Notes from the Field – the 2022 AICPA National Conference for Banks and Savings Institutions

By John Marsh October 11, 2022

I recently attended the 2022 AICPA National Conference for Banks and Savings Institutions. The conference focused on a variety of areas, some of which are gaining traction quickly in community banking, such as Environmental, Social, and Governance (ESG), digital assets and cryptocurrency, as well as the economy, taxation and regulatory updates.

Economic Update

A summary of what was discussed by the economists presenting at the conference included the following:

COVID permanently changed the world with hybrid working models; online shopping, telemedicine, and remote learning; workers/wealth moving from cities to suburbs and beyond; nationalized labor and real estate markets; and a smaller but more skilled labor force.

From a macroeconomic perspective, much of the COVID relief money has not yet been spent. There is approximately $2.5 trillion in household and nonprofit checking accounts. Corporations and state and local governments are flush with cash. These serve to boost aggregate demand/inflation. Russian sanctions and COVID lockdowns in China are impacting agriculture, energy, metals, and technical components/assembly. There is also a transition to green energy and electric vehicles. Aggregate demand exceeds aggregate supply, and with limits of Federal Reserve tightening, high inflation will persist. A very challenging path to 2.0% – 2.5% growth exists.

Remedies include Federal Reserve monetary policy; industrial policies (green energy, EVs, batteries, semiconductors); resolution of the conflict in Ukraine and diversify trade; and at the federal level, reduce spending  and raise taxes.

The national economic forecast is for the federal funds rate to rise to 4.375% by Q1 2023 and the 10-year treasury rate to peak at 4.80% in Q1 2023. New home sales are expected to decrease in 2022 and 2023.

The GDP fell again in Q2, but Fannie Mae thinks the recession won’t start until early 2023. Employment remains much stronger than previous recessions, but despite strong job growth, labor force participation remains well below the pre-pandemic level. Home prices typically filter through the CPI with a 5-quarter lag, meaning housing will continue to drive higher inflation readings for multiple quarters. Residential fixed investment tends to decline prior to recessions, which is currently occurring. Home sales are expected to slow further due to rising rates and forecasted 2023 recession. Months’ supply of new homes is rising as the number of completed homes for sale also rises, suggesting builders may soon begin discounting prices. Monthly rent is becoming increasingly more attractive when compared to principal and interest payments.

SEC Update – Office of the Chief Accountant (OCA)

The OCA consists of 45 professionals and serves as an investor protection agency. Their mission is to facilitate high quality standards and high quality rules.

Proper and complete disclosures and determining how best to communicate to investors is important. Key areas include focusing on estimates that may change in the near term, credit allowances and discounted cash flows.

Working with FASB is a key role of the SEC.

Staff Accounting Bulletin 121 related to the accounting for obligations to safeguard crypto-assets an entity holds for platform users was discussed.

Importantly, it was noted that materiality is not a mechanical exercise and not just quantitative. Companies must consider all the facts and circumstances.

Financial Accounting Standards Board (FASB)

Top priorities identified by invitation to comment respondents – consisting of users/investors, preparers, practitioners, trade group representatives and others were as follows (top 5):

• Digital Assets
• ESG – Related Transaction Disclosures
• Disaggregation of Financial Reporting Information
• Intangible Assets
• Software

Top priorities of financial institutions (top 5):

• ESG – Related Transactions or Disclosures
• Digital Assets/Cryptocurrency
• Software Capitalization
• Definition of Derivative
• Interpretive Process

Changes to FASB’s technical agenda:

• Redefined projects
  • Targeted improvements to income tax disclosures
  • Disaggregation – income statement expenses
• Added projects
  • Accounting for and disclosure of digital assets
  • Accounting for and disclosure of software costs
  • Accounting for environmental credit programs

The FASB is conducting a CECL post-implementation review (PIR). The objectives of the PIR include the following:

• Determining whether the standard is accomplishing its stated purpose
• Evaluating implementation and continuing compliance cost and related benefits
• Improving the standard-setting process

