Accounting and Auditing Update WBA/OBA CFO Conference PRESENTED BY: LOUISE HANSON, PARTNER, MOSS ADAMS LLP

Transcription

1 Accounting and Auditing Update WBA/OBA CFO Conference PRESENTED BY: LOUISE HANSON, PARTNER, MOSS ADAMS LLP

2 Accounting and Auditing Update LOUISE HANSON, BUSINESS ASSURANCE PARTNER

3 Disclaimer The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Content is not all inclusive. 3

4 Agenda Finalized Accounting Standards Updates SEC Update PCAOB Update FASB Update 4

5 FINALIZED ACCOUNTING STANDARDS UPDATES (ASU) 5

6 Business Combinations ASU No , Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments 6

7 Business Combinations ASU No , Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments Purpose of the new rule: To simplify the accounting for adjustments made to provisional amounts recognized in a business combination Changes current GAAP as to when and how adjustments to provisional amounts are recorded 7

8 Business Combinations Elements of the new rule include: During a measurement period Instead of the acquirer retrospectively adjusting the provisional amounts recognized at the acquisition date with an adjustment to goodwill, and restating comparative periods, the acquirer will recognize them in the period in which the adjustments are determined 8

9 Business Combinations Elements of the new rule include: An entity would present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. 9

10 Business Combinations Effective date: Public entities: fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. All other entities: fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, Amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. 10

11 Business Combinations ASU No , Business Combinations (Topic 805): Pushdown Accounting Purpose of the new rule: Limited guidance and diversity in practice/current guidance provided by SEC for SEC registrants Provides an acquired entity the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity in the period in which the change in control event occurs 11

12 Business Combinations Elements of the new rule include: Election to apply pushdown accounting should be determined for each individual change in control event If pushdown accounting is not applied in the reporting period in which the change in control event occurs, the entity has the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity s most recent change in control event If elected it is considered a change in accounting principle and is irrevocable 12

13 Business Combinations Effective date: The amendments in this ASU were effective on November 18, After the effective date, an acquired entity can make an election to apply the guidance to future change in control events or to its most recent changein control event. However, if the financial statements for the period in which the most recent change in control event occurred have already been issued or made available to be issued, the application of this guidance would be a change in accounting principle. 13

14 Business Combinations ASU No , Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council (PCC) Purpose of the new rule: To improve private company financial reporting regarding accounting for identifiable intangible assets in a business combination 14

15 Business Combinations Elements of the new rule include: Allows a private company to elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination If elected the company would no longer recognize the following separate from goodwill: Customer related intangible assets Noncompetition agreements Some customer related intangible assets that are capable of being sold or licensed independently would continue to be separately recognized, such as mortgage servicing rights, core deposits, and customer information 15

16 Business Combinations Effective date: The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative. If the transaction occurs in the first fiscal year beginning after December 15, 2015, the adoption will be effective for that fiscal year and all periods thereafter. If the transaction occurs in fiscal years beginning after December 15, 2016, the adoption will be effective in the interim period that includes the date of that first transaction and all periods thereafter. 16

17 Debt Issuance Costs ASU No , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs ASU No , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs Associated with Line of Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18,2 015 EITF Meeting 17

18 Debt Issuance Costs Elements of the new rule (ASU ): The Update simplifies the presentation of debt issuance costs Requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts Now the costs will be a direct deduction from the debt amount 18

19 Debt Issuance Costs Elements of the new rule (ASU ): Given the absence of authoritative guidance within ASU for debt issuance costs related to line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. 19

20 Debt Issuance Costs Effective date: Public entities: Effective for annual periods beginning after December 15, 2015 Private entities: Effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016 Early adoption is permitted 20

21 Revenue Recognition ASU No , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ASU defers the effective date of ASU No , Revenue from Contracts with Customers (Topic 606) Public entities: Effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period Private entities: Effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15,

