What s the Latest? An Accounting & Financial Reporting Update

Transcription

1 What s the Latest? An Accounting & Financial Reporting Update May 3, 2018 Kara Baldwin and Laura Cronkhite 2018 Crowe Horwath LLP 2017 Crowe Horwath LLP

2 Agenda Standard-setting Timeline of Major Standards Public Business Entity (PBE): Why Does It Matter? OCC BAAS update Major standards Revenue Recognition Recognition & Measurements Credit Losses Hedging Leases Tax Reform Unique Aspects 2018 Crowe Horwath LLP 2

3 Major Standards: Effective Dates Beginning of fiscal year: Revenue Recognition / Financial Instruments: Recognition and Measurement PBE (Annual and Interim) Non-PBE (Annual Periods Only) Non-PBE (Annual and Interim Periods) Leases Early adoption permitted PBE (Annual and Interim) Non-PBE (Annual Periods Only) Non-PBE (Annual and Interim Periods) Hedging Early adoption permitted PBE (Annual and Interim) Non-PBE (Annual Periods Only) Non-PBE (Annual and Interim Periods) Credit Losses Early adoption permitted PBE that are SEC Filers (Annual and Interim) PBE that are not SEC Filers (Annual and Interim) Non-PBE (Annual Periods only) Non-PBE (Annual and Interim) 2018 Crowe Horwath LLP 3

4 Major Standards Key Implementation Messages Importance of Reasonable Judgment Keep Going/Get Going Disclosures within the New GAAP Standards Transition Disclosures (SEC registrants) FASB Implementation Resources Crowe Horwath LLP 4

5 Definition of a Public Business Entity (PBE) FASB ASU , Definition of a Public Business Entity Issued Dec. 23, 2013 Defines public for financial reporting purposes, not legal purposes Implications for effective dates, disclosure, recognition and measurement (e.g., PCC alternatives) In broad terms, a PBE is an entity that meets any of the following: a) Files with the U.S. Securities and Exchange Commission (SEC) b) Required to file under the 34 Act with a regulator other than the SEC c) Required to provide financial statements with a regulator for purposes of issuing securities Criterion d d) Securities are traded, listed, or quoted on an exchange or an over-the-counter market e) Required by law or regulation to file financial statements and make them publicly available (and the securities do not have a contractual restriction) Criterion e Clarifications ABA PBE Discussion Paper AICPA Technical Question and Answers (TQA) Crowe Horwath LLP 5

6 AICPA Technical Questions & Answer (TQA) Q&A Section 7100, Definition of a Public Business Entity Process Project of AICPA DIEP Reviewed by various AICPA industry panels Reviewed by FASB staff Approved by AICPA Financial Reporting Executive Committee (FinREC) 23 pages and 9,700 words 16 questions (and answers) Addresses financial institutions Crowe Horwath LLP 6

7 AICPA Technical Questions & Answers (TQA): Common Questions for Financial Institutions Question 8: How evaluated in a tiered organizational structure? Question 11: Do banks subject to FDICIA meet the definition of a PBE? Question 12: Do mutual entities meet the definition of a PBE? Perform the evaluation on an entity by entity basis. Use entity by entity approach to evaluate the institution s capital structure. Evaluate sub-debt / secondary capital under (d). Mutual thrifts subject to FDICIA assess unrestricted securities. Question 13: How do brokered CDs impact a PBE analysis? Determine whether CDs are traded or quoted under (d). Other topics include types of contractual restrictions and OTC markets Crowe Horwath LLP 7

8 OCC BAAS Office of the Comptroller of the Currency (OCC) Bank Accounting Advisory Series (BAAS) Released on Aug. 15, 2017 OCC s interpretations of GAAP and regulatory guidance based on facts and circumstances presented for national banks and federal savings associations. Includes revisions to topics related to new accounting standards issued by the FASB on recognition and measurement of financial instruments, leases, and revenue recognition as well as other updates. Message from the Chief Accountant: Includes a list of the topics which have been updated. Describes the revised approach to include standards not yet effective which either must be adopted by public business entities (PBEs) in 2018 or can be early adopted. Color coded by PBE/non-PBE for ease of reference both pre and post-adoption of various standards Crowe Horwath LLP 8

