Summary of recent accounting guidance impacting financial institutions
The following summary may be useful to you in fulfilling year-end reporting requirements. While not intended to be a comprehensive list, the summary contains information on various recently issued or effective accounting standards that may need to be considered for your 2013 financial statements. Additionally, the summary includes a section on proposed standards and major projects underway that may be of interest to you in planning ahead. While the standards effective in 2013 are rather limited in terms of number and reach, there are major potential changes on the near horizon associated with proposed standards as are elaborated on below.
Select recently issued or effective accounting standards
New benchmark interest rate. In July 2013, the FASB issued ASU 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes", to permit the Fed Funds Effective Swap Rate (OIS) to be used as a benchmark interest rate for hedge accounting purposes, in addition to the pre-existing benchmark interest rates associated with direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (LIBOR) swap rate. This ASU also eliminated the restriction on using different benchmark rates for similar hedges. The ASU was effective upon issuance and therefore permits use of OIS as a benchmark interest rate prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. It may be worthwhile for financial institutions to consider electing OIS as a benchmark rate when hedging interest rate risk in certain circumstances including when hedging variable interest payments that are indexed to fed funds or OIS rates, when hedging forecasted debt and when entering into fair value hedges of financial instruments.
Liquidation basis of accounting. In April 2013, the FASB released ASU 2013-07, "Liquidation Basis of Accounting", to provide clarification on when liquidation is imminent such that an entity should apply the liquidation basis of accounting. As stated in the ASU, liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity's expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. An entity is also required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with the sale or settlement of assets and liabilities. Additionally, the ASU requires certain disclosures about the plan for liquidation as well as the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after Dec. 15, 2013, and interim reporting periods therein; with prospective application from the day that liquidation becomes imminent. Early adoption is permitted.
Fair value measurements and disclosures. In February 2013, the FASB released ASU 2013-03, "Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities", to clarify that the requirement to disclose the level of the fair value hierarchy does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. The ASU was effective upon issuance.
Reclassifications out of accumulated other comprehensive income. In February 2013, the FASB released ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (AOCI) by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For 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 such amounts. The ASU is effective prospectively for reporting periods beginning after Dec. 15, 2012 for public entities, and Dec. 15, 2013 for nonpublic entities, with early adoption permitted.
Disclosures about Offsetting Assets and Liabilities. In January 2013, the FASB released ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," to clarify that the previously released ASU 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. As amended, ASU 2011-11 requires disclosures of these instruments on both a gross and net basis when they are either (a) offset in accordance with relevant sections of GAAP or (b) subject to a master netting arrangement or similar agreement. These ASUs are effective for annual reporting periods beginning on or after Jan. 1, 2013, and interim periods within those annual periods. Retrospective disclosures are required for all comparative periods presented. Refer to our whitepaper Disclosures about offsetting assets and liabilities for additional information and suggestions for implementation.
Indemnification assets. In October 2012, the FASB issued ASU 2012-06, "Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution," to address diversity in practice in how these types of indemnification assets are subsequently measured. This ASU clarifies that when a change in the cash flows expected to be collected from such an indemnification asset occurs as a result of a change in cash flows expected to be collected on the assets subject to indemnification (such as acquired loans subject to an FDIC loss sharing agreement), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. This could be relevant, for example in the context of acquired loans with credit quality issues accounted for in accordance with ASC 310-30-35, which requires certain post-acquisition improvements in expected cash flows to be accreted into income over the remaining life of the loan. Similarly, an associated decrease in the indemnification asset would be amortized, with the amortization period being limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified loans. The ASU is effective for fiscal years, and interim periods within those years, beginning on or after Dec. 15, 2012, with early adoption permitted. It requires prospective application to any such new indemnification assets acquired after the date of adoption and to such indemnification assets existing as of the date of adoption.