22 Revenue Recognition Transition Effective January 2018 for public entities (early adoption allowed; 2019 for private entities) Option 1: Full Retrospective Follow current guidance in 2016 & 2017 In 2018, recast 2016 & 2017 to new guidance (January 1, 2016 cumulative effect adjustment date) SEC will not require 5 years; 3 years acceptable 22

23 Revenue Recognition Transition Option 2: Modified Retrospective Follow current guidance in 2016 & 2017 For 2018, present new guidance (January 1, 2018 cumulative effect adjustment date) Comparative disclosure of 2018 new vs. old Cumulative effect adjustment requires evaluation of open/unsatisfied contracts that carryover in 2016 or 2018, respectively depending on transition approach 23

24 Revenue Recognition Transition Resource Group 73 issued addressed; issues most relevant for financial institutions include: TRG Paper No. Summary of Issue Current Status 1 Grossvs. Net reporting (principal vs. agent) Boards will issue Exposure Drafts reflecting tentative decisions 9, 22 Identifying performance obligations FASB issued Exposure Draft (May 2015) reflecting tentative decisions. IASB Exposure Draft expected in Q Variable consideration for asset managers (evaluating ASC 606 vs Method 2 & evaluating whether carried interests are within the scope of the standard) Discussed at the October 2014 TRG meeting. No further discussion expected. 24

25 Revenue Recognition Transition Resource Group TRG Paper Summary of Issue No. 14, 19, 28, 37 Consideration payable to customer (various topics) 23 Costs to obtain a contract (whether/when commission payments should be capitalized) 36 Credit card arrangements (whether the card issuer s contract with the cardholder is within the scope of ASC 606) 43 Commodity arrangements ( whether a promise to deliver a commodity meets the over time criterion) Current Status Discussed at the July 2015 TRG meeting. No further discussion expected. Discussed at the January 2015 TRG meeting. No further discussion expected. Discussed at the July 2015 TRG meeting. No further discussion expected. Discussed at the July 2015 TRG meeting. No further discussion expected. 25

26 Revenue Recognition AICPA Task Forces Also evaluating standard Formed 16 industry task forces for application examples of the standard Three banking industry focused: Asset Management Broker Dealers Depository Institutions 26

27 Extraordinary Items ASU No , Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items 27

28 Extraordinary Items Elements of the new rule include: Purpose is to reduce the complexity in accounting standards Eliminates from U.S. GAAP the concept of extraordinary items that required an entity separately classify, present, and disclose extraordinary events and transactions to more align with International Accounting Standards Unusual or infrequently occurring items shall be reported as a separate component of income from continuing operations. 28

29 Extraordinary Items Effective date: Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 The effective date is the same for both public and private business entities and all other entities 29

30 Reporting on Going Concern ASU No , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern 30

31 Reporting on Going Concern Purpose to address the fact that: There was no guidance in GAAP that addressed management s responsibility to evaluate the entity s ability to continue as a going concern Reduce the diversity in the timing and content of footnote disclosures Provides definition of the term substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that is it probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued 31

32 Reporting on Going Concern Elements of the new rule include: Require an evaluation every reporting period including interim periods Provides principles for considering mitigating effect of management s plan Require specific disclosures when substantial doubt is alleviated as a result of management s plan, and requires an express statement and other disclosures when substantial doubt is not alleviated Assessment period is set to one year after the date that the financial statements are issued (or available to be issued) 32

33 Reporting on Going Concern Effective date: Public and Nonpublic entities: Periods ending after December 15, 2016 Early adoption permitted 33

34 SEC UPDATE 34

35 SEC Update Audit Committee Disclosures SEC is exploring if the current disclosure rules provide investors with sufficient useful information regarding the role of and responsibilities carried out by the Audit Committee in public companies Focus on oversight of the independent auditor Current disclosure does not describe how audit committee executes its responsibilities Apparent demand from investors, as evidenced through the PCAOB standard setting process and existing companies that voluntarily provide disclosure incremental to the requirements 35