9 Revenue Recognition 2018 Crowe Horwath LLP 9

10 Revenue Recognition ASU , Revenue from Contracts with Customers (Topic 606): Issued May 2014 Effective Dates: PBEs: fiscal years (and interim periods) beginning after Dec. 15, 2017 Non-PBEs: fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019; early adoption is permitted Landscape Comments from the SEC, including disclosures Industry discussions AICPA discussions Challenges for financial institutions Scoping what is in? what is out? Other Internal control over financial reporting Disclosures 1Q18 for 12/31 year-ends 12/31/19 for 12/31 year-ends Crowe Horwath LLP 10

11 Revenue Recognition: Scoping for Financial Institutions Out of Scope Interest Income Trading Revenue Loan Servicing Fees Credit Card Fees Guarantee Fees In Scope Service Charges on Deposit Accounts Asset Management Fees Gains or Losses on Other Real Estate Owned Interchange Fees Brokerage Fees FASB Revenue Recognition Transition Resource Group (TRG) July 13, 2015 meeting Memo No. 36, Credit Cards Memo No. 44, July 2015 Meeting Summary of Issues Discussed and Next Steps April 18, 2016 meeting Memo No. 52, Scoping Considerations for Financial Institutions Memo No. 55, April 2016 Meeting Summary of Issues Discussed and Next Steps Crowe Horwath LLP 11

12 Revenue Recognition: Scoping for Financial Institutions 2018 Crowe Horwath LLP 12

13 Revenue Recognition: Common Changes Revenue Line Service Charges on Deposit Accounts Asset Management Fees Gains or Losses on Other Real Estate Owned Interchange Fees Brokerage Fees Potential/Common Impact Fee waivers should be recorded on an expected basis vs. reversing upon each forfeiture (if waivers are material) Contracts should be examined to determine true performance obligations and timing Financed other real estate sales with deferred gains may have current period gains Principal vs. agent should be considered and may need to consider gross vs. net presentation for interchange fees Principal vs. agent should be considered and may need to consider gross vs. net presentation for brokerage fees 2018 Crowe Horwath LLP 13

14 Revenue Recognition: Principal vs Agent When another party is involved in providing goods or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for those goods or services to be provided by the other party (that is, the entity is an agent). If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others. An Entity May be Principal When. ( ) The entity is primarily responsible for fulfilling the promise to provide the specified good or service. The entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return). The entity has discretion in establishing the price for the specified good or service. The evaluation of Principal vs Agent is not limited to the above, although the above may be useful indicators in making that assessment Crowe Horwath LLP 14

15 Revenue Recognition: Principal vs Agent Principal B When an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or transferred Impact of Revenue Recognition for a Principal vs an Agent Agent When an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the other party to provide its the specified goods or services to be provided by the other party. An entity s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party Crowe Horwath LLP 15

16 Recognizing Revenue and Related Disclosures Step 1: Identify the Contract Step 2: Identify the Performance Obligation(s) Step 3: Determine the Transaction Price Step 4: Allocate the Consideration to the Separate Performance Obligation(s) Step 5: Recognize Revenue When (or as) Performance Obligations are Satisfied 2018 Crowe Horwath LLP 16

17 Revenue Recognition: Disclosures Objective: To understand nature, timing, and uncertainty ( ) Allowed to consider level of detail necessary to satisfy objective and how much emphasis to place on each disclosure requirement ( ) Disclosures include: Information about contracts with customers ( through 50-16) Significant judgments and changes in those judgments ( through 50-21) Assets recognized related to cost to obtain or fulfill a contract ( through 50-6) The disclosure requirements can be significant! Deposit Fees Example - Excerpts from FASB TRG Memo 52 regarding Deposit Fees Typical depository arrangement is considered a short term day-to-day contract with ongoing renewals and optional purchases Potential disclosure impacts from the FASB staff Contract balances and remaining performance obligations related to the depository arrangements might not exist, so the disclosures in paragraphs through 50-11, and paragraphs through might not apply An entity generally would not need to make many judgments that would significantly affect the amount and timing of such deposit fee revenue, there might not be much to disclose about judgments (paragraphs through 50-20) Crowe Horwath LLP 17

