Accounting and Auditing Update. Erika Skouras, Senior Manager, Moss Adams

Transcription

1 Accounting and Auditing Update Erika Skouras, Senior Manager, Moss Adams

2 Over the Next Hour 2 Providing the group with an update on accounting standards and other accounting/industry related matters impacting credit unions

3 Acronyms Used 3 ASU Accounting Standards Update CECL - Current Expected Credit Losses Methodology PBE Public Business Entity PCD Purchased Credit-Deteriorated PCI Purchased Credit-Impaired AFS Available-for-sale HTM Held-to-maturity HFI Held for Investment OCI Other Comprehensive Income

4 Business Combinations 4 ASU No , Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

5 Business Combinations 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 5

6 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 period in which the adjustments are determined. 6 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.

7 Business Combinations Effective date: All non PBE: 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 within earlier application permitted for financial statements that have not been issued.

8 Business Combinations 8 ASU No , Business Combinations (Topic 805): Clarifying the Definition of a Business

9 Business Combinations 9 Amendment adds a screen that will reduce the number of transactions that need to be further evaluated If the screen is not met, the amendment in this update: Require that to be considered a business, a set of assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output Remove the evaluation of whether a market participant could replace missing elements Provides a framework to assist entities in evaluating whether both an input and a substantive process are present

10 Business Combinations Effective date: Nonpublic entities: Periods ending after December 15, 2018 Early adoption permitted 10

11 Revenue Recognition ASU No , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective 11 ASU No , Revenue from Contracts with Customers (Topic 606)

12 ASC 606 Revenue Recognition: FASB Amendments FASB 12 ASU One-year deferral of the effective date ASU Licenses Sales-based and Usagebased Royalties ASU Principal vs. Agent ASU Sales Tax Presentation: Gross vs. Net Measurement of Noncash Consideration Collectibility ASU Technical Corrections and Improvements Performance Obligations Accounting for Shipping and Handling Services Practical Expedients upon Transition Completed Contracts Final amendments have been published

13 ASC 606 Revenue Recognition Typical Financial Institution Income Statement: 13 Year Ended December 31, Interest income Interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses Noninterest revenue Investment banking fees Principal transactions / Trading Revenue Deposit-related fees Asset management, administration, and commissions Securities gains Mortgage fees and related income Card income Other income Noninterest revenue Noninterest expense Income before income tax expense Income tax expense Net income 12/31/XX Certain income statement lines are, by their nature, less likely to contain activity within the scope of ASC 606 (e.g., interest income) Implementation impact is primarily expected in noninterest revenue (namely the highlighted lines) Certain noninterest revenue lines reflect inscope activity as well as out-of-scope activity - > potential disclosure challenge

14 ASC 606: Key Areas of Judgment Step 1: Scope / Identify the Contract Step 2: Identify the Performance Obligations Step 3: Determine the Transaction Price Step 4: Allocate the Transaction Price Step 5: Recognize Revenue 14 Determining when contracts for different services/from different lines of businesses need to be combined Determining whether other literature includes rev. rec guidance Identifying all services provided (even those without separate fees) Determining which services are considered distinct Identifying principal vs. agent roles Estimating contingent fees, subject to constraint Estimating standalone prices to support allocation of revenue to performance obligations Determining point in time vs. over time recognition patterns

15 ASC 606: Effective Date and Transition Effective January 2019 for nonpublic entities (early adoption is allowed) Option 1: Full Retrospective Cumulative effective adjustment date * Follow current guidance in 2018 In 2019, recast 2018 to new guidance 15 Option 2: Modified Retrospective *Cumulative effect adjustment requires evaluation of open/unsatisfied contracts that carryover into 2018 or 2019, respectively, depending on transition approach Follow current guidance in 2018 For 2019, present new guidance Comparative disclosure of 2019 new vs. old No changes to 2018 Cumulative effective adjustment date *

16 Financial Instruments 16 ASU No , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities

17 Financial Instruments 17 Key elements of the new rule include: Eliminates the available-for-sale classification for equity securities and contains a new requirement to carry those equity securities with readily determinable fair value through net income (FV-NI) Requires an exit price notion for those items disclosed at fair value (rather than entrance value) eliminates practicability exception Record changes in instrument-specific credit risk for own financial liabilities measured under the fair value option in other comprehensive income (not through net income) Eliminates disclosure requirements for Non PBEs for financial instruments measured at amortized cost (AKA the FAS 107 table ). Generally, an entity will record a cumulative effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

18 Financial Instruments Effective date (non PBE): annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15,

19 19 Leases ASU No , Leases (Topic 842)

20 Right-of-Use Model Lease: A contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 20

21 Does the contract contain a lease? IDENTIFIED ASSETS Explicitly or implicitly identify leased asset Supplier has no practicable ability to substitute and would not economically benefit from substitution 21 RIGHT TO CONTROL Decision making authority to direct the use of the identified asset Ability to obtain substantially all of the economic benefit from the use of the asset

22 Implementation Guidance ASC Flowchart depicting how to determine whether a contract is or contains a lease 22

23 FASB s Dual Model Finance Balance Sheet Right-of-use asset Lease liability Income Statement Amortization expense Interest expense Cash Flows Financing cash flow for principal Operating cash flow for all other 23 Operating Right-of-use asset Lease liability (not debt) Single lease expense on a straight-line basis Operating cash flow for all lease payments Recognition and measurement option for short-term leases.

