From the Federal Financial Institution Regulators
Banking Regulators Propose Regulatory Capital Rules Simplification
The Board of Governors of the Federal Reserve System (Fed), Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) on Sept. 27, 2017, issued
a proposed rule that would simplify Basel III regulatory capital calculations for all but the very largest banks – generally those with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure.
Under the proposal, restrictions to assets subject to common equity tier one (CET1) capital threshold deductions for mortgage servicing assets (MSAs), temporary difference deferred tax assets (DTAs) not eligible for carryback, and investments in the capital of unconsolidated financial institutions would be loosened, and limitations on minority interest would be simplified. Also, the definition of high-volatility commercial real estate (HVCRE) exposures would be replaced with a more straightforward measure.
The regulators also issued a community bank summary
and a spreadsheet tool that helps banks estimate how their regulatory capital would change under the proposed rule.
Comments on the proposal are due 60 days after it is published in the Federal Register.
OCC Releases Supervision Operating Plan and Priorities
On Sept. 28, 2017, the OCC released
its bank supervision operating plan
for fiscal year (FY) 2018. The plan provides the foundation for OCC policy initiatives and for supervisory strategies as applied to individual national banks and is used to guide OCC staff supervisory priorities, planning, and resource allocations.
The OCC has identified the following supervisory priorities for FY18:
- Cybersecurity and resilience: Assessing specific cybersecurity controls as part of information security, including significant areas of cybersecurity risk management, such as the service providers’ risk management, control structures, and level of cyber resilience.
- Commercial and retail credit underwriting: Evaluating underwriting practices on new or renewed loans for easing in structure and terms, increased risk layering, and potential fair lending implications. Reviews will focus on new products, areas of highest growth, and portfolios that represent concentrations, such as commercial and industrial, commercial real estate, agriculture, and auto loans.
- Bank Secrecy Act/anti-money laundering (BSA/AML) compliance management: Determining whether banks have designed and implemented effective BSA/AML and Office of Foreign Assets Controls programs and controls to address continued risks from traditional money laundering schemes, evolving vulnerabilities resulting from the rapid pace of technological change, and emerging payment solutions and terrorist financing.
From the Consumer Financial Protection Bureau (CFPB)
CFPB Proposes Changes to Publicly Reported HMDA Data
The CFPB issued
, on Sept. 20, 2017, a final rule
on the loan-level Home Mortgage Disclosure Act
(HMDA) data it will make available to the public under the revised HMDA data collection rules, which take effect in 2018. Noting concerns over consumer identity protection, the CFPB modified Equal Credit Opportunity Act
regulations to give mortgage lenders additional flexibility in the collection of consumer ethnicity and race information.
Separately, the CFPB seeks comment on proposed policy guidance
describing the HMDA data it proposes to make available to the public beginning in 2019. The proposed changes would reduce the precision of values reported for several data fields – such as the amount of the covered loan applied for, the age of an applicant or borrower, or a borrower’s debt-to-income ratio – in order to protect consumer privacy.
Comments are due Nov. 24, 2017.
From the Financial Accounting Standards Board (FASB)
FASB Clarifies Credit Card Methodology in CECL Estimate
At its Oct. 4, 2017, meeting
, the board decided to allow financial institutions to include all or only a portion of borrower payments expected to be collected when estimating expected future payments on credit card receivables under the CECL model. This resolves the remaining issue from the June 12, 2017, meeting of the Credit Losses Transition Resource Group (TRG), related to estimating the life of a credit card receivable under the credit losses standard.
FASB Codifies SEC Deferral of Adoption Dates for Revenue Recognition and Leases Standards
In Accounting Standards Update (ASU) 2017-13, “Revenue Recognition (Topic 605), Revenue From Contracts With Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments
,” the FASB codified the previous Securities and Exchange Commission’s (SEC) staff announcement from the July 20, 2017, EITF (Emerging Issues Task Force) meeting related to the effective date deferral of the revenue recognition and leases accounting standards for “certain public business entities (PBEs).”