18 Revenue Recognition: Disclosures con t Make an assessment itself based on its facts and circumstances Deposit Fees Example - Excerpts from FASB TRG Memo 52 regarding Deposit Fees Disclosures that may still be relevant if material Disaggregation of revenue (paragraphs through 50-7) into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, as well as sufficient information to enable users to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if an entity applies Topic 280 on segment reporting Examples of categories that might be appropriate include, but are not limited to, all of the following: a) Type of good or service (for example, major product lines) b) Geographical region (for example, country or region) c) Market or type of customer (for example, government and nongovernment customers) d) Type of contract (for example, fixed-price and time-and-materials contracts) e) Contract duration (for example, short-term and long-term contracts) f) Timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time) g) Sales channels (for example, goods sold directly to consumers and goods sold through intermediaries). Information about an entity s performance obligations (paragraph ), including the nature of services and when the entity typically satisfies its performance obligations (for example, as services are rendered or upon completion of service) Crowe Horwath LLP 18

19 Example Revenue Recognition Disclosures Example Disclosures from Crowe s April 2018 Whitepaper asset/example-revenue-recognition-disclosures/ 2018 Crowe Horwath LLP 19

20 Resources Just Around the Corner: Applying the New Revenue Recognition Standard to Financial Institutions Issued May 25, 2017 (24 pages) Contents Standardizing Revenue Recognition Practices Evaluating a Financial Institution s Revenue Streams: What Is In and What Is Out? For Revenue in Scope: Now What? Disclosures Effective Date and Transition Example Revenue Recognition Disclosures Issued April 19, 2018 (8 pages) Sample disclosures (need to be customized) Virtual Symposium Financial Institutions Jan 2018 Webinar Recording Steps through how to evaluate contractual relationships for specific revenue streams and disclosures Crowe Horwath LLP 20

21 Financial Instruments: Recognition & Measurement 2018 Crowe Horwath LLP 21

22 Recognition & Measurement ASU , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities - Issued Jan. 5, 2016 Equity Investments Eliminates the available-for-sale (AFS) category all will be carried at fair value with changes in earnings (trading) Provides a practical expedient for equities without a readily determinable FV to be recorded at amortized cost, less impairment, adjusted for observable price changes Mutual Funds are considered equity investments Transition: Amounts reported in AOCI for equity securities previously reported as AFS should be reclassified to retained earnings as of 1/1 in the period of adoption. Valuation allowance for deferred-tax assets (DTA) on an AFS debt security Assess in combination with other DTAs Financial liabilities measured at fair value under the FVO election Fair value change attributed to instrument-specific credit risk presented in OCI rather than net income 2018 Crowe Horwath LLP 22

23 Recognition & Measurement con t Disclosures Assets and liabilities On the balance sheet or in the footnotes, disclose all financial assets and financial liabilities grouped by measurement category and form (for example, securities or loans and receivables) of financial assets. Fair value of financial instruments measured at amortized cost (formerly FAS 107) PBEs - measure based an exit price, rather than the commonly used entrance pricing Non-PBEs have the option to remove this disclosure Significant change! Effective Date PBEs Fiscal years (and interim periods) beginning after Dec. 15, 2017 Non-PBEs 1Q18 for 12/31 year-ends Fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019 Early adoption is permitted 12/31/19 for 12/31 year-ends 2018 Crowe Horwath LLP 23