24 Lease Term Classification & Measurement Assess at lease commencement and reassess only upon changes that are in lessee s control Factors to consider: Lessee s options to purchase, extend, or terminate the lease when reasonably certain Lessor s options to extend (or not terminate the lease) 24 Contract has penalty for failure to renew Asset is critical to operations Entity performed significant integration Below market option Assessment of reasonably certain to consider all factors

25 Financial Statement Presentation 25 Operating Lease Finance Lease Gross presentation of ROU assets and lease liabilities for operating and finance leases (comingling prohibited) Single SL lease expense Front-loaded interest and SL amortization expense Operating cash flow classification for all payments Financing and operating cash flow classification Operating lease liability isn t debt

26 Footnote Disclosures Quantitative Periodic lease expense, ROU asset amortization, interest costs Qualitative Terms and conditions, purchase options and termination penalties 26 Short-term, variable leases, sublease income, cash and noncash flows Accounting policy elections, areas of significant judgment, assumptions Weighted average discount rate for both finance & operating Residual value guarantees Weighted average remaining lease term for both finance & operating Significant judgments & assumptions

27 27 Effective Dates Non-Public

28 Financial Instruments Credit Losses 28 ASU No , Financial Instruments - Credit Losses (Topic 326)

29 CECL On June 16, 2016, ASU was issued: Financial Instruments Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments 29

30 30 CECL Effective Dates The FASB decided to defer the originally planned effective dates by one year to the following: 1. For all non PBE entities, including not-for-profit organizations and employee benefit plans, the forthcoming standard will be effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, Early adoption will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Scope: Includes financing receivables (Loans) and HTM debt securities, lease receivables, loan commitments, guarantees, and other items; AFS securities guidance was separately amended.

31 Measuring Current Expected Credit Losses 31 THE ULTIMATE LOSS DOESN T CHANGE JUST THE TIMING OF RECOGNITION Estimate of contractual amounts that an entity does not expect to collect over the contractual life When determining the contractual life of the asset: Consider expected prepayments Do not consider extensions, renewals, and modifications unless entity reasonably expects to execute a TDR Assets should be pooled when similar risk characteristics exist ; otherwise assess individually

32 Measuring Current Expected Credit Losses (continued ) Management s expectations should consider all relevant internal and external information including: Past events Current conditions Reasonable and supportable forecasts 32 Revert to historical loss average experience for future periods beyond which the entity is able to make reasonable and supportable forecasts Can adjust historical losses for borrower specific factors The estimate of expected credit losses should be a best estimate but must not be a best case scenario (or worst case) and must always reflect the risk of loss, even when that risk is remote, however: Not required to recognize a loss on a financial asset in which the risk of default is greater than zero yet the amount of loss would be zero In practice, Treasuries and GSE s likely to meet this definition

33 Measuring Current Expected Credit Losses (continued ) 33 OTHER ITEMS OF INTEREST Collateral dependent financial assets practical expedient (fair value less costs to sell) TDRs remain follow CECL guidance Purchase Credit Deteriorated follow gross-up accounting model AFS Debt Securities revised accounting model bifurcate credit and interest rate mark; reserve for credit New disclosures (vintage and qualitative discussion) Business combinations: (ASC) A For acquired financial assets that are not purchased financial assets with credit deterioration, the acquirer shall record the purchased financial assets at the acquisition-date fair value. Additionally, for these financial assets within the scope of Topic 326, an allowance shall be recorded with a corresponding charge to credit loss expense as of the reporting date.

34 CECL Considerations 1. Group financial assets with similar risk characteristics into pools 2. Determine appropriate method for measuring losses 3. Determine historical loss experience on the pools/asset evaluated Adjust historical loss experience for current conditions and reasonable and supportable forecasts 5. Revert to historical losses for period for which reasonable and supportable forecasts cannot be made

35 Design of CECL Process Aligned with GAAP Aligned with capital adequacy evaluation Conceptually sound Well documented 35

36 Model Risk Management Fit for its purpose Within risk tolerance Subject to validation process 36

37 Controlled, Supported, and Disclosed Completeness and accuracy of data IT governance Credit risk and other non-finance functional areas Financial reporting 37

38 Ongoing Monitoring Key performance indicators Consistency of views on future economic conditions Basis for assumptions and projections Understanding regulatory areas of focus 38

39 Who will be responsible for the key decisions? Questions Changes to existing systems/reporting mechanisms? Changes to processes/controls? How will these be tested? Key accounting interpretations/new disclosure requirements? 39

40 Moss Adams Resources Leases Revenue Recognition 40 CECL (coming soon)

41 41 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 nor 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. Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

42 Questions?