bank of Chicago is available to view.

NCUA Restructuring Planned

On July 21, 2017, the National Credit Union Administration (NCUA) announced a major restructuring plan that will consolidate regional offices and reorganize staffing. “The time has come for the NCUA business model to change,” board Chair J. Mark McWatters said. “Positioning the NCUA to meet the changing demands of the credit union system we regulate in a transparent and fully accountable manner while promoting efficiency and effectiveness is essential.”

During 2016, the internal NCUA review teams considered the agency’s operations, evaluated its processes, and provided recommendations for improvements. Among the approved recommendations are the following:
  • Closing the Albany, New York, and Atlanta, Georgia, offices, thereby consolidating the NCUA’s five regional offices into three
  • Redefining and realigning several NCUA programs to create an Office of Credit Union Resources and Expansion
  • Restructuring the Office of Examination and Insurance into specialized working groups
As part of the restructuring effort, the NCUA also plans to close agency offices with redundant functions and improve functions such as examination reporting, records management, and procurement.

From the Consumer Financial Protection Bureau (CFPB)

Rule Curtailing Mandatory Customer Arbitration Agreements Finalized

On July 10, 2017, the CFPB finalized a rule that prohibits companies from using mandatory arbitration clauses that make customers waive their ability to participate in group or class-action lawsuits and limits the use of mandatory arbitration agreements for financial products and services. Banks of all sizes often include mandatory arbitration clauses in their credit card and deposit account agreements in order to manage the costs of class-action lawsuits and ensure prompt dispute resolution. Under the rule, companies can still include arbitration clauses in their contracts; however, companies subject to the rule may not use arbitration clauses to stop consumers from being part of a group action. The rule includes specific language that companies will need to use if they include an arbitration clause in a new contract.

Products and services provided by depository institutions, nonbank lenders, and money transmitters that provide covered products to more than 25 consumers annually are subject to this rule. An institution that continues to employ arbitration must submit to the CFPB certain claim records, agreements, and arbitrator communications related to ongoing arbitrated disputes, and the CFPB will publish on its website these redacted records.

The rule is effective on Sept. 18, 2017, and applies to contracts entered into after March 18, 2018.

From the Financial Accounting Standards Board (FASB)

Implementation Costs in a Cloud Computing Arrangement Discussed

At the FASB Emerging Issues Task Force (EITF) meeting held on July 20, 2017, members discussed implementation costs for cloud computing arrangements. Examples of cloud computing arrangements include software as a service (SaaS), platform as a service, infrastructure as a service, and other similar hosting arrangements. A SaaS arrangement uses internet-based application software hosted by a service provider or third party and is the most common cloud computing arrangement.

The FASB addressed whether fees paid in a cloud computing arrangement should be capitalized expenses in ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”

As a follow-up, stakeholders requested additional guidance on accounting for implementation costs associated with cloud computing arrangements considered service contracts, citing diversity in practice. Implementation costs include setup and other upfront fees to get the arrangement ready for use. Other implementation costs can include training, creating or installing an interface, reconfiguring existing systems, and reformatting data. In May 2017, the FASB added a project, “A Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That Is Considered a Service Contract,” to the EITF’s agenda as Issue 17-A.

During its meeting, the EITF did not reach a consensus and has requested that further research be conducted by the FASB staff.

From the Securities and Exchange Commission (SEC)

Adoption Deadline Extended for Revenue Recognition and Lease Accounting Standards for Certain Public Business Entities

At the FASB EITF meeting held on July 20, 2017, the SEC staff made an announcement specifically related to providing relief for PBEs that otherwise would not meet the definition of a PBE, except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC (certain PBEs). Common examples of SEC rules that trigger a requirement to include one entity’s financial statements or financial information in another entity’s SEC filing include rules 3-05 (significant business acquisitions), 3-09 (separate financials of an entity that is a significant nonconsolidated equity method investment), or 4-08(g) (summarized financial information of a significant group of nonconsolidated equity method investments) of Regulation S-X.