24 Recognition & Measurement con t Entrance Price vs. Exit Price Component Entrance Price Exit Price Discount rate Credit risk For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are assumed to approximate carrying values. Fair values for fixed rate loans are estimated using discounted cash flow using interest rates currently offered on loans with similar terms to borrowers of similar credit quality. The allowance for loan and leases losses is deducted from the present value of the financial asset discounted using entrance price discount rate. In other words, the allowance is used as a proxy for credit risk. Independent discount rate calculation must consider the return required by the market participants relative to the cash flow expectations of the loan. This approach considers a market participant s cost of funds, liquidity premiums, capital charges, expectations of future rate movements (for variable rate loans), and any other adjustments to the discount rate perceived by the market. Two options exist: 1. Use historical data or market data to derive overall loss rates by product type (or loan specific where available) and develop the probability of default, loss given default and recovery lag assumptions to be embedded into a discounted cash flow model. Given the discounted cash flow approach, timing of losses is a factor and loss curves can be used to better forecast when losses will occur. 2. Build the credit risk adjustment into the discount rate. Market data on credit risk adjustments to the discount rate are not widely available; therefore this approach is not widely used because of difficulties in anchoring the credit risk adjustments Crowe Horwath LLP 24

25 Recognition & Measurement con t Entrance Price vs. Exit Price, continued Component Entrance Price Exit Price Prepayment risk Incorporating prepayment assumptions is not explicitly required. Capture historical data or obtain market data to embed single monthly mortality prepayments into a discounted cash flow model. Cannot just use your ALM disclosures without incorporating changes! Should work with your auditors to come up with a solution Crowe Horwath LLP 25

26 Financial Instruments: Credit Losses Not in this session! 2018 Crowe Horwath LLP 26

27 Financial Instruments: Hedging 2018 Crowe Horwath LLP 27

28 Derivatives and Hedging ASU Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities Issued Aug. 28, 2017 Goals: Improve transparency, understandability, and reduce complexity Some elements considered during the deliberations were not changed Highly effective threshold (80-125%) Benchmark interest rate concept for fair value hedges of fixed rate financial instruments Voluntary hedge dedesignations Timing of qualitative hedge documentation Other aspects not changed Need for detailed and specific hedge documentation While complexity has been reduced, hedge accounting is not without its challenges 2018 Crowe Horwath LLP 28

29 Cash Flow Hedges Replaced benchmark rate concept with contractually specified rate Can now directly hedge prime interest rate Hedging prime will no longer require pooling like spreads or running complex models for mixed spreads to determine which loans paid first 2018 Crowe Horwath LLP 29

30 Fair Value Hedging Added the Securities Industry and Financial Markets Assoc. (SIFMA) Muni Swap Rate as another benchmark rate Exposure Draft Pending Would introduce the Overnight Index Swap (OIS) Based on the Secured Overnight Financing Rate (SOFR) (as a possible replacement for LIBOR if not sustained) No longer requires change in fair value of hedged item to be measured using cash flows from the coupon of the hedged item, now permitted to use the benchmark rate component of the coupon; this will significantly reduce ineffectiveness Permits partial term hedging (e.g. hedge first 2 years of 10-year instrument, without causing ineffectiveness) Allowed to assume the hedged instrument matures at the end of the hedge Partial term can be any contiguous time-frame within the hedged item Last-of-Layer Method Combines new concepts of the partial term hedging and benchmark effectiveness assessment Allows hedge of a closed pool of prepyblefixed rate assets (or beneficial interests backed by prepybl assets) without considering prepay risks Requires on-going assessment to determine that the expected remaining pool will be at least as large as the hedged amount If expected remaining pool is smaller than the hedged amount, full or partial desdesignation is permitted If actual remaining pool is smaller than the hedged amount, full dedesignation is required Basis adjustments to the hedged pool can remain unassigned until dedesignation at which time it is allocated to the individual assets in the pool and amortized FV hedges impact carrying amounts of the hedged item, and for assets, will therefore impact credit impairment analyses 2018 Crowe Horwath LLP 30

31 Ineffectiveness Ineffectiveness is no longer measured, even though it still exists economically Perfect effectiveness replaces no ineffectiveness Mismatch replaces ineffectiveness Cash flow hedge: If effective, full change in derivative value goes to AOCI No more separate evaluation of cumulative over and under hedging, where an over hedge resulted in ineffectiveness in earnings, but an under hedge did not Not all mismatches are the same; no longer recognizing ineffectiveness means late cash flow hedges (i.e. swap value at time of designation) will leave an amount in AOCI - now requires amortization of the designation date derivative value out of AOCI to earnings Fair value hedge: If effective, the full change in fair value of the derivative is reported in the same income statement line as the hedged item. Mismatches continue to be recognized in current earnings, but no longer in a separate line Crowe Horwath LLP 31

