Notes from the Field – the 2024 AICPA & CIMA Conference on Banks & Savings Institutions & Credit Unions

By John Marsh October 14, 2024

I recently attended the 2024 AICPA & CIMA Conference on Banks & Savings Institutions & Credit Unions Conference. Speakers at the conference, which took place September 9 – 11 in Washington, DC, covered the economy, regulatory developments, artificial intelligence (AI), blockchain and other current topics affecting financial institutions as well as the accounting and auditing profession.

AI and Banking

There were several AI focused sessions and AI was also covered by several speakers in other sessions over the course of the conference. Starting with the opening session, Barry Melancon, AICPA & CIMA President and CEO, noted that rapidly evolving digital transformation and AI are at the top of concerns for accounting firms. There was universal agreement that AI is here to stay; however, there was a wide range of opinions on the potential benefits and risks of AI. Presenters from KPMG and Rhino.ai put forth real-world experience cases spotlighting AI to accelerate application modernization and development. Michael Harper, Managing Director at KPMG, noted that there is a sense that GenAI has changed more in the last 12 months than in the last 12 years.  Lamont Black, Ph.D. and Associate Professor of Finance at DePaul University, noted the evolving impact and significant potential of emerging technologies in the financial space.  He advised companies that they should focus on adoption of AI to avoid becoming passe as opposed to worrying about whether AI is bad or good.  Financial institutions should find the most appropriate use case, balancing risk concerns with value creation/cost savings.  As noted by more than one speaker, companies need to be cognizant of the risks related to emerging technologies, such as cybersecurity threats, privacy and security, wrong answers, and ensuring that the right governance structure is in place.  In accordance with a recent survey by KPMG LLP, GenAI Pulse Survey (March 2024), 97% of business leaders are investing in GenAI over the next year.

SEC Update – Office of the Chief Accountant (OCA)

Jonathan Wiggins, Deputy Chief Accountant, and Gaurav Hiranandani, Senior Associate Chief Accountant, discussed a variety of topics during their remarks.  Paul Munter, Chief Accountant for the SEC, spoke remotely regarding crypto asset safeguarding obligations.

The OCA presented its views on high-quality financial reporting and provided its perspective on the following topics:

• Audit quality, and
• Oversight of the PCAOB.

The OCA encourages consultation early in the process of the application of accounting rules for more complex transactions as opposed to potentially receiving a subsequent comment letter or an enforcement action.  The OCA continues to see an increase in consultations related to business combinations with emphasis on identifying the accounting acquirer.  The accounting acquirer may not always be the legal acquirer.  The parties involved should follow the guidance within ASC 810, Consolidation, and ASC 805, Business Combinations, when identifying the accounting acquirer. 

Paul Munter spoke about crypto asset safeguarding arrangements and noted that Staff Accounting Bulletin (SAB) No. 121 requires entities with safeguarding obligations to record a liability on their balance sheets along with a corresponding safeguarding asset.  He presented the conclusions from two recent SEC consultations where the staff concluded the arrangement did not fall within the scope of SAB No. 121 based on the specific fact pattern.  He emphasized the importance of evaluating the specific facts and circumstances in each case and advised that the ultimate conclusions may be different based on those fact patterns.

Financial Accounting Standards Board (FASB): 2024 and Beyond

The FASB panel discussed several topics related to its technical and research agenda projects impacting the banking industry.  Topics of most interest to financial institutions included the accounting for purchased financial assets (PFA), hedging improvements, and making the statement of cash flows for financial institutions more meaningful for investors. 

Accounting for PFAs

The proposed amendment eliminates the assessment of credit deterioration at acquisition and applies the purchased credit-deteriorated (PCD) gross-up approach to all financial assets acquired. For an asset acquisition, the concept of “seasoning” is introduced to determine if the financial assets are considered acquired or originated.  Day 1 credit loss expense is not recognized for an acquired financial asset accounted for under this approach; instead an allowance for credit losses is established by grossing up the acquired asset’s amortized cost basis on acquisition.

FASB is redeliberating comment letter feedback from stakeholders, but no timeline has been released for an updated exposure draft.  Nothing is currently expected in 2024.

