Accounting and Auditing Update

Transcription

1 Accounting and Auditing Update What Supervisory Committees Need to Know Jeff Green, Partner, Moss Adams

2 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 accountantclient 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. 2

3 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 Audit 3

4 Newly Issued Rules and Guidance Derivatives Cloud computing arrangements Debt issue costs Elimination of the concept of extraordinary items Residential RE and foreclosures Revenue recognition 4

5 Proposed Rules and Guidance Allowance for loan losses, Current Expected Credit Loss Model CECL Leases 5

6 Russell Golden, Chairman James L. Kroeker, Vice Chairman R. Harold Schroeder Accounting Standard Updates Thomas J. Linsmeier Marc A. Siegel Lawrence W. Smith Daryl E. Buck

7 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 Two stage formal application process 7

8 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 How will your margins react? 8

9 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 systems it has put in place 9

10 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 programs must be in place 10

11 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 11

12 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 instruments 12

13 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 There is risk that must be properly managed 13

14 Cloud Computing Internal Use Software (Subtopic ) No 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 Diversity in practice 14

15 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 compared to amortizing the cost over time 15

16 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 Early adoption is permitted 16

17 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 17

18 Debt Issue Imputation of Interest (Subtopic ) No 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 amount 18

19 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 expense 19

20 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 Early adoption is permitted 20

21 Extraordinary Items Income Statement (Subtopic ) No 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 Example A blizzard in Florida causes damage to your branch 21

22 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 continuing operations 22

23 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 Early adoption is permitted 23

24 Accounting for Government Guaranteed Loans in Foreclosure Troubled Debt Restructurings by Creditors (Subtopic ) No 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 receivable from FHA rather than OREO 24

25 Effective Date Annual periods ending after December 15, 2015, and interim periods within annual periods beginning after December 15, 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

26 Revenue Recognition Standard Topic 606 No Issued 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 satisfied 26

27 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 Interest on loans and investments, scoped out 27

28 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 year end 28

29 Recent Exposure Drafts WHAT S ON THE HORIZON? 29

30 Proposed Accounting Standard Credit Losses (Subtopic ) 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 30

31 Credit Quality and the Allowance for Loan Losses 31

32 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)

33 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 on how we understand the way the rule is taking shape. 33

34 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 said. 34

35 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 We will see? 35

36 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 implementation of CECL 36

37 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 be excluded 37

38 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 We will see? 38

39 Key Takeaway 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 39

40 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 Run what if scenarios 40

41 Questions?