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Transcript of Accounting and Regulatory Issues for Banks and Thrifts and Regulatory Issues for Banks and Thrifts...
www.fmsinc.org | 800-ASK-4FMS
Accounting and Regulatory
Issues for Banks and Thrifts
Tuesday, June 18, 2013 8:00 am – 9:30 am
Robert F. Storch, Chief Accountant Federal Deposit Insurance Corporation Jeffrey J. Geer, Deputy Chief Accountant Office of the Comptroller of Currency Sydney K. Garmong, Partner Crowe Horwath LLP
www.fmsinc.org | 800-ASK-4FMS
Agenda: Main Topics
FASB’s Financial Instruments Project
Classification & Measurement
Credit Losses
FASB’s Leasing Project
Lightning Round
Mortgage Purchase Program
OREO – physical possession
Audit Committees
Internal Control Framework
Purchased Credit Impaired (PCI) Loans
Call Report Revisions
OCC Bank Accounting Advisory Series (BAAS) Update
slide 2
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Financial Instruments:
Classification & Measurement
A convergence project of the FASB and the
International Accounting Standards Board (IASB)
During 2011, the FASB developed a tentative new
model with 3 asset categories, including amortized
cost, in place of its May 2010 proposal
In Jan. 2012, the FASB and the IASB agreed to work
together to reduce differences in their models
The IASB and the FASB issued their Exposure Drafts
in Nov. 2012 and Feb. 2013, respectively
The FASB’s comment period ended May 15, 2013
The FASB has received 144 comment letters
slide 3
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Classification of Financial Assets
Upon initial recognition, classify each financial asset
into appropriate subsequent measurement category
based on
• Contractual cash flow characteristics of the asset
• Entity’s business model for managing the asset
A financial asset that does not satisfy the contractual
cash flow characteristics test must be subsequently
measured at fair value through net income (FV-NI)
Business model test is applied only to a financial asset
that satisfies the cash flow characteristics test
Financial Instruments:
Classification & Measurement
slide 4
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Contractual Cash Flow Characteristics Test
Financial asset satisfies this test if its contractual terms give
rise on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding
Business Model Assessment
For financial assets passing contractual cash flow
characteristics test
Classification determined at origination or acquisition based on
how financial assets will be managed together with other
financial assets within a distinct business model
Entity not prevented from managing the same or similar
financial assets within different business models
No tainting
Financial Instruments:
Classification & Measurement
slide 5
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Business Model Assessment
Amortized Cost – Financial assets held within a business model
whose objective is to hold the assets in order to collect
contractual cash flows
Fair Value through Other Comprehensive Income (FV-OCI) –
Financial assets managed within a business model whose
objective is both to hold the financial assets to collect
contractual cash flows and to sell the financial assets
Fair Value through Net Income (FV-NI) – A residual category for
financial assets that fail the amortized cost and FV-OCI
business model assessments
Limited fair value option would be available
Financial Instruments:
Classification & Measurement
slide 6
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Regulatory Agencies’ Views on the FASB’s Proposal
Overall, supportive of the FASB’s effort to improve the
accounting for financial instruments
A single model that could be applied uniformly to all financial
assets and across institutions has conceptual merit because
it would improve comparability and reduce complexity
However, several key aspects of the FASB’s proposal fall short
of its objectives
• Creates complexity
• Results in reporting that is not representationally faithful to how
some financial assets are managed
Because convergence is a major priority, the need for change
to current model is questionable without convergence
Financial Instruments:
Classification & Measurement
slide 7
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Agencies’ Views on Cash Flow Characteristics Test
Conceptually, agencies support a model in which
classification is determined based on instrument’s cash flows
However, certain aspects of the cash flow characteristics
assessment are overly complex, rules-based, and yield
counterintuitive financial reporting outcomes
Recommended that “solely payments of principal and interest”
(SPPI) be revised pragmatically
Definition of “principal” and “contingent features” criterion
produce counterintuitive results
“Modified economic relationships” criterion and assessment
criteria for beneficial interests introduce significant
complexity and raises operational questions
Financial Instruments:
Classification & Measurement
slide 8
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Agencies’ Views on Business Model Assessment
Conceptually, agencies support a model in which
classification requires assessment of how an instrument’s
cash flows will be realized as part of an entity’s business
model
However, certain aspects of the business model assessment
lack clarity and could result in financial reporting not faithful
to how financial assets generally are managed in a business
Hold-to-collect model carries over current held-to-maturity
guidance, which could be problematic for loans
For loans originated as part of a business model that relies
on securitization or other markets for funding, proposal
could result in all such loans being measured at FV-OCI
Financial Instruments:
Classification & Measurement
slide 9
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Loans managed as part of a portfolio for which sales are used
to manage concentrations of credit risk could result in all
such loans being measured at FV-OCI
Unclear how assessment would apply to a loan managed as
part of planned strategy in which a portion of the loan’s cash
flows will be sold and the rest will be held for collection (e.g.,
syndications and participations)
Unclear where to draw the line between FV-NI and FV-OCI
because magnitude or frequency of sales differentiating when
these categories should be used is not explained
• Apply FV-NI to trading activities and assets originated or