The SEC will allow PBEs that qualify as such due solely to the requirement to include or the inclusion of their financial statements or financial information in another entity’s SEC filing (“certain PBEs”) to elect to apply the non-PBE effective dates for the revenue recognition and lease accounting standards as follows:
- Certain PBEs may elect to apply the revenue recognition guidance for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2019, which, if elected, first applies to Dec. 31, 2019, annual financial statements for calendar year-end entities.
- Certain PBEs may elect to apply the lease guidance for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020, which, if elected, first applies to Dec. 31, 2020, annual financial statements for calendar year-end entities.
FASB Proposes Recognition and Measurement Standard Clarifications
On Sept. 27, 2017, the FASB issued an exposure draft that contains two proposals for technical corrections and improvements to two recent accounting standards. One is a proposal for recognition and measurement: “Two Proposed Accounting Standards Updates – Technical Corrections and Improvements to Recently Issued Standards: I. Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and II. Accounting Standards Update No. 2016-02, Leases (Topic 842)
The board proposes six clarifications to ASU 2016-01.
Equity securities without a readily determinable fair value:
- The measurement alternative applies until the investment has a readily determinable fair value or becomes eligible for the net asset value practical expedient. The proposal clarifies that an entity may also change from the measurement alternative to a fair value method consistent with Topic 820, “Fair Value Measurement,” for all securities of the same type.
- When an observable transaction occurs for a similar security, an adjustment is made to reflect the current fair value of the security. The proposal clarifies that those adjustments should be made as of the date that the observable transaction took place.
- The proposal clarifies that remeasuring the entire value of forward contracts and purchased options is required when an observable transaction on the underlying equity investment occurs.
- A prospective transition approach is required for all equity securities without a readily determinable fair value. The proposal clarifies that such an approach is required only when the measurement alternative is applied.
For fair value option (FVO) financial liabilities:
- Presentation of financial liabilities for which the FVO has been elected is required, and the proposal further clarifies that the presentation guidance in Accounting Standards Codification (ASC) 825-10-45-5 should be applied whether the FVO was elected under ASC 825-10 or ASC 815-15 for embedded derivatives.
- The fair value change attributable to instrument-specific credit risk for FVO financial liabilities is required (by ASC 825-10-45-5) to be separately presented in other comprehensive income (OCI). For FVO financial liabilities denominated in a foreign currency, the proposal clarifies that the fair value change for instrument-specific credit risk should first be measured in the currency of denomination when separately presented in OCI. It also clarifies how the fair value change components would be remeasured into the functional currency of the reporting entity.
Comments are due Nov. 13, 2017.
FASB Proposes Leases Accounting Standard Clarifications
The exposure draft “Two Proposed Accounting Standards Updates – Technical Corrections and Improvements to Recently Issued Standards: I. Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and II. Accounting Standards Update No. 2016-02, Leases (Topic 842)
” also includes a proposal for 16 technical corrections and improvements to the leases accounting standard.
Comments are due Nov. 13, 2017.
FASB Proposes Practical Expedient for Land Easements
The FASB issued a proposal, on Sept. 25, 2017, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
,” to ease the costs of applying the new lease accounting guidance to land easements (that is, “a right to use, access, or cross another entity’s land for a specified purpose,” often referred to as a “right of way”). There currently is diversity in practice in accounting for land easements. Some entities apply Topic 840, “Leases,” while others use Topic 350, “Intangibles – Goodwill and Other,” or Topic 360, “Property, Plant, and Equipment.” Under the proposal, all entities would apply the new lease accounting guidance in Topic 842 to land easements in order to eliminate diversity in practice.
To provide transition relief, the proposal would permit entities that do not currently apply Topic 840 to continue to apply current accounting policies to all land easements that existed or expired before the effective date of Topic 842. Topic 842 would be applied prospectively to all new or modified land easements.
