The 2014 AICPA Banking Conference

By Baker Newman Noyes December 2, 2014

The American Institute of Certified Public Accountants (AICPA) held its annual National Conference on Banks and Savings Institutions in National Harbor, Maryland on September 8th – 10th. With more than 1,500 attendees and dozens of sessions and renowned speakers, the conference provided updates on economic, accounting, regulatory and financial reporting issues. The speakers included prestigious economists, and officials from standard setting bodies and regulatory agencies.

Douglas Duncan, Fannie Mae’s Chief Economist, gave a presentation that focused on the general macroeconomic environment, credit conditions, and the real estate market. Although GDP is down in the first half of 2014, Mr. Duncan feels that the overall economy is improving. Consumer spending on goods has increased but consumers have concerns about the direction of the economy, which could be weighing on the housing recovery. Home prices are showing moderate growth and there is a shrinking gap between buyer and seller confidence levels which could lead to more home inventories across the country. Household debt-to-income ratios have normalized which has increased the overall credit quality of consumers and direct bank lending is increasing, though at a rate less than pre-crisis levels.

It was no surprise to find that the Current Expected Credit Loss (CECL) model and Basel III were the most commonly discussed topics at the conference.

• CECL continues to be supported by the standard-setting bodies and regulators because they believe weaknesses in the current model became apparent during the recent economic recession. Regulators feel that most investors support CECL, but that preparers generally do not, because of their concern with projecting losses beyond a reasonably foreseeable period, and that CECL does not reflect the economics of lending. Regulators noted that based on studies performed, allowances are expected to increase between 30% and 50% upon implementation of CECL. The two largest challenges are going to be: (1) the ability to develop reasonable and supportable forecasts that include general economic conditions, the direction of the economic cycle, changes in underwriting and collateral values, and (2) the ability to estimate what loan balances are going to be for hard-to-determine loan products. For example, mortgages and home-equity lines-of-credit may need a separate model due to long tenor, advances, prepayments, etc. For a more detailed discussion on this topic, please see the companion article from this newsletter.
• The key changes reflected in Basel III include: (1) increased Tier 1 capital requirements, (2) introduction of common equity Tier 1 capital and a capital conservation buffer (the “buffer”), (3) requirements for greater risk weights on certain assets (such as commercial real estate), and (4) establishment of limits on deferred tax assets and mortgage servicing rights as a percentage of capital. The main concerns around Basel III which were echoed by many at the conference are over the risk weightings and the buffer which is designed to limit capital distributions and discretionary bonuses to executive officers for banks that do not meet certain capital ratios. Jeffrey Geer, Deputy Chief Accountant of the OCC, discussed that the final ruling reflects some important changes from the previous proposal to respond to concerns. Specifically, risk weightings for residential real estate loans remained unchanged from the current rule, banks can make a one-time election to either include or exclude components of accumulated other comprehensive income in regulatory capital, and trust preferred securities will generally be grandfathered in Tier 1 capital. Geer also indicated that if the Basel III rules were implemented today, approximately 95% of banks would be in compliance.

COSO

TJ Scallon, a Partner at KPMG, discussed the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) internal control framework. Part 363 of FDIC’s regulations identifies COSO’s internal control integrated framework as a suitable and available framework for assessing the effectiveness of internal control over financial reporting. In response to changes in business and operating environments, including increased complexity and changes in technology, COSO issued an updated version of its framework. The revision retains the core definition and the basics of the 1992 version, but now explicitly speaks to seventeen principles for assessing whether the five components of COSO (control environment, risk assessment, control activities, information and communication, and monitoring) are present and functioning. The revision also contains “points of focus” to assist management in designing, implementing, and maintaining the seventeen principles. COSO will make the original 1992 framework available through December 15, 2014, after which it will consider the 1992 framework to be superseded by the 2013 framework.

Repurchase-to-Maturity & Repurchase Financings

On June 12, 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2014-11 “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The two objectives of the ASU are to require repo-to-maturity agreements and repurchase financings to be accounted for as secured borrowings and to require new disclosures. The ASU is effective for interim or annual periods beginning after December 15, 2014 for public companies and for annual periods beginning after December 15, 2014 for non-public entities. Early adoption is prohibited and the transition is to be a cumulative-effect adjustment as of beginning period.

Lease Accounting

The FASB’s proposal on lease accounting, whereby essentially all leases with terms greater than one year will be recorded on the balance sheet, continues to move forward. The FASB has stated a 2015 (likely second half) issuance date with an effective date not yet determined and they will be discussing additional effective date and transition details in late 2014. The FASB’s current determination is to apply transition provisions at the beginning of the earliest comparative period presented in the year of adoption.

“Public” Company Defined

To clarify the definition of a “public” company, the FASB issued ASU 2013-12 “Definition of a Public Business Entity – An Addition to the Master Glossary” on December 23, 2013. The ASU defines “public” for financial reporting purposes not for legal purposes, addresses the existing multiple definitions in the ASC and re-evaluates the prior definitions – “….in an over-the-counter market, including securities quoted only locally or regionally.” Under the ASU, a public business entity is a business entity meeting any one of the criteria below (neither a not-for-profit entity nor an employee benefit plan is a business entity):

• It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
• It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
• It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
• It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
• It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC. Companies that meet the definition of a public company cannot use practical expedients developed by the Private Company Council while private companies can use them.

If you would like to discuss any of these please contact your BNN advisor at 800.244.7444.