36 SEC Update Audit Committee Disclosures Potential disclosures How the Audit Committee assesses, promotes and reinforces the auditor s objectivity and professional skepticism Communications between Audit Committee and auditor Involvement in the selection of the audit firm and the engagement partner Qualifications of the audit firm, members of engagement team, and other firms Concept release was issued concurrently with a PCAOB reproposal that would also enhance disclosure 36

37 SEC Update Pay vs Performance Disclosures Proposed April 2015 Additional disclosure on compensation of principal executive officer, and averages for other named executive officers Total shareholder return information Narrative of relationship between compensation paid and the total shareholder return Regulation A Changes Finalizes certain mini IPO rules Allows capital raises of up to $50 million under a Tier 2 offering Requires initial and ongoing reporting to the SEC, though less frequent than an SEC Issuer 37

38 SEC Update July 2015 SEC Proposes Rules Requiring Companies to Adopt Clawback Policies on Executive Compensation The SEC has proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that require executive officers to pay back incentive based compensation that they were awarded erroneously Under the proposed new Rule 10D 1, listed companies would be required to develop and enforce recovery policies that in the event of an accounting restatement, claw back from current and former executive officers incentivebased compensation they would not have received based on the restatement; recovery would be required without regard to fault 38

39 SEC Update August 2015 SEC Adopts Pay Ratio Disclosure Rule Requires public companies to disclose the ratio of the annual total compensation of the chief executive officer to the median of the annual total compensation of the company s employees as required by section 953(b) of the Dodd Frank Act SEC Chair Mary Jo White indicated that the rules provide additional company specific information about important executive compensation practices, which shareholders now have a specific say on 39

40 SEC Update August 2015 SEC Adopts Pay Ratio Disclosure Rule continued The final rule does include provisions aimed at reducing the cost of compliance, including: Flexibility in the methodology used to calculate the median employee, which can be based on the registrant s total employee population or a statistical sample; The median employee must only be determined once every three years, unless significant changes would reasonably be expected to significantly change the median employee calculation; The median employee can be determined on any date within the last three months of the registrant s fiscal year; Non US employees can be excluded from the calculation if it would violate foreign data privacy laws to obtain certain information; and Companies can exclude up to 5% of its overseas workers from its pay ratio calculation. Does require companies to calculate the median employee using all employees, including full time, part time, and seasonal employees Does not apply to certain registrants, including emerging growth companies, smaller reporting companies, and foreign private issuers 40

41 PCAOB UPDATE 41

42 PCAOB Proposed Form Disclosing Name of Audit Engagement Partner The PCAOB proposed a rule that would mandate disclosure in the auditor s report of the name of the engagement partner and information about certain other participants in the audit Comments period closed August 31, 2015 The PCAOB would create and put into service Form AP, Auditor Reporting of Certain Audit Participants, to be a public information vehicle. Audit firms would use the form to disclose the name of the engagement partner on the audit, in addition to information about certain other participants. Forms would be posted and made searchable on PCAOB's website. In addition to filing Form AP, auditors could voluntarily provide the same disclosures in the auditor s report 42

43 PCAOB Audit quality indicators PCAOB has long been interested in the use of potential audit quality indicators ( AQIs ) Quantitative measures that may provide insight about how to evaluate the quality of audits Would provide insight to: Audit firms, as part of the quality control process The PCAOB, to identify higher risk engagements for inspection Audit committees, to assess quality of the audit firm overall and their company s audit engagement specifically 43

44 PCAOB Audit quality indicators Potential Audit Quality Indicators 28 potential indicators in three broad groups Applicable at the engagement and firm level Categories of AQIs Audit Professionals Availability, Competence, Focus Audit Process Tone of Leadership, Independence, Infrastructure, Monitoring, and Remediation Audit Results Financial Statements, Internal Control, Going Concern, Communications, Enforcement of Litigation 44