Hedge Accounting Improvements

The project objective is to make targeted improvements to the hedge accounting guidance in Topic 815, based on issues raised by stakeholders.  Issues addressed – change in hedged risk – choose-your-rate debt; shared risk assessment in cash flow hedges; net written options as hedging instrument; cash flow hedges on nonfinancial forecasted transactions; dual hedges; and use of the term Prepayable under the Shortcut Method.

 FASB has completed deliberations, and a proposed ASU was issued on September 25, 2024.

Statement of Cash Flows – Targeted Improvements

The project objective is to consider targeted improvements to the statement of cash flows to provide investors with decision-useful information.  Potential improvements include: reorganize and disaggregate the statement of cash flows for financial institutions; and develop a disclosure model.

FASB is performing further research and outreach to determine the scope of entities that would be affected by the proposed changes and explore possible revised definitions of investing and financing activities.

Federal Banking Agencies

A fireside chat with the Chief Accountants – Shannon Beattie, FDIC – Amanda Freedle, OCC – Lara Lylozian – Federal Reserve – focused on a variety of areas including the following:

The agencies have seen an uptick in sale-leaseback agreements, bank-owned life insurance (BOLI) arrangements, and structured finance deals. Day-one gains will be closely monitored by the agencies.  The focus on reducing balance sheet risk and increasing earnings has been triggered by economic uncertainty and market pressures. Areas highlighted by the Chief Accountants included sale-leaseback transactions, restructuring of bank owned life insurance (BOLI), securitizations and credit risk transfers.  The mantra “if it sounds too good to be true, it most likely is” was pointed out by Freedle and the other chief accountants with the note that there is a heightened regulatory focus on these types of transactions. Freedle confirmed that a particular transaction with a day one gain or that results in an immediate improvement in a bank’s capital position is most likely going to receive elevated scrutiny during the examination process. You should have upfront discussions with your auditors and examiners before entering into these types of transactions.

Debt Security Classification – each banking agency will be paying close attention to the transfer of available-for-sale (AFS) and held-to-maturity (HTM) categories. Relative to the transfer of HTM securities to AFS, banks should document their support and reasoning for the transfer to avoid tainting the remaining HTM securities. 

CECL – the regulators have had increased discussions regarding the appropriateness of the allowance for credit losses estimate. It was noted that banks should coordinate among credit and accounting functions and make sure that effective management review and challenge is taking place.  Observations from recent OCC examinations suggest a need for a more robust level of CECL documentation including around the qualitative factors used. 

Business Combinations and Pushdown Accounting – similar to what was noted by the SEC in their presentation, the FDIC noted that complex business combinations will be closely reviewed. Results of business combinations where there is a bargain purchase gain or where the accounting acquirer is not the legal acquirer will receive increased attention. Consultations with your primary regulator was suggested in those instances. Lylozian emphasized that although pushdown accounting is an election under GAAP, the FRB has the authority to require pushdown accounting for call report purposes if it is more reflective of the economics of the transaction (business combination).

Regulatory Trends and Focus

Jonathan Gould, Partner at Jones Day, is of the view that risk tolerance of the banking regulators is zero or near zero. The historically low levels of bank failure prior to 2023 may be indicative of overly tight risk tolerance. Increased capital requirements are pushing more activities out of the banking system.

The Economists

Marci Rossell, Former CNBC Chief Economist, and Douglas Duncan, Chief Economist at Fannie Mae, separately discussed the economy both globally and domestically, interest rates and the real estate market. Both Rossell and Duncan provided several reasons why in their view the economy is recovering, and a recession is not likely. Rossell noted that recessions are generally caused by unexpected events and that future losses in commercial real estate (CRE) are unlikely to trigger a recession. The CRE sector impact, if it went to zero in value, would be approximately $4 trillion vs. the residential impact due to its decline would be approximately $16 trillion. Additionally, some sectors within the CRE market continue to perform well, such as warehouses and senior housing. Duncan further analyzed the CRE space, emphasizing that the asset class was wide-ranging, with the troubled spots seen mainly in traditional office vacancy rates. Similar to Rossell, overall, he indicated a fallout from CRE lending would not impact the economy nearly as much as a residential fallout. It was noted that the deficit as a percentage of GDP is at the same level as it was during WWII. Given the rise in interest rates, the cost to fund the deficit will shortly exceed the defense budget. The interest rate premiums demanded in the global market will be a leading indicator that the federal deficit is too large.