32 Other Documentation Permits quarterly effectiveness assessments to be qualitative, even if not 100% effective This will permit day one quantitative analysis (i.e. regression), but qualitative assessment thereafter. Quarterly quantitative analysis required only if facts and circumstances warrant Only for hedges that are highly effective and where a company can reasonably support an expectation of high effectiveness on a qualitative basis in subsequent periods Short-cut Allowed to specify a long haul method within a hedge designation to use if short-cut determined to be inappropriate Expanded to include partial term fair value hedges Disclosures Ineffectiveness disclosures from the tabular footnote presentation no longer needed Basis adjustments in fair value hedges expanded to include cumulative basis adjustment New disclosures for last-of-layer 2018 Crowe Horwath LLP 32

33 Transition Effective Dates: PBE: Effective fiscal years beginning after Dec. 15, 2018 and interim periods within those years Non-PBE: Effective fiscal years beginning after Dec. 15, 2019 and interim periods beginning after Dec. 15, 2020 Early adoption permitted Modified retrospective method, with adjustment to opening retained earnings Required for cash flow hedges with ineffectiveness More complex if ineffectiveness caused by late hedging (cumulative ineffectiveness less catch up amortization) Elections: Most simplifications (not all) can be adopted in transition also using modified retrospective method Partial term, SIFMA, and excluded component (when previously used G20/Caplet method) are prospective only Also allows transfer from HTM to AFS securities that are eligible for being hedged under last-of-layer method Not all HTM securities are eligible investment must be prepayable Follow transition guidance under c for transfers of HTM to AFS Elections are required in the quarter of adoption, and for some, will require thoughtful adoption Adopting in an interim period is more complex; transition as of first day of fiscal year and restate prior periods within the fiscal year without reissuing 2018 Crowe Horwath LLP 33

34 Hedging Resource FASB Just Moved a Mountain, Changed Landscape on Hedging Issued Sept. 13, 2017 (8 pages) Contents Cash Flow Hedges Fair Value Hedges Amounts Excluded From Hedge Effectiveness Assessment Hedge Documentation Disclosures Effective Dates and Transition Crowe Horwath LLP 34

35 Leases 2018 Crowe Horwath LLP 35

36 Leases ASU , Leases (Topic 842) Issued in Feb Effective Dates: PBEs (SEC filers) - fiscal years (and interim periods) beginning after Dec. 15, 2019 Non-PBEs - fiscal years beginning after Dec and interim periods after Dec. 15, 2021 Recognize all leases with a term more than 12 months Operating leases would no longer be off-balance sheet items for lessees Recognize a right-of-use (ROU) asset and a lease liability on the balance sheet A finance lease (expense is front-loaded; ROU amortization + interest expense) An operating lease (straight-line; rent expense) Display Approach - accounting-as-usual during the period, top-side entries at period end Sale-leasebacks might qualify as a sale (that is, no deferred gain) with an operating leaseback 2018 Crowe Horwath LLP 36

37 Leases con t Preparing for implementation Inventory of leases (including embedded leases) Analysis of impact on debt covenants if applicable Analysis of impact on capital requirements Evaluate premises & equipment requirements for statutory or regulatory purposes Evaluate the need for purchasing software to aid in on-going calculations Regulatory capital treatment Basel Committee Leases FAQ ROU asset not deducted from regulatory capital like an intangible asset ROU asset should be included in the risk-based capital and leverage ratio denominators ROU asset should be risk-weighted at 100% Consistent with the risk weight applied historically to owned tangible assets and to a lessee's leased assets under leases accounted for as finance leases in accordance with existing accounting standards 2018 Crowe Horwath LLP 37