45 FASB UPDATE 45

46 FASB Proposed Simplification to Employee Share Based Accounting The FASB has issued proposed Accounting Standards Update (ASU), Compensation Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting The areas for simplification in this proposal involve several aspects of the accounting for share based payment transactions, including: Income tax consequences Classification of awards as either equity or liabilities Classification on the statement of cash flows Some of the areas for simplification apply only to nonpublic entities 46

47 FASB Proposed Simplification to Employee Share Based Accounting The proposal would also eliminate the guidance in Topic 718, Compensation Stock Compensation, that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share Based Payment. Changes to the recognition and measurement of sharebased payment transactions generally would transition through a cumulative effect adjustment to equity as of the beginning of the annual period in which the guidance is effective. However, an entity would apply the amendments for the accounting for excess tax benefits and tax deficiencies and the practical expedient for estimating the expected term prospectively. 47

48 FASB Proposed Simplification to Employee Share Based Accounting The proposed amendments related to the classification on the statement of cash flows should be applied retrospectively for all prior periods presented Transition disclosures would include the nature of and reason for the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change on retained earnings or other components of equity The effective date will be determined after stakeholder feedback on the proposal is considered 48

49 Redeliberated Model Financial Instruments Classification and Measurement Effective Dates Public after December 15, 2017, including interim periods. One year delay for all other entities. Early adoption is permitted for certain items. Retain current US GAAP for Financial Instrument, except for the following: Investments in equity securities will be measured at FV Ni, except: Equity method investments Equity securities without readily determinable FV (marked to observable price changes) Fair value change resulting from own credit for financial liabilities measured under FV option will be recognized through OCI Valuation allowance on a DTA related to an AFS debt security to be assessed in combination with other DTAs Disclosure changes: Private entities not required to disclose FV of financial instruments not recognized at value in balance sheet Reduced disclosures for public entities about FV information of financial instruments not recognized at FV in balance sheet 49

50 Proposed Accounting Standard Credit Losses (Subtopic ) Incurred vs. Expected Loss Model Subject Incurred Loss Expected Loss Measurement approach Generally relies on historical loss rates adjusted for various qualitative factors and considers present information No prescribed methodology; however, is based upon lifetime of expected losses by incorporating forecasted loss factors (past, present, and future) 50

51 Proposed Accounting Standard Credit Losses Key Takeaways Effective dates (just announced) Public entities effective for fiscal years beginning after December 15, 2018, including interim periods. Smaller Public entities (those that do not meet definition of an SEC filer) for fiscal years beginning after December 15, 2019, including interim periods. All other entities for fiscal years beginning after December 15, 2019 and for interim financials for fiscal years beginning after December 15, Certain early adoption provisions are permitted. 51

52 FASB CECL Model Single measurement objective replaces (multiple) existing impairment models in current U.S. GAAP: Each reporting date, the allowance will measure the assets at the amount an entity expects to collect Simplifies the accounting for purchased credit deteriorated (ASC /SOP 03 3) assets Included in scope: All debt instruments (e.g. debt securities and loans) except AFS debt securities and FV NI securities Receivables that result from revenue transactions Reinsurance receivables Lease receivables recognized by a lessor Loan commitments Financial guarantees Excluded from scope: Equity instruments Equity method investments Derivatives Related party loans Receivables between entities under common control 52

53 Recognizing Current Expected Credit Losses No minimum threshold for recognition of impairment losses At each reporting date, expected credit losses would be recognized as an allowance Similar to current GAAP for loans Changes existing practice for HTM debt securities (no longer a direct write down i.e. current OTTI accounting changed) The amount required to adjust the allowance from prior period to current period calculation is the provision for credit losses, recognized in earnings Expect guidance in final standard on charge offs definition and no specific guidance (or no change to current guidance) on non accrual 53

