Highlights from the 2012 AICPA National Conference on Banks & Savings Institutions

By Jeff Skaggs, Audit Principal
October 2012

In September, nearly 1,500 people attended the AICPA’s 2012 National Banking Conference in Washington, D.C. The conference featured high-profile speakers from the AICPA, FASB, and various regulatory agencies.  The focus of this year was the regulatory environment, accounting and financial reporting issues, and the economic environment currently facing the banking industry.

It was the consensus of economists and regulators, on a national level, that banks continue to exhibit improving trends in earnings, problem loans, and bank failures. However, the levels of problem loans and bank failures continue to remain higher than historical norms. Much discussion surrounded the potential for negative effects on the U.S. economy, and therefore the banking industry, of the current economic situation in the European Union and the looming “fiscal cliff” in the U.S.

A noteworthy point crossing all three spectrums (i.e. the regulatory, accounting and economic environments) is uncertainty. It appeared unanimous that the uncertainty caused by the pending regulatory initiatives related to Dodd-Frank and Basel III, tax rates, and the FASB’s initiatives related to accounting under an expected loss model and an impairment model make it difficult for banks to “know the rules” and therefore difficult to plan accordingly.

The chief accountants from the regulatory agencies highlighted the efforts their agencies are spending considering the impact of Basel III on capital ratios and what types of changes, if any, should be made to these calculations. For example, under Basel III, unrealized gains and losses on available-for-sale securities are included in various regulatory capital calculations, which would make these ratios more volatile. Other areas that may be of particular concern to community banks are the treatment of mortgage servicing rights (MSR) and deferred tax assets. Basel III would limit MSRs to 10 percent of core capital, and MSRs plus other assets, including deferred tax assets, would be limited to 15 percent of core capital.

A board member of the FASB discussed their efforts on convergence of U.S. GAAP with international accounting standards, the FASB’s current agenda, and several high-profile initiatives. Most notably to community banks being the liquidity and interest rate risk disclosures and the “expected loss model” for determining the allowance for loan losses. The FASB received numerous responses to the expected loss model proposal and is considering these responses before proceeding. It does not appear that the expected loss model concept will be dropped. It is more likely the method of determination will be changed to address concerns.  The expectation from a regulatory standpoint is that loan loss reserves will increase under an expected loss model. For the liquidity and interest rate risk disclosures, the comment period was still open so the comments were limited.  However, it was interesting to note that these disclosures are viewed by some in the FASB as a way to provide the information wanted by proponents of “fair value accounting” without requiring the recognition of items at fair value in an entity’s financial statements.

The FASB is continuing with their efforts to simplify private company financial reporting. Their preliminary conclusion is that banks that are not publicly traded would qualify as “private companies.” This could result in some easing of reporting requirements in the future from a GAAP standpoint, but the regulators are currently indicating that they will not accept these reduced disclosure financial statements.

On the tax front, there is a national level IRS effort to treat the costs of carrying repossessed assets as capital costs and require banks to defer their deduction until the assets are sold.

For further information on these topics, or any others covered at the conference, please contact Jeff Skaggs or Carl Chatto.

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