Comments are due Oct. 25, 2017.
FASB Proposes Rearrangement of Consolidation Guidance
On Sept. 20, 2017, the FASB issued a proposal, “Consolidation (Topic 812): Reorganization
,” to reorganize its consolidation guidance consistent with how the guidance should be applied. The proposal would move the guidance from Topic 810 to a new section, Topic 812, and add two subtopics – one for variable interest entities (VIEs) and one for voting interest entities.
The board does not expect the proposed reorganization to change current practice.
Comments are due Dec. 4, 2017.
FASB Proposes Codification Improvements
The FASB proposed, on Oct. 3, 2017, “Codification Improvements
,” to clarify the guidance contained in the ASC and correct unintended application of guidance.
Proposed clarifications of highest relevance to financial institutions include:
- Income taxes for stock compensation (ASC 718-740) – to clarify that excess tax benefits (or tax deficiencies) should be recognized in the period when the amount of tax deduction for compensation expense is determined
- Income taxes for business combinations (ASC 805-740) – to remove three methods for allocating the consolidated tax provision to an acquired entity after acquisition, and instead require that the tax benefit from the tax basis step-up be credited to the acquired entity’s additional paid-in capital consistent with Topic 740
- Derivatives and hedging (Topic 815-10) – to clarify that the intent to set off may not be required in order to offset derivative assets and liabilities when the related instruments are executed with the same counterparty under a master netting agreement
- Fair value measurement (Topic 820-10) – to clarify that an entity should consider transfer restrictions that are characteristics of the asset (and not restrictions that are characteristics of the entity) when measuring the fair value of a liability or instrument classified in owner’s equity when the fair value is based on the quoted price of the corresponding asset
- Financial services – depository and lending (Topic 942) – to clarify that disclosure requirements for regulatory capital include all applicable required and actual ratios and amounts
Comments are due Dec. 4, 2017.
From the Securities and Exchange Commission (SEC)
SEC Releases Proposal to Reduce and Streamline Disclosure
The SEC released
, on Oct. 11, 2017, a proposal, “FAST Act Modernization and Simplification of Regulation S-K
,” for public comment. Requirements of the Fixing America’s Surface Transportation Act of 2015
present the SEC with an opportunity to streamline its entire disclosure framework. Among the proposed changes to Regulation S-K, registrants would no longer be required to provide, under certain circumstances, a discussion of the earliest year when three years are presented in Item 303, Management’s Discussion and Analysis (MD&A).
The proposal would make the confidential treatment process more efficient for registrants and SEC staff without changing the responsibilities of registrants with regards to personally identifiable information as well as immaterial and competitively harmful information contained in exhibits. Registrants would no longer be required to first seek approval for confidential treatment from the SEC on specified matters.
In addition, a description of property would no longer be required if the premises or facilities are not material to the registrant, and material contracts outside the ordinary course of business that were entered into within a two-year window of filing a registration statement or report would be required only for new registrants, rather than all registrants.
In order to eliminate various incorporation by reference provisions in SEC rules and regulations, registrants would be required to include hyperlinks in current filings to the incorporated information that was previously filed on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
In the required exhibit that includes a list of the registrant’s subsidiaries, the proposal would require disclosure of legal entity identifiers (LEIs) for the registrant and its subsidiaries to the extent the LEI has been obtained. LEIs are alphanumeric codes used across markets and jurisdictions to track entities and understand entities’ corporate structure.
Comments are due 60 days after publication in the Federal Register.
Chair Focuses on Cybersecurity
On multiple occasions recently, SEC Chair Jay Clayton emphasized his concerns about cybersecurity risks, including that more disclosure on cybersecurity is warranted. He has reminded issuers of existing disclosure guidance from the SEC’s Division of Corporation Finance (Corp Fin) on cybersecurity risks and incidents, “CF Disclosure Guidance: Topic No. 2
Clayton has stated that the SEC is examining the cybersecurity disclosures of public companies, including after a breach has occurred. He has cautioned issuers to carefully consider disclosure obligations for material cybersecurity risks and events in periodic and current reports.