Essentially deferring the effective date for certain PBEs by one year, the SEC will not object if certain PBEs adopt the revenue recognition and lease accounting standards using the non-PBE effective dates, which are as follows:
  • Revenue recognition (Topic 606), for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2019, which first applies to Dec. 31, 2019, annual financial statements for calendar year-end entities
  • Lease accounting (Topic 842), for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020, which first applies to Dec. 31, 2020, annual financial statement for calendar year-end entities
The deferral is applicable only to certain PBEs for the revenue recognition and lease accounting standards. It does not apply to the credit loss standard because that standard already contains staggered effective dates for PBEs that are not SEC filers.

Comments on PCAOB’s Auditor’s Reporting Model Standard Sought

On July 21, 2017, the SEC issued a release (34-81187) that seeks comment on the new auditing standard from the Public Company Accounting Oversight Board (PCAOB), “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,” prior to the SEC taking further action on the standard.

The new standard would significant modify the auditor’s report while retaining the pass-fail reporting model. The most significant change to the auditor’s report is the requirement to communicate in the report any critical audit matters (CAMs) arising during the current-period audit. A CAM is defined as a matter that has these elements:
  • Has been or was required to be communicated to the audit committee
  • Relates to accounts or disclosures that are material to the financial statements
  • Involves especially challenging, subjective, or complex auditor judgment
The auditor’s report will include:
  • The identification of the CAMs
  • A description of the principal considerations that led the auditor to determine that the matter was a CAM
  • A description of how the CAM was addressed
  • A reference to the relevant financial statement accounts and disclosures
See more on the new audit standard in the section, New Standard to Enhance Auditor’s Report Sent to SEC for Approval in the June 21, 2017, “Financial Institutions Executive Briefing.”

Comments are due to the SEC on Aug. 18, 2017.

From the American Institute of CPAs (AICPA)

Comments Sought on Revenue Recognition Scoping Issues for Financial Institutions

On Aug. 1, 2017, the AICPA’s Financial Reporting Executive Committee (FinREC) released working draft issue 5-1, “Scope Issues,” which addresses revenue recognition scoping issues for credit card annual fees, deposit-related fees, and servicing income.

The draft proposes language for the AICPA Audit and Accounting Guide for Revenue Recognition and summarizes the conclusions of the FASB Revenue Recognition Transition Resource Group (TRG) for scoping matters presented at its meetings as follows:
  • July 13, 2015
    • Memo 36, Credit Cards
    • Memo 44, July 2015 Meeting – Summary of Issues Discussed and Next Steps
     
  • April 18, 2016
    • Memo 52, Scoping Considerations for Financial Institutions
    • Memo 55, April 2016 Meeting – Summary of Issues Discussed and Next Steps
     
Comments are due Oct. 2, 2017.

Statement on Auditor Involvement With Exempt Offerings Issued

In July, the Auditing Standards Board of the AICPA issued Statement on Auditing Standards (SAS) 133, “Auditor Involvement With Exempt Offering Documents.” The audit standard addresses the auditor’s responsibilities in situations where the auditor is involved with offerings exempt from registration with the SEC. For financial institutions, such offerings would include private placements such as offerings under SEC Regulation A, “Conditional Small Issues Exemption,” or Regulation D, “Limited Offer and Sale of Securities Without Registration Under the 1933 Act.”

Auditor involvement, under SAS 133, includes situations where the auditor’s report on financial statements or review report on interim financial information is included or incorporated by reference into an exempt offering document, and the auditor performs activities related to the offering document, such as reading it. When the auditor is involved with an exempt offering, the new audit standard requires that the auditor perform specific procedures, including subsequent event procedures that are designed to identify events occurring between the date of the auditor’s report and the distribution of the exempt offering document.

The audit standard is effective for exempt offering documents that are initially distributed, circulated, or submitted on or after June 15, 2018.
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