Round-up of Recent Accounting Developments
Carl Chatto, Audit Principal
The following information serves as a round-up of some recent accounting developments and proposals, all of which may be of interest to our readers serving in the financial services industry.
The FASB’s proposed changes to lease accounting continue to evolve, but slowly. In short, the proposal would require most leased property to appear on the lessee’s balance sheet as an asset, with an offsetting financing liability. The concept of an “operating lease” would largely disappear. The effect would be to increase assets and liabilities with no corresponding increase to capital; capital ratios would decline as a result. FASB is considering some changes to simplify the accounting for small-ticket items and for the distinction between Type A and B leases. For more information, see our July 2013 article here.
Impairment of financial assets
This proposal, too, is still under FASB’s consideration. The basic concept is that all lenders would recognize losses when expected, as opposed to when incurred (which is the current model); this would accelerate the recognition of losses. FASB received a number of comments on this proposal, many relating to implementation issues. FASB has also addressed some questions about the following:
- TDRs: How to adjust the cost basis of certain TDRs.
- Nonaccrual loans: No new guidance will be provided.
- Purchased loans with credit impairment: The discount or premium on a pool of assets would be allocated among the pool.
- Investments available for sale: Losses recognized in net income would be limited to the difference between the fair value and the amortized cost basis.
- Measurement of expected losses: This would include guidance on using historical loss rates, total cash flows including prepayment estimates, and guidance on various loss estimation methods such as discounted cash flow.
The general expectation is that loan loss allowances would increase when this proposed change is implemented, which would lower banks’ capital ratios. A final standard is expected to be issued in late 2014. You can read a more in-depth discussion in a previous BNN article here.
Private Company Council
The FASB set up a Private Company Council (PCC) to address areas of accounting that should be simplified for private companies. To date, the PCC has issued guidance for interest rate swaps, goodwill amortization and Variable Interest Entities. Pronouncements issued by the PCC are considered to be GAAP. However, the banking regulators have not issued any guidance as to whether PCC pronouncements are acceptable for call reporting purposes, even if the institution is otherwise a private company. They may not allow adoption of PCC pronouncements since that could lead to a lack of comparability among regulated financial institutions.
The most recent FDIC call report instructions include the following note: “The banking agencies are currently evaluating the legal and policy issues raised in allowing banks and savings associations that meet the private company definition to use private company accounting alternatives issued by the FASB, such as the goodwill accounting alternative in ASU No. 2014-02, for Call Report purposes. Until these issues are resolved, the agencies recommend that banks and savings associations should not apply the goodwill accounting alternative in ASU No. 2014-02 when preparing their Call Reports.”
For now, we recommend that regulated financial institutions not adopt any PCC guidance until there is more clarification.
Other Comprehensive Income
Other comprehensive income (OCI) is set for another change in presentation. ASU 2013-02 is effective for nonpublic companies prospectively for years beginning after December 15, 2013 (calendar year 2014). The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require detailed information about the amounts reclassified out of accumulated OCI by component. In addition, the financial statements need to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated OCI by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts.
Substantially all the information that this ASU requires already is required to be disclosed elsewhere in the financial statements. However, the new requirement about presenting information about amounts reclassified out of accumulated OCI and their corresponding effect on net income will present, in one place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures. Currently, this information is presented in different places throughout the financial statements.
The ASU can be found here.
If you have any questions regarding these accounting developments, please contact your BNN service provider or Carl Chatto at 1-800-244-7444.
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