PIR may identify areas of improvement and result in additional standard-setting projects. The process is on-going for several years after the latest effective date of the standard. PIR feedback has resulted in the FASB adding two projects to its technical agenda:

• Accounting for TDRs by creditors
  • FASB decided to remove TDR recognition and measurement guidance
  • Require entities to disclose gross write-offs, but not recoveries
• Accounting for acquired financial assets
  • FASB determined that the Purchased Credit Deteriorated (PCD) accounting model should apply to all acquired financial assets, with limited exceptions

Federal Banking Agencies

CECL

The regulators commented that the CECL results so far are as intended. The allowance for credit losses (ACL) ratio to total loans is generally higher. In addition, they feel that releasing ACL and ALLL is appropriate when supported in an environment of reduced credit risk.

The FRB has provided two CECL tools (1) the Expected Loss Estimator (ELE) Tool and (2) the Scaled CECL Allowance for Losses Estimator (SCALE) Method and Tool. The SCALE method is a simple spreadsheet-based method developed by the FRB to assist smaller community banks in calculating their CECL compliant allowances. The ELE tool is an Excel-based tool that automates the Weighted-Average Remaining Maturity (WARM) Method.

The regulators are training examiners on the CECL methodology. The regulators realize that changes will be made to the CECL model over time and it will not be perfect on day one.

Cryptocurrency

The regulators feel that a cautious approach to cryptocurrency is appropriate. The FDIC released a FIL notifying banks that they should notify their regulators if they plan to enter into Crypto activities.

Under the category of ESG and climate policy, the regulators indicated that their role is not to make policy or rules. The OCC announced the addition of a new climate risk officer.

Comments from the Chief Accounting Officers of Mid-Size Banks

In regard to data governance, the chief accounting officers’ view is that the finance department is a consumer of data not an originator of data. Efficiency is important through automation with the consensus that it is critically important that data integrity be maintained at a high level.

Standardization of data is important. They are in the process of tagging all loans related to their green portfolio.

The chief accounting officers’ view on the expanded application of the proportional amortization method to all qualifying investments in income tax structures through limited liability entities (e.g. partnerships, LLCs) was very positive. The new guidance will be very beneficial. There is a requirement that a significant portion of cash flows come from tax credits (most likely estimate 90%). Structuring new deals to comply is important going forward.

Their experiences operating in a remote work environment were generally positive with solid productivity. All are bringing employees back to the office in a mixture of a hybrid and onsite work, depending on the nature of the role. Some banks on the panel had three false starts bringing employees back to the office.

Emerging Tax Developments Impacting Your Institution

Inflation Reduction Act- Signed Into Law On August 16, 2022

Tax provisions included:

• 15% corporate Alternative Minimum Tax – estimated federal revenue $183 billion
• 1% excise tax on stock repurchases – estimated federal revenue $55 billion
• $80 billion in new funding for the IRS – estimated federal revenue $152 billion
• Expansion/extension of energy tax credits – estimated federal cost $332 billion
• Extension of existing loss limitations for non-corporate taxpayers – estimated revenue $68 billion

The 15% corporate Alternative Minimum Tax applies if the prior three-year average adjusted pre-tax book income reported in the applicable financial statements is greater than $1 billion.

The 1% excise tax on stock repurchases applies:

• To all corporations whose stock is traded on an established securities market
• If the total amount paid for stock repurchases during the year is greater than $1 million
• To repurchases of stock occurring after December 31, 2022

Taxable repurchases are reduced by the fair market value of new shares issued during the year including shares issued or provided to employees (including stock option exercises), share repurchases contributed to certain employer-sponsored retirement plans, and by other less common issuances. This is not considered an income tax and will be nondeductible for income tax purposes. For accounting purposes, the 1% excise tax will likely be capitalized to treasury stock and not expensed through the income statement.

The $80 billion in funding for the IRS is intended to modernize the agency while expanding enforcement efforts. It is possible the banking industry may see an increased frequency of IRS audits in the coming years under this expansion.

