Accounting
and
Auditing
Update
What Supervisory Committees Need to KnowDisclaimer
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
Agenda
• Overview of new rules and guidance
• Overview of proposed and pending rules and
guidance
• We will keep this higher level because we have a mix
of Board/SC members, CEOs, CFOs, COOs, Internal
Newly
Issued
Rules
and
Guidance
– Derivatives
– Cloud computing arrangements
– Debt issue costs
– Elimination of the concept of extraordinary items
– Residential RE and foreclosures
Proposed
Rules
and
Guidance
• Allowance for loan losses, Current Expected Credit Loss Model ‐ CECL
Accounting
Standard
Updates
Russell Golden, Chairman
James L. Kroeker, Vice
Chairman
Daryl E. Buck Thomas J. Linsmeier
R. Harold Schroeder
Derivatives
12 CFR Parts 703, 715, and 741
• NCUA passed a rule allowing well‐managed credit
unions with $250 million or more in assets to utilize
certain derivative instruments
Why
is
the
NCUA
finally
addressing
this
now?
• Many CUs are liability‐sensitive
– Long‐term fixed‐rate assets and short‐term
variable funding
• We are at historic rate lows; they will go up
Derivatives
• First stage: the credit union will present to NCUA an
IRR mitigation plan, which demonstrates how
derivatives fit within that plan and how it will acquire
the appropriate resources, controls, and systems to
implement a sound derivatives program
• Second stage: the NCUA will evaluate the credit
union on its actual readiness to engage in derivatives
transactions based on the personnel, controls, and
Derivatives
•
Credit
unions
new
to
derivatives
authority
must
operate
safely
for
one
year
under
limited
authorities
before
moving
to
full
authority
•
CAMEL
ratings
1,
2,
3
with
management
1,
2
•
Robust
policies,
procedures,
and
monitoring
Allowable
Derivative
Instruments
• Simple plan vanilla interest rate derivatives for
balance sheet management and risk reduction,
including
– interest rate swaps, caps, floors – basis swaps and Treasury futures
Derivatives
• Concerns
– Pay to play
– They can cause increased risk, because each side
of the transaction is insuring their position
• The cost can be high
• Complex instruments and high volatility
– Must have the expertise and programs to
effectively understand and manage these
Key
Takeaway
• With sound processes and controls in place,
derivatives can be an effective tool to help credit
unions hedge interest rate risk and better protect
earnings and capital from adverse rate moves
• Consider discussing with management
Cloud
Computing
Internal‐Use Software (Subtopic 350‐40) No. 2015‐05 Issued ‐ April 2015
• Examples of cloud computing arrangements
– software as a service – platform as a service
– infrastructure as a service and
– other similar hosting arrangements
• Existing GAAP does not have clear guidance about a
customer’s accounting for fees paid in a cloud
computing arrangement
Cloud
Computing
Arrangements
• Accounting based on
– If a cloud computing arrangement includes a software
license, then the customer should account for the software
license element of the arrangement consistent with the
acquisition of other software licenses
– If a cloud computing arrangement does not include a
software license, the customer should account for the
arrangement as a service contract
– Generally the difference is expensing a cost up front
Effective
Date
• The amendments will be effective for annual periods
beginning after December 15, 2015, and interim
periods in annual periods beginning after
December 15, 2016
• December 31, 2016 for calendar year‐end
• Public companies December 31, 2015, for calendar
year‐end
Key
Takeaway
Cost Savings ‐ Technology Agreements
– Perform an inventory of software agreements with your
major processor
• G/L, loan and deposit systems
• Internet banking
• Mobile banking
– Align agreements so they are all on the same renewal cycle – Begin negotiations well in advance of renewal date
Debt
Issue
Imputation of Interest (Subtopic 835‐30) No. 2015‐03 Issued ‐ April 2015
• 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
Issue
Costs
• Simplified Example – Credit Union borrows $10
million from FHLB at a cost of $100,000
• Record the borrowing on the balance sheet for $10
million and a contra borrow account for $100,000 for
the costs associated with entering into a borrowing
agreement
• Grosses down the balance sheet
• Amortization of debt issue costs report as interest
Effective
Date
• The amendments are effective for financial statements
issued for fiscal years beginning after December 15,
2015, and interim periods within fiscal years beginning
after December 15, 2016
• December 31, 2016 for calendar year‐end
• Public companies December 31, 2015, for calendar
year‐end
Extraordinary
Items
Income Statement (Subtopic 225‐20) ‐ No. 2015‐01 Issued ‐ January 2015
• Unusual nature. The underlying event or transaction
should possess a high degree of abnormality and be of a
type clearly unrelated to, or only incidentally related to,
the ordinary and typical activities of the entity, taking into
account the environment in which the entity operates
• Infrequency of occurrence. The underlying event or
transaction should be of a type that would not reasonably
be expected to recur in the foreseeable future, taking into
account the environment in which the entity operates
Extraordinary
Items
• If an event or transaction meets the criteria for
extraordinary classification, an entity is required to
segregate the extraordinary item from the results of
ordinary operations and show the item separately in
the income statement, net of tax, after income from
Effective
Date
• The amendments are effective for fiscal years, and
interim periods within those fiscal years, beginning
after December 15, 2015
• December 31, 2016, for calendar year‐end
• The effective date is the same for both public
business entities and all other entities
Accounting
for
Government
Guaranteed
Loans
in
Foreclosure
Troubled Debt Restructurings by Creditors (Subtopic 310‐40) No.