Duncan emphasized that over 90% of existing mortgages are over 200 basis points below the market rate.  As such, there is a disincentive for people to move resulting in a low supply in the housing market.  This has driven up housing prices and resulted in first-time home buyers seeking alternatives to existing homes, such as new homes or new markets. He is advocating for a supply-side policy reset to combat both low levels of supply and affordability, which he sees continuing into the foreseeable future. Duncan views the supply and affordability issues within the housing market as taking time to resolve.

Tax Planning in a High Interest Rate Environment and Other Tax Developments

David Thornton, Partner at Crowe LLP, discussed various tax topics in his session.

• Tax Planning in a High Interest Rate Environment
• Tax Planning Strategies That Provide a Permanent Income Tax Savings
• Tax Planning Strategies That Defer the Payment of Income Tax Liabilities
• Other Tax Developments

High interest rates can negatively impact income tax liabilities in two ways – (1) exacerbates the impact on non-deductible interest expense in the determination of taxable income, and (2) increases the cost of leveraged funds used to satisfy income tax liabilities and to carry income tax receivables.  Strategies for banks directly impacted by high interest rates or interest expense would include minimizing the bank TEFRA interest expense disallowance and deferring the payment of income taxes by accelerating deductions and deferring taxable income recognition such as accelerating fixed asset tax depreciation and market discount accretion deferral. 

Tax planning strategies that provide a permanent income tax savings directly reduce income tax expense; directly increase net income; and reduce the effective tax rate.  The bad news is that these strategies are in short supply and mostly rely upon tax-favored investments with the tax benefit already factored into the yield or purchase price.  Examples would include investing in tax-exempt municipal bonds, bank-owned life insurance, tax credit equity structures, and implementing state and local tax planning strategies. 

Strategies that defer the payment of income taxes are plentiful, easy to apply, often carry little or no risk, may provide a regulatory capital benefit, and their fair value rises with interest rates.  However, they do not reduce income tax expense and may require more complex tax recordkeeping.  These strategies reduce the current tax liability in favor of pushing that liability into a future tax year.  They do not result in a permanent tax savings, so no reduction in income tax expense.  Examples include – (1) the deferral of market discount accretion on qualified securities purchased on the secondary market at a discount, (2) adoption of the “bad debt conformity method” for bank bad debts, and (3) current deduction of qualifying loan origination costs.  Specific strategies include the election of bonus depreciation on qualifying fixed assets; ensure current deduction of qualifying short-term prepaid expenses is being claimed; ensure current deduction for qualifying accrued credit card rewards is being claimed; defer up to 15% of captive REIT income through the spillover dividend process; and modify cash incentive plan to claim employee bonus deductions in year of accrual. 

The FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, in December 2023.  This update requires enhanced disclosures in the income tax footnote for public business entities (PBE).  They include disclosure of specific categories in their effective tax rate (ETR) reconciliation table, including breakout of items equal to or >5%; ETR reconciliation to be presented in tabular format showing amounts and percentages; qualitative description of the state and local jurisdictions that comprise >50% of the state and local income tax ETR reconciliation item; and certain disclosures pertaining to net income taxes paid for the year.  For non-PBEs, qualitative disclosures must be provided about specific categories of reconciling items and individual jurisdictions that result in a significant ETR reconciling item; and must make certain disclosures pertaining to net income taxes paid for the year.  The effective dates for PBEs are annual periods beginning after 12/15/2024 and for non-PBEs, for annual periods beginning after 12/15/2025, applied on a prospective basis, with optional retrospective application permitted.  Early adoption is permitted. 

The IRS will begin processing employee retention credit claims filed between 9/14/2023 and 1/31/2024.  Processing will focus on the highest risk and lowest risk claims first.  Of note, many of the claims are being denied, unless determined to be low-risk, and some taxpayers have initiated legal action to force action or payment on claims.

The tax treatment of the special FDIC assessment imposed in 2023 is not subject to the deduction phase-out for bank groups with total assets >$10 billion and is deductible when paid.  As such, the accrued liability for the special assessment on the bank’s books will create a deferred tax asset for the tax effect of this accrual.

Summary

The conference was well attended with a good mixture of financial institutions, regulators, auditors, and accountants.

Several key accounting topics were covered that should be considered heading into year-end 2024 and then into 2025. To discuss these or any other banking topics, please contact Joseph Jalbert, our banking and financial services practice lead, or your BNN advisor at 800.244.7444.