38 Implementation Recent practical expedients from the FASB Easements (ASU ) A land easement is a right to use, access, or cross another entity s land for a specified purpose, often referred to as a right-of-way. For land easements not previously accounted for under Topic 840, allows entities to forego the lease evaluation under Topic 842 and continue applying current accounting policies. New or modified land easements will be evaluated prospectively under Topic 842. Comparative periods during transition (final ASU being drafted) Provides an optional transition method allows transition at its adoption date rather than at the earliest comparative period presented in the financial statements. Allocation of consideration to components in the contract (final ASU being drafted) For lessors, provides an option which allows them to not separate nonlease components from the related lease components if certain criteria are met (that is, the pattern of recognition must be the same and it must be an operating lease). Examples of nonlease components include equipment maintenance services, common area maintenance services in real estate, or other goods or services provided to the lessee apart from the right to use the underlying asset. Recent SEC OCA consultations Did not object to either including or excluding executory costs within remaining minimum rental payments for purposes of establishing the lease liability in transition Did not object to the use of a discount rate (for measurement of the lease liability during transition) based on either the original lease term or the remaining lease term, as long as that approach is applied consistently 2018 Crowe Horwath LLP 38

39 Tax Reform Unique Aspects 2018 Crowe Horwath LLP 39

40 Tax Reform Unique Aspects Rate Change Recap The Tax Cuts and Jobs Act (TCJA) was signed on December 22, Among other things, it reduced the corporate tax rate to 21% beginning January 1, 2018 All references to tax equivalent yields need to be updated to use a 21% federal rate going forward. Deferred taxes required remeasurement through tax expense in the quarter that the rate reduction was enacted. DTAs and DTLs originally recorded through Other Comprehensive Income (OCI) also required remeasurement through income tax expense. This accounting leaves a Stranded Tax Effect in OCI ASU remedies this and requires a one-time reclassification between Retained Earnings and OCI to eliminate the stranded tax effects related to the TCJA Effective for fiscal years beginning after December 15, 2018 Early adoption is permitted 2018 Crowe Horwath LLP 40

41 Tax Reform Unique Aspects 2018 Tax Calculation Considerations Meals & Entertainment Entertainment is now 100% nondeductible Should review all meals and entertainment accounts along with contributions and advertising for deductibility of sporting events, golf outings, etc. Section 162(m) - $1 Million Compensation Deduction Limitation for Public Companies Performance and commission based exceptions were repealed The CFO is now considered a covered employee Expands the definition of covered employee to include anyone who was an officer during the year (instead of officers only at year end) Adds a predecessor rule that would apply in a merger situation to include officers of the target corporation FDIC Insurance Premium deduction is now limited for financial institutions over $10 billion in assets AMT AMT is repealed for tax years beginning after December 31, AMT credits as of January 1, 2018 may be used to offset regular tax liability with a portion of remaining unused credits being refundable through AMT refund amount potentially subject to a haircut due to sequestration 100% Bonus Depreciation is allowed and applies to new and used assets before 1/1/ Crowe Horwath LLP 41

42 Tax Reform Unique Aspects Other Related Considerations for Banks Call Report Implications Prior to 1/1/18 banks were allowed to factor in the amount of DTA that could be realized via NOL carryback. NOLs generated after 1/1/18 are not allowed to be carried back, limiting this benefit in the calculation of the disallowed DTA. Federal banking agencies have confirmed that a Bank can continue to consider current-year taxes in the calculation of the disallowed DTA to absorb some deferreds. BOLI issues in tax-free reorganizations If a bank acquires a BOLI policy in a merger or acquisition, the death benefits received from the policy may be taxable if the buyer does not have a substantial relationship with the insured. Not sure if this is what Congress intended, but is widely believed to be the literal interpretation of the new law at this time. State Conformity Indiana, along with other states, has not yet conformed to the new Internal Revenue Code, thus any changes to taxable income would need to be reversed for state purposes in these states until they conform to the TCJA changes. Home Equity Interest Deduction (for customers) For , only interest on acquisition debt is deductible, not any other home equity debt. Acquisition debt is debt incurred to acquire, construct or substantially improve any qualified residence, as long as the debt is secured by that residence. See the instructions to Form 1098 to provide to customers 2018 Crowe Horwath LLP 42

43 Questions and Answers Kara Baldwin Partner Crowe Horwath LLP Indianapolis, IN Laura Cronkhite Partner Crowe Horwath LLP South Bend, IN Crowe Horwath LLP 43