Financial Institutions Executive Briefing – Oct. 21, 2015
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
OCC Accounting Resource Updated
The Office of the Comptroller of the Currency (OCC) on Sept. 29, 2015, released an updated version of its “Bank Accounting Advisory Series,” which provides guidance for accountants at financial institutions based on the OCC’s interpretations of generally accepted accounting principles and regulatory guidance. The update answers frequently asked questions from banks and examiners about topics such as troubled debt restructurings, other real estate owned, and pushdown accounting.
2014 Mortgage Lending Data Released by FFIEC
On Sept. 22, 2015, the Federal Financial Institutions Examination Council (FFIEC) made available the 2014 mortgage lending transactions data on 7,062 financial institutions covered by the Home Mortgage Disclosure Act. The 2014 data showed a decrease of government-backed mortgage originations and a significant decline in refinances from 2013. The information covered 9.9 million mortgage applications, with approximately 6 million resulting in loan originations.
Overall, loans backed by the Federal Housing Administration, Veterans Administration, or federal farm programs accounted for 37 percent of all new mortgages in 2014, down from the 2009 high of 54 percent. Home purchase originations rose by 4 percent from 2013, while refinance originations dropped 55 percent from 2013.
September Issue of “The NCUA Report” Released
The National Credit Union Administration (NCUA) posted the September 2015 issue of “The NCUA Report” on Sept. 16, 2015. This latest issue includes a column from the NCUA board chairman as well as articles from various NCUA offices on the NCUA’s initiatives and information on supervisory, regulatory, and compliance issues.
Articles in this month’s report include:
- “Preparing for an Active Shooter Situation”
- “Chairman’s Corner: The Power of Partnerships”
- “Small Steps by Members Can Prevent Big Losses”
- “Vice Chairman Rick Metsger’s Perspective: Building a Better Playbook”
- “Board Member McWatters’ Perspective: Our Membership Rules Can Be Better With Your Help”
- “Understanding the Purchase and Assumption Process”
- “Flood Insurance Requirements Expanded for Lenders and Servicers”
- “Credit Union Locator Gets New Look, Search Functions and Map Features”
Updated Definition of “Small” Credit Union Approved by NCUA
On Sept. 17, 2015, the NCUA board unanimously approved a final rule and policy statement that raises the asset ceiling of a “small entity” to $100 million from $50 million. Approximately 76 percent of all federally insured credit unions, a total of 4,690, will be classified as small entities under the final rule (Part 791) and interpretive ruling and policy statement (IRPS 15-1).
With the higher ceiling, an additional 733 federally insured credit unions will be eligible for special consideration of regulatory relief in future rulemakings. In addition they may receive assistance, including training and consulting, from the NCUA’s Office of Small Credit Union Initiatives.
The final rule will be effective 60 days after publication in the Federal Register.
From the Consumer Financial Protection Bureau (CFPB)
Inspector General Report on Consumer Complaint Database Issued
The inspector general for the CFPB on Sept. 10, 2015, released an audit report, “Opportunities Exist to Enhance Management Controls Over the CFPB’s Consumer Complaint Database,” highlighting inaccuracies and process weaknesses in the CFPB’s consumer complaint database. The report states, “We found several noticeable inaccuracies in our analysis of the 254,835 complaints in the Consumer Complaint Database as of June 30, 2014. Although the number of complaints with inaccuracies that we identified was relatively small, enhancing existing controls would help ensure that as the number and types of complaints published increase, overall reliability of the data is maintained.”
Among other items, the report provides the following recommendations to improve accuracy:
- Establish controls to assess the accuracy of complaint fields in the database.
- Create an address verification tool.
- Monitor company responses to ensure they are published appropriately and consistently.
TILA-RESPA Integrated Disclosures Readiness Guide, Exam Procedures Updates Published
The CFPB updated “The CFPB Dodd-Frank Mortgage Rules Readiness Guide,” its compliance readiness guide for lenders. In addition, it published updates to the exam procedures for Truth in Lending Act and Real Estate Settlement Procedures Act (TILA-RESPA) integrated disclosures, which are effective Oct. 3, 2015.