acquired for sale
• Apply FV-OCI to assets held for managing interest rate risk or
meeting everyday liquidity needs in ordinary course of business
Financial Instruments:
Classification & Measurement
slide 10
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Agencies’ Views on Other Aspects of Proposal
Own credit: Require presentation of fair value changes
attributable to own credit risk in AOCI for all liabilities
measured at fair value, not just fair value option liabilities
Fair value option: Impose conditions for use of option for
assets otherwise measured at FV-OCI rather than
unconditional election
Beneficial interests: Need to retain existing interest income
recognition guidance for a change in cash flows that appears
to have been eliminated
Transition for SPPI assessment: Permit use of existing
“clearly and closely related” assessment to identify existing
assets to be measured at FV-NI
Financial Instruments:
Classification & Measurement
slide 11
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FASB Current Expected
Credit Losses (CECL) - Agenda
Background
Overview & Objectives
Interagency Comment Letter
Key Interagency Messages on FASB’s proposal
IASB proposal
Overview of the 3-stage model
slide 12
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CECL: Background
On December 20, 2012, FASB issued its Credit Losses
Exposure Draft (ED) with comments due May 31, 2013
FASB issued a Frequently Asked Questions document on March
25, 2013, to further educate stakeholders on the proposal
Interagency Comment Letter has been sent to the FASB
The FASB has received 349 comment letters
The main provision of the current expected credit loss
(CECL) model:
To require an entity to measure expected credit losses on financial
assets held at the reporting date on the basis of the current
estimate of contractual cash flows not expected to be collected
This would remove the “probable” threshold and the “incurred” loss
notion in existing GAAP
slide 13
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Objectives of the Credit
Impairment Project
Address credit impairment weaknesses exposed by the
financial crisis, including those raised by joint FASB –
IASB Financial Crisis Advisory Group (FCAG):
Respond to “too-little, too-late” criticism of the incurred loss model
Include more forward-looking information into the measurement of
impairment
Reduce complexity in GAAP by creating a single impairment model
for all debt instruments (loans and investment securities)
Provide for more transparency in accounting for PCI assets
Achieve international convergence
slide 14
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CECL: Key Provisions
Allowance for Credit Impairment is recognized at
each reporting date for Expected Credit Losses
Expected Credit Loss – estimate of all contractual
cash flows not expected to be collected from a
financial asset or commitment to extend credit
Expected
Future
Cash Flows
Expected
Credit
Losses
Total
Contractual
Cash Flows
www.fmsinc.org | 800-ASK-4FMS slide 16
CECL: Key Provisions
Estimating CECL
Should consider past events, current
conditions, and reasonable and
supportable forecasts to estimate credit
losses over the entire term of the loan
Estimate must consider time value of money
Estimate is not most likely, best case or
worst case, but expected :
• At least two outcomes are required
• Reflect both the possibility that a credit
loss results and no credit loss results
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CECL: Key Provisions
The same CECL model applies to all debt
instruments not measured at FV-NI (e.g.,
“trading”)
Practical Expedient
Bank may elect to not recognize CECL on debt
instruments measured at FV-OCI if both:
• Fair value of the debt instrument is > amortized cost
• CECL is insignificant, which may be determined by
considering general expectations of the range of
CECL given credit-quality indicators
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CECL Overall Message:
Earlier Recognition
Agencies believe the FASB’s CECL ED addresses the
“too-little, too-late” criticisms that arose during the
financial crisis
Eliminating “probable incurred loss threshold” permits
allowances reported in financial statements that fully
consider all relevant information
Agencies believe this provides more decision-useful
information for financial statement users
Presents a balance sheet that reflects the present value of future cash
flows expected to be collected
Allows financial institutions to align with all information used in
credit risk management in the measurement of expected credit losses
slide 18
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CECL Model Application: Smaller,
Less Complex Institutions
Agencies believe all entities should apply the principles
governing the measurement of credit losses consistently
Will increase comparability between regulated and non-regulated
entities
Believe model is scalable for entities of all sizes and
complexities
However, the Agencies believe the objectives of the ED can be
achieved with less burdensome estimation practices than may be
used/developed by larger institutions
Agencies encourage the FASB to consider practical expedients, a
reasonable transition period, and condensed disclosure
requirements
slide 19
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CECL Model Application:
Expanded Implementation Guidance
Agencies acknowledge that credit loss recognition under
the proposed model may result in significant impact to
earnings for de novo banks and new product lines
Agencies encourage FASB to explore the consequences of applying
the standard to these narrow circumstances
Agencies support the establishment of a single impairment
measurement (loan and debt securities)
Agencies encourage FASB to provide illustrative guidance on the
application of the model to debt securities and to financial assets
measured at FV-OCI
slide 20
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CECL Model Application:
PCI Assets
Agencies believe FASB’s proposal for PCI assets is an
improvement and provides more decision-useful
information
Agencies in a past comment letter to the FASB have criticized the
current model in ASC 310-30 for not providing sufficient
transparency
Encourage FASB to consider ways to reduce the incentives of
overstating expected credit losses at acquisition by providing
additional implementation guidance, disclosure requirements, etc.