2014‐14 Issued ‐ August 2014
• Would require a residential mortgage loan to be taken off
the books and moved to a separate receivable to be
recognized upon foreclosure if the loan is fully
government‐guaranteed and the lender has the intent
and ability to recover through the guarantee; details
• Diversity in practice
• Example ‐Take the loan off the books and include it as a
Effective
Date
• Annual periods ending after December 15, 2015, and
interim periods within annual periods beginning after
December 15, 2015.
• December 31, 2016, for calendar year‐end
• Public companies effective now
• Early adoption, including adoption in an interim
period, is permitted if the entity already has adopted Update 2014‐04
Revenue
Recognition
Standard
Topic 606 ‐ No. 2014‐09Issued ‐ May 2014
• Replaces industry and transaction‐specific guidance
with a principles‐based framework applied to all
revenue transactions with customers
• Five step model
1. Identify the contract with the customer
2. Identify the separate performance obligations in the
contract
3. Determine the transaction price 4. Allocate the transaction price
5. Recognize revenue when a performance obligation is
Revenue
Recognition
• Potential impact to credit unions relates to
– Sale of real estate (foreclosed assets) – Possibly on credit card bonus programs – Other non‐interest income items
Effective
Date
‐
Delayed
• Annual periods beginning after December 15, 2018,
and interim periods within annual periods beginning
after December 15, 2019
• December 31, 2019, for calendar year‐end
• Public companies December 31, 2018, for calendar
WHAT’S
ON
THE
HORIZON?
Proposed
Accounting
Standard
‐
Credit
Losses
(Subtopic 825‐15)
How the Current Expected Credit Loss (CECL) Model
originated
• The Great Recession
• Users of financial statements felt
– Financial institutions recognized loan losses too late
– They were not made fully aware of the concentrations of risk
on balance sheets
– There was too much diversity in presentation of certain
financial information • The SEC
Credit
Quality
and
the
Allowance
for
Loan
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,
What
Is
the
Expected
Impact?
“It will increase the costs for most credit unions making
those calculations,” explained Jason Peach, CFO at West
Community CU in O'Fallon, Mo., and second vice chair
of the CUNA CFO Council. “It will probably also
increase reserves for most institutions. I’ve heard there
could be anywhere from a 10 to 30 basis‐point hit in
terms of net worth when that goes into place. Reserves
could go to 1.5 to 2 times what they are today based
What
Is
the
Expected
Impact?
• Bill Kennedy, CFO at Department of the Interior FCU,
noted that while it’s on his credit union’s radar, “I don't
see it being a huge impact financially other than maybe
the initial costs of doing the data collection and
maintaining it.”
• Kennedy said he believes that as long as credit unions
can up their game with data collection, it shouldn’t be an
overwhelming issue. “I think most of your credit unions
of any size are involved in [digging deeper into] data and
data management, because data is where it's all at,” he
Timing
• The FASB has said it wants to publish the new
standard by the end of the year, but Golden in April
signaled it would be published in December, by the
earliest
Key
Takeaways
CECL Model
– Ensure your credit union is housing historical loan data to
help support expected loss rates for the new CECL model
• By type of loan
• By geographic location
• By industry
– Run “what if” scenarios on the impact to your capital of
different provisions to loan losses in anticipation of the
Proposed
Accounting
Standard
‐
Leases
• 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
Timing
• The FASB staff plans to circulate a draft among a
select group of external reviewers in July
• A final accounting standard is expected to be
published by the end of 2015
Key
Takeaway
Leases
– Develop an inventory of all leases
– Run “what if” scenarios on the impact on your capital of
Summary
of
Key
Takeaways
1. Consider the implications and application process to
enter into derivative contracts
2. Cost Savings ‐ Review technology agreements
3. Ensure to understand the impact on your balance
sheet (capital) of the CECL Model
• Run “what if” scenarios
4. Ensure to understand the impact on your balance
sheet (capital) of adding all your leases