The chair’s recent statements include:
- Remarks before the Senate Committee on Banking, Housing, and Urban Development on Sept. 26, 2017
- Public statement on cybersecurity on Sept. 20, 2017
- Remarks at the Economic Club of New York on July 12, 2017
Deputy Chief Accountant Addresses Major Accounting Standards
on Sept. 21, 2017, in San Diego, SEC Deputy Chief Accountant Sagar Teotia focused on implementation of the new major generally accepted accounting principles (GAAP) standards on revenue recognition, leases, and credit losses. He offered observations in these areas:
- Keep going, get going – focus on implementation
- Internal control over financial reporting
- Transition disclosures required by SAB 74
- New disclosures required by the new standards
- Importance of reasonable judgment
- Role of audit committees in the implementation of the new GAAP standards
For revenue recognition, he noted adoption is only a few months away. The SEC will accept well-reasoned judgments, but those generally take time to develop. The SEC is available to answer questions, and the time to ask is now. Teotia also stressed the importance of the accompanying disclosures and noted that it takes time to develop how the disclosures will be made and time to implement system and internal control changes to gather and present the data.
Turning to leases, he encouraged companies to consider beginning their leases implementation efforts. The standard will require several steps including identifying relevant legal contracts, evaluating whether an arrangement is or contains a lease, and applying the standard to contracts within its scope. These steps can be time-consuming, so getting started sooner rather than later is a best practice. He pointed to a few lessons learned from revenue recognition including making sure companies have the appropriate resources to evaluate the lease arrangements and setting the right tone at the top.
For credit losses, Teotia shared observations from the SEC’s monitoring activities. He stressed the importance of coordination among all stakeholders – namely preparers and auditors moving in tandem so that one group does not significantly get ahead of the other. He suggested registrants should bring interpretative concerns to the SEC and encouraged stakeholders to refer challenging issues to the FASB’s Credit Losses TRG.
SEC Releases Pay Ratio Rule Guidance
On Sept. 21, 2017, the SEC adopted
interpretive guidance in Release No. 33-10415
to assist companies that are required to make the pay ratio disclosure (the ratio of the compensation of the principal executive officer to the median employee's compensation) beginning in 2018. The interpretive guidance addresses the following related to developing the disclosure:
- Use of reasonable estimates, assumptions, and methodologies and statistical sampling
- Use of existing internal records
- Use of widely recognized tests under another area of the law to determine which workers are employees
Also, Corp Fin released staff guidance
in the form of questions and answers to cover acceptable methodologies for developing the pay ratio disclosure and provide examples of reasonable methodologies.
SEC Provides Relief for Hurricane Victims
The SEC announced
on Sept. 28, 2017, that it is extending the filing deadlines for certain entities affected by hurricanes Harvey, Irma, and Maria for specified reports and forms that companies must file under Regulation Crowdfunding and Regulation A. In addition, the SEC staff will address the need for additional relief or assistance on a case-by-case basis for the affected companies and encourages those entities to contact SEC staff.
From the Public Company Accounting Oversight Board (PCAOB)
PCAOB Staff Releases Guidance for Auditing the Revenue Standard
On Oct. 5, 2017, the PCAOB released Staff Audit Practice Alert No. 15, “Matters Related to Auditing Revenue From Contracts With Customers
,” to provide guidance for auditors to consider during their interim reviews and annual audits of financial statements with regards to the revenue recognition standard.
The practice alert addresses the following topics:
- Management’s transition disclosures in the notes to the financial statements
- Transition adjustments
- Internal control over financial reporting
- Fraud risks
- Revenue recognition in conformity with the financial reporting framework
- Revenue disclosures