From the Financial Accounting Standards Board (FASB)
Disclosure Materiality Guidance Proposed
The FASB issued for public comment a proposed Accounting Standards Update (ASU), “Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material,” on Sept. 24, 2015, to clarify the way organizations should consider materiality when assessing requirements for providing information in the notes to financial statements.
The proposed amendments specify the following:
- Materiality would be applied to quantitative and qualitative disclosures in the context of the financial statements as a whole so that some, all, or none of the requirements in a disclosure section may be material.
- Materiality would be identified as a legal concept.
- Omitting immaterial information from a disclosure would not be an accounting error.
To be consistent with the proposed amendments, the FASB also is proposing changes to existing disclosure requirements in each disclosure section within the codification, so that each topic would state that an entity shall provide required disclosures if they are material; each disclosure section would refer readers to Topic 235, as amended by this proposal, for information on the appropriate exercise of discretion; and existing phrases that might make it difficult to justify omitting immaterial disclosures, such as “an entity shall at a minimum provide,” would be replaced with language that is less prescriptive.
The proposed amendments would be effective upon issuance. Entities may choose to apply the proposed amendments prospectively or retrospectively.
Comments are due Dec. 8, 2015.
Transition Amendments to Private Company Accounting Alternatives Proposed
On Sept. 30, 2015, the FASB issued for public comment a proposed ASU, “Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), and Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance.” The proposed amendments would remove the effective dates in ASUs 2014-02, 2014-03, 2014-07, and 2014-18, making them effective immediately. In addition, they include transition guidance that would allow private companies to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this proposal.
Also, the proposed guidance would extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely.
Comments are due Nov. 16, 2015.
Narrow-Scope Improvements to Revenue Recognition Standard Proposed
The FASB issued for public comment a proposed ASU, “Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” on Sept. 30, 2015.
The proposed amendments are targeted at improving the guidance in the new revenue recognition standard on collectibility, noncash consideration, and completed contracts at transition. The amendments also would offer a practical expedient for contract modifications at transition as well as an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.
Comments are due Nov. 16, 2015.
Accounting for Business Combinations Measurement Period Adjustments Simplified
On Sept. 25, 2015, the FASB released ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments eliminate the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination.
In addition, the ASU includes these requirements:
- An acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
- An acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
- An entity must present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
For public business entities, the amendments are effective for fiscal years beginning after Dec. 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec. 15, 2017.
From the Securities and Exchange Commission (SEC)
Fiscal Year 2016 Fee Rate Advisory Announced
The SEC announced on Sept. 30, 2015, that on Oct. 1, 2015, the start of the 2016 fiscal year, it does not expect to have received a regular appropriation for fiscal year 2016. Therefore, the fees paid under the Securities Exchange Act, Section 31, will remain at the current rate until 60 days after the enactment of a regular appropriation for the SEC.
Thirty days after enactment of the new fiscal year appropriation, the SEC is required to issue an updated rate, and the new rate would be effective 60 days after the enacted appropriation. Until that time, the Section 31 fee rate remains at $18.40 per million for securities transactions, and the assessment on round turn transactions in security futures remains at $0.0042 per transaction.
Updated EDGAR Filer Manual Issued
The SEC published on Sept. 15, 2015, a final rule, “Adoption of Updated EDGAR Filer Manual,” which includes revisions to the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System Filer Manual including changes to the EDGAR system. In particular, the changes included in this update incorporate the following:
- Two new security-based swap data repository submission form types
- Newly available exhibit EX-36 (depositor certification for shelf offerings of asset-backed securities) on EDGARLink Online for certain submission form types
- Acceptance of Exhibit K and Exhibit L in eXtensible Business Reporting Language (XBRL) format for certain specified submission form types
- Acceptance as valid of XBRL file attachments if they contain multiple identically tagged XBRL facts
- Documentation updates to Chapter 2 of the “EDGAR Filer Manual, Volume I: General Information” and Chapters 2, 3, and 7 of the “EDGAR Filer Manual, Volume II: EDGAR Filing” relating to Form NRSRO
The manual also is being revised to address software changes made previously in EDGAR.