Energy tax credit provisions expand certain energy tax credits and extend phase-out provisions. They generally impact solar/wind tax credits. A new provision allows for transfers (i.e. sales) of energy tax credits (for cash). It includes electric vehicle tax credits of up to $7,500 per qualifying vehicle.

Will a corporate tax rate increase be enacted anytime soon? Depends on the balance of power in Congress. Democrats currently lack the votes in the Senate to enact a corporate rate increase, but the margin is very thin. It is very unlikely for the remainder of president Biden’s current presidential term if Republicans gain control of at least one chamber of Congress in the 2022 mid-term elections.

In regard to digital assets and cryptocurrencies, Congress and Treasury are moving quickly to enact/implement tax measures to extend existing tax rules to these assets. The Treasury views these assets as a form of intangible property. Consequently, gain or loss is recognized upon their exchange.

Public Company Accounting Oversight Board (PCAOB)

Standard-Setting Update

A recently completed project included the supervision of other auditors. The amendments specify certain procedures for the lead auditor to perform when planning and supervising an audit that involves other auditors; and apply a risk-based supervisory approach to the lead auditors’ oversight of other auditors for whose work the lead auditor assumes responsibility. The amendments will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024.

Short-term standard-setting projects include:

• Quality control
• Noncompliance with laws and regulations
• Attestation standards update
• Going concern
• Confirmations

Mid-term standard-setting projects include:

• Substantive analytical procedures
• Fraud
• Interim ethics and independence standards
• Interim standards

Division of Registration and Inspection Update

Focus is on reviewing audits in industries negatively impacted by supply chain disruptions and/or experiencing negative effects related to COVID-19, such as electronic components and equipment, automobile, retail, materials, airlines, hospitality, and entertainment. Areas of review that have been affected by the pandemic such as impairments, going concern assessments, allowance for credit losses (ACL), and the increased risk of fraud will be focal points. The PCAOB continues their enhanced focus on firms’ quality control systems.

Financial institution audits make up approximately 20% of inspections in 2022 and vary by year. Commonly selected focus areas include loans and related allowance for credit losses and investments, including derivatives. The PCAOB continues to identify deficiencies in audit firms that recur from year to year. Frequent areas of audit deficiencies within financial institutions include auditing the ACL and other accounting estimates, including fair value measurements. The PCAOB continues to view COVID-19 as being relevant to the ACL process.

PCAOB Staff Overview for Planned 2022 Inspections

Selected focus areas of planned 2022 inspections include:

• Fraud and other risks
• Initial public offerings and mergers and acquisitions activity
• Audit firms’ execution challenges
• Considerations specific to broker-dealers
• Independence
• Use of service providers in the confirmation process
• Critical audit matters
• Audit areas with continued deficiencies
• Firms’ quality control systems
• Technology

Community Bank Financial Reporting Hot Topics

Available-For-Sale (AFS) Security Portfolio and Other Than Temporary Impairment

The significant decline in the AFS portfolio of many institutions may be primarily the result of general market conditions which reflect prospects for the economy as a whole rather than by specific information pertaining to an industry or issuer. Assessing the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value may be challenging when:

• The majority of individual AFS securities are in large unrealized loss positions
• There is a long or uncertain timeframe for anticipated recovery of market value
• Near-term liquidity needs are satisfied via sales of AFS securities

AICPA Center For Audit Quality (CAQ) Audit Partner Pulse Survey

• Includes 700 audit partners from the eight CAQ governing board firms
• 84% are not optimistic on economic outlook over next 12 months
• Top risks
  • Inflation
  • Labor shortages
  • Supply shortages and supply chain disruption
  • Cybersecurity threats
• 53% – talent is the most important corporate priority for 2022

Summary

The conference was well attended with a good mixture of financial institutions, regulators, auditors and accountants. The conference was held both onsite in Washington, D.C. and virtually.

Several key accounting topics were covered that should be considered heading into year-end 2022 and then into 2023. To discuss these or any other banking topics, please contact Joseph Jalbert, our banking practice lead, or your BNN advisor at 800.244.7444.