Select proposal stage accounting standards
Major joint projects. While it is not always smooth sailing, efforts continue and progress has been made in certain respects as it relates to the joint projects of the FASB and International Accounting Standards Board (IASB). While referred to as joint projects, in many cases there are significant differences related to decisions made and exposure drafts issued by the FASB in comparison to the IASB. The summary that follows is based on FASB only information including the expected timetable and meeting summaries included on its website, as well as the most recent exposure draft issued by FASB on each project. Refer to "The Project Roster and Status" on the FASB website for the most recent information about open projects.
|Project||Current status||Potential ramifications|
||Final standard expected in first quarter of 2014 with effective date for public entities of annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods therein. For nonpublic entities, effective date will be annual reporting periods beginning after Dec. 15, 2017.||While financial instruments are expected to be excluded from the scope, the accounting for other sources of revenue and gains of financial institutions could be impacted.|
|Classification and measurement||Final standard expected in first half of 2014||Refer to our summary of the February 2013 exposure draft, Accounting for financial instruments: Overview of FASB's exposure draft on recognition and measurement. The FASB decided recently to maintain the existing derivative bifurcation requirements for both financial assets and liabilities as well as consider new cash flow characteristics assessment models to determine the classification and measurement of financial assets, including the host contract after a derivative has been bifurcated. Recent decisions have also focused on clarifying and improving the business model assessment for financial assets.|
|Credit impairment||Final standard expected in first half of 2014.||Refer to our summary of the December 2012 exposure draft, Credit impairment: A long and winding road. Subsequent discussions and decisions by the FASB have focused on clarifying how an entity would estimate expected credit losses and reaffirming the desire to continue to move forward with an expected credit loss approach.|
|Hedging||No recent activity.|
|Leases||In the process of holding roundtable discussions and evaluating concerns with May 2013 exposure draft.||As proposed, most leases would be required to be capitalized on the balance sheet and could therefore potentially have a significant impact to regulatory capital ratios. Refer to our update FASB and IASB discuss feedback received on joint lease accounting proposal.
|Insurance Contracts||In the process of holding roundtable discussions and evaluating feedback on June 2013 exposure draft.||Financial institutions are included in proposed scope and definition of insurance contract extends to various credit-related products of financial institutions such as standby letters of credit.
Financial institutions are included in proposed scope and definition of insurance contract extends to various credit-related products of financial institutions such as standby letters of credit. Refer to our summary of the exposure draft, Proposed accounting for insurance contracts.
Private Company Council alternatives. On Nov. 25, 2013, the FASB endorsed the decisions previously reached by the Private Company Council (PCC) to provide accounting alternatives for private companies related to a simplified hedge accounting approach for certain interest rate swaps and the subsequent accounting for goodwill. Final ASUs on these topics are expected to be issued in January 2014. While financial institutions will be specifically excluded from the scope of the ASU on a simplified hedge accounting approach, financial institutions that are not public business entities may be able to elect to apply the provisions of the ASU on goodwill in their financial statements for 2013. The PCC also issued exposure documents in the summer to propose alternative accounting methodologies for private companies related to variable interest entities under common control leasing arrangements and identifiable intangible assets in a business combination. Documents on these topics have not yet been presented to FASB for final endorsement.
Recently ratified EITF issues. At the Dec. 11, 2013 meeting, the FASB ratified the consensuses reached by the Emerging Issues Task Force (EITF) on various issues and approved the issuance of the related ASUs (expected to occur by the first half of 2014). While the ASUs will have effective dates beginning in 2015 at the earliest for calendar year-ends, early adoption will be permitted. As such, to the extent these ASUs may be applicable to your institution, they may warrant a closer look.
- Issue 12-G, "Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity"
- Issue 13-B, "Accounting for Investments in Qualified Affordable Housing Projects"
- Issue 13-E, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure"
For more information on the contents of this summary or other accounting matters impacting financial institutions, please contact a McGladrey team member or Faye Miller, partner, National Professional Standards Group at 410.246.9194.