54 AFS Debt Securities (Impairment Revised) Apply the existing model, revised as follows: If fair value < cost, recognize expected credit losses as a loss reserve/allowance (contra asset to AFS debt securities) No direct write off of the security As credit losses change over time (increases or decreases), the loss reserve is adjusted through earnings (i.e. credit reversals are permitted) Changes in FV due to interest rates recognized in OCI Do not consider the duration of fair value < cost When estimating credit losses, do not consider recoveries or additional declines in fair value after the balance sheet date No OTTI in vocabulary, but similar concept with allowance instead of direct write down 54

55 Credit Losses Proposed Disclosures Methods used to estimate expected credit losses for periods beyond which the entity is able to make reasonable forecasts (methods for reverting to unadjusted historical credit loss experience) Policies for uncollectible receivables charge offs and the placing of financial assets on nonaccrual status and the accounting for nonaccrual financial assets Allowance rollforward Period to period rollforward of its allowance for expected credit losses, both for financial assets measured at amortized cost and FV OCI Vintage analysis Tabular disaggregation of credit quality indicators, for all classes of financing receivables (excluding revolving lines of credit, such as credit cards) that are disclosed under current GAAP By year of origination (i.e. vintage), but limited to no more than five annual reporting periods (aggregate older vintages) For interim reporting, include a YTD originations column 55

56 Credit Losses Proposed Disclosures TDRs New: disclose the write offs Disclosures for collateral dependent financial assets The type of collateral The extent to which collateral secures the financial assets The significant changes in the extent to which collateral secures the financial assets, whether because of a general deterioration or some other reason Previous impaired loan table with and without allowance is expected to be eliminated Disclosures about past due status of financial assets: Disaggregation by portfolio segment Required for HTM debt securities (new) and held for investment loans 56

57 Key Takeaways Data Preserve what you have (stop the data purges) Develop a more formal data and document management process What data can you recover quickly without significant cost? What kind of data do you have? What are you missing that you need (cost to acquire)? How does your data connect? (renewals/refi s new loans in the system?) How are you storing info like FICO scores and collateral values? Risk ratings if a pass rating never moves and then you have a charge off, how good do you think your risk ratings are for migration purposes? Improve quality of guarantor data 57

58 Key Takeaways DATA National Statistics Being Considered in Migration: Real GDP Growth Nominal GDP Growth Real Disposable Income Growth Nominal Disposable Income Growth Unemployment Rate CPI Inflation Rate 3 Month Treasury Rate 5 Year Treasury Rate 10 Year Treasury Rate BBB Corporate Yield Mortgage Rate (30 year) Prime Rate Dow Jones Total Stock Market Index House Price Index Commercial Real Estate Price Index Market Volatility Index 58

59 Key Takeaways Models Multiple options different models for different segments? Correlation of industry/economic data to your losses varies by segment and model? Forecast needs to be reasonably consistent with other modeling (ALM, Capital Stress Testing, etc.) How will you define the historical loss period? Model Risk Management! 59

60 Key Takeaways Prep for additional disclosures particularly the vintage disclosure (how does your CECL segmentation impact this going forward?) Updated Policies, Procedures, Controls around all the new data Better understanding of credit risk needed at origination/purchase Regulatory Position: CECL is more than a tweak ; CECL is an integrated approach to credit risk management ; No early adoption, so don t build up reserves ahead of time FRB outreach webcasts: Ask the Fed on CECL schedule for 10/22/

61 Proposed Accounting Standard Leases November 11, 2015 FASB announced the standard will be published in early 2016 All leases will be recorded on the balance sheet Currently only capital leases are recorded Impact leverage the balance sheet Short term leases (no longer than 1 yr.) expected to be excluded Standard will be effective for public companies for fiscal years beginning after December 15, 2018 and for private companies, after December 15,

62 Proposed Accounting Standard Leases Key Takeaways Leases Develop an inventory of all leases Run what if scenarios on the impact on your capital of placing all leases on the balance sheet Begin discussions with lending team regarding changes to financial reporting from borrowers 62

63 Questions Name Louise Hanson Partner (425)