The updates are effective upon publication in the Federal Register.
Amendments to Remove References to Credit Ratings in Money Market Fund Rule and Form Issued
The SEC on Sept. 16, 2015, adopted amendments to remove credit rating references in the principal rule governing money market funds and the form that those funds use monthly to report information to the SEC regarding their portfolio holdings. The amendments also subject additional securities to the money market fund rule’s issuer diversification provisions. Under the amendments, a money market fund will be limited to investing in a security only if the fund analyzes certain prescribed factors and then determines that the security presents minimal credit risks.
The amendments are effective 30 days after publication in the Federal Register, and the compliance date will be Oct. 14, 2016.
Compliance and Disclosure Interpretations Updates Published
The staff in the Division of Corporation Finance (Corp Fin) of the SEC issued updates to the Compliance and Disclosure Interpretations on Regulation AB and related rules (new Section 311.02) on Sept. 16, 2015.
These updates comprise Corp Fin’s interpretations of the rules adopted under Regulation AB, the Securities Act, and the Exchange Act. These interpretations replace those published in the Regulation AB “Manual of Publicly Available Telephone Interpretations” and have been revised and updated in some instances.
Liquidity Management Rules for Mutual Funds and ETFs Proposed
The SEC voted on Sept. 22, 2015, to propose a comprehensive set of rule reforms that would enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs), with an underlying goal of allowing investors to redeem their shares and receive their assets in a timely manner.
In accordance with the proposal, mutual funds and ETFs would be required to put into place liquidity risk management programs and increase disclosures regarding fund liquidity and redemption practices. The proposal also would require multiple elements to be contained in the liquidity risk management program. Additionally, the proposal would codify the 15 percent limit on illiquid assets included in current SEC guidelines.
The proposal will be published on the SEC’s website and in the Federal Register. The comment period will be 90 days after publication in the Federal Register.
From the Public Company Accounting Oversight Board (PCAOB)
Brief on Inspections Program for Auditors of Brokers and Dealers Published
The PCAOB on Oct. 1, 2015, published its “Staff Inspection Brief: Information About 2015 Inspections,” describing the objectives, focus, and scope of its ongoing inspections in 2015 of PCAOB-registered auditors.
According to the brief, the inspection staff is taking a closer look at the following areas:
- Auditing internal control over financial reporting
- Assessing and responding to material misstatement risks
- Auditing accounting estimates, including fair value measurements
Additionally, the PCAOB considers the current economic environment and related developments including:
- High-paced mergers and acquisitions activity
- The search for higher-yielding returns on investments in a low-interest-rate environment
- Fluctuating oil prices and the varying effects on the financial reporting risks of different industries
During the 2015 inspection cycle, the PCAOB will inspect approximately 220 registered audit firms, which includes approximately 60 non-U.S. firms.
The brief’s appendix includes additional information on the inspection program, industry sector and market capitalization demographics of issuers with inspected audits, and data on inspection focus for issuer audits inspected in cycles 2011 through 2014.
From the Institute of Internal Auditors (IIA)
“Tone at the Top” on Whistleblower Programs Issued
The IIA issued its September-October 2015 edition of “Tone at the Top,” entitled “Whistleblowers: What the Board Needs to Know.” This edition examines the benefits to an organization of effective whistleblower programs and how an organization and its board members and executives can support a whistleblower program to achieve the best results.
Recommendation Issued to Mandate Internal Audit for All Issuers
On Sept. 9, 2015, the IIA issued a comment letter responding to an SEC request for comments on possible revisions to audit committee disclosure rules. In the letter, the IIA urged the SEC to make internal audit functions a requirement for all publicly traded companies.
The letter states the IIA’s belief that the rule revisions should require internal audit conduct in accordance with globally recognized standards. In addition, the IIA advocates for requiring audit committee disclosures on the internal audit function’s stature, independence, and resources as well as its performance.