slide 21
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CECL Model Application:
PCI Assets
Some fun PCI equations – “grossing up”
Amortized
Cost
Purchase
Price (FV)
Allowance for
expected credit
losses at acquisition
Noncredit
Discount
(Premium) Par Amortized Cost
slide 22
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CECL: PCI Assets Example
A financial asset with a par value of $1,000,000 was acquired
for $750,000 (FV). At acquisition, CECL was $175,000
Amortized
Cost
$925,000
Purchase
$750,000
Allowance
$175,000
Noncredit
Discount
$75,000
Par
$1,000,000
Amortized Cost
$925,000
Journal Entry
Account Debit Credit
Loan $1,000,000
Noncredit Discount $75,000
Allowance $175,000
Cash $750,000
slide 23
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CECL Model Application:
TDR & Regulatory Principles
Agencies encourage the FASB to consider alternatives to
the TDR designation requirements
Encourage targeted or expanded disclosures
Encourage further cost-benefit analysis on the usefulness of
retaining TDR designation
Agencies support the inclusion of nonaccrual and write-
off principles into GAAP
Agencies do not anticipate a change in current practice
Encourage FASB to align its definitions as much as possible with
current regulatory guidance to avoid changes in current practice
slide 24
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Nonaccrual: Regulatory
Principles vs. ED Principles Current Regulatory Guidance FASB ED
Nonaccrual
Definition
Payment in full of principal or
interest is not expected
It is not probable that the entity
will receive substantially all of
the principal or substantially all of
the interest
Cash Basis
The remaining recorded
investment in the loan is
deemed fully collectible
It is probable that the entity will
receive substantially all of the
principal, but it is not probable
that the entity will receive
substantially all of the interest
Cost
Recovery
If doubt exists as to the
collectability of the recorded
investment in the asset
It is not probable that the entity
will receive substantially all of the
principal
slide 25
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Write-offs: Regulatory
Principles vs. ED Principles
Current Regulatory Guidance FASB ED
Wri
te-o
ffs (C
harg
e-O
ffs)
A loss classification is assigned when an
asset, or portion thereof, is considered
uncollectible and of such little value
that its continuance on the books is not
warranted. This does not mean that
the asset has absolutely no recovery
or salvage value; rather, it is not
practical or desirable to defer writing off
an essentially worthless asset (or portion
thereof), even though partial recovery
may occur in the future.
Directly reduce the cost basis in
a financial asset in the period in
which the entity determines
that it has no reasonable
expectation of future
recovery
slide 26
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Collateral Dependent: Regulatory
Principles vs. ED Principles
Current Regulatory Guidance FASB ED
Definition
A loan is collateral dependent if
repayment of the loan is expected to be
provided solely by the underlying
collateral and there are no other
available and reliable sources of
repayment.
A financial asset for which the repayment
is expected to be provided primarily or
substantially through the operation (by
the lender) or sale of the collateral, based
on the entity’s assessment as of the
reporting date.
Borrower Sale
of Collateral Collateral Dependent Collateral Dependent
Lender
Acquisition/
Sale of
Collateral
Collateral Dependent Collateral Dependent
Lender
Operation
of Collateral
Not Addressed Collateral Dependent
Borrower
Operation of
Collateral
Collateral Dependent Not Collateral Dependent
slide 27
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Credit Losses:
International Convergence
Agencies support convergence and the 2009 G20
mandate for a single set of high quality accounting
standards worldwide
The Agencies commend FASB for conducting outreach to
understand the operational difficulties of the 3-stage model and
proposing an alternative solution
The Agencies believe FASB’s proposed model addresses the
concerns raised by FCAG
Agencies believe there is potential common ground
between the two Boards and encourage the Boards to
jointly re-deliberate after the comment period ends
slide 28
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IASB 3-Stage Model Overview
The IASB issued its proposal in March 2013 with comments due
July 5, 2013
The Banking Agencies will provide comments through their participation within
the Basel Committee’s Accounting Experts Group (AEG)
IASB proposal captures deterioration in credit quality through
stages (1-3)
Stage 1: “12 month expected credit losses” & calculation of interest revenue is
based on effective interest rate x gross carrying amount
Stage 2: Lifetime expected credit losses & calculation of interest revenue is
based on effective interest rate x gross carrying amount
Stage 3: Lifetime expected credit losses & calculation of interest revenue based
on the effective interest rate x amortized cost (net of allowance) as credit losses
are incurred
“12 month expected credit losses” is defined as the expected
shortfalls in contractual cash flows over the life of a financial
instrument that will result if a default occurs in the 12 months
after the reporting date
slide 29
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Leases: Introduction
FAS 13, “Accounting for Leases,” created two types of
leases:
Capital leases – accounted for similarly to purchases (asset
and liability on-balance sheet)
Operating leases – all others accounted for as executory
contracts (off-balance sheet)
Result: The balance sheet does not reflect (for most leases)
the underlying rights and obligations associated with the
lease
slide 30
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Leases Project Timeline
Project added to agenda - July 2006
Discussion Paper - March 19, 2009
Exposure Draft – August 17, 2010
Outreach / Fieldwork
Re-deliberations
Revised Exposure Draft – May 16, 2013
Outreach / Fieldwork / Re-deliberations
Issue final ASU
Current
stage of the
project
slide 31
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The Revised Leases Proposal
“Leases (Topic 842): A Revision of the 2010 Proposed FASB
ASU, Leases (Topic 840)”
Applies to both lessees and lessors
Retains an exception for short-term leases
• Leases with a maximum possible lease term of 12 months or
less, including any options to renew
Significant changes
Pattern of expense recognition
Characterization of expense
slide 32
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Lease Accounting:
For Lessees
The “Right-Of-Use” (ROU) model
Asset - the right to use the asset
Liability - the obligation to make payments
Expense
• Amortization and character depends on:
– “....whether the lessee is expected to consume more than an
insignificant portion of the economic benefits embedded in
the underlying asset.”
• Practically, this assessment will often depend on the nature of
the underlying asset
slide 33
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Lease Accounting:
For Lessees (Con’t)
Type A (financing) - other than property (e.g.,
equipment, aircraft, cars, trucks)
Interest expense and amortization expense
Expense is front-loaded
Type B (straight-line) - property (i.e., land and/or a
building or part of a building)
Lease expense
Expense is recognized on straight-line basis
slide 34
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Lease Accounting:
For Lessors
Type A (receivable and residual) – other than property
Derecognize the underlying asset
Recognize a receivable for lease payments and a residual
asset for rights retained relating to the underlying asset;
recognize discount as interest income
Recognize any profit at commencement
Type B (operating lease) - property
Continue to recognize the underlying asset
Recognize lease income over the lease term typically on a
straight-line basis
slide 35
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Lease Accounting:
Other Matters
Transition
Recognize and measure leases at the beginning of the earliest
period presented using either a modified retrospective
approach or a full retrospective approach
Effective date
Board will decide when it finalizes the standard
Board acknowledges the broad impact
Comments are due September 13, 2013
slide 36
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Lightning Round
Mortgage Purchase Programs
OREO – Physical Possession
Audit Committees
Internal Control Framework
Purchased Credit Impaired (PCI) Loans
Call Report Revisions
OCC Bank Accounting Advisory Series (BAAS)
Update
slide 37
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Mortgage Purchase
Programs – Background
Mortgage Purchase Programs (MPP)
Function similar to a warehouse lines of credit (WLC) to a
mortgage originator
Basic premise of MPP
Bank provides funding to a mortgage loan originator
• Originator closes residential mortgage loans subject to a takeout
commitment with an unrelated 3rd party investor
Bank “acquires” interests (varies from 97% - 100%) in
mortgage loans, subject to 3rd party takeout commitments
Accounting Question
How should the Bank account for this transaction?
• Purchase of mortgage loans or a loan to a mortgage originator
(warehouse line) secured by residential mortgage loans?
slide 38
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MPP – Accounting
Considerations ASC 860 – Transfers of Financial Assets
Requires symmetrical accounting for the Originator & the Bank
If the entire financial asset is not being sold, does portion
transferred meet the definition of “Participating Interest”?
• Is there proportionate ownership in the financial asset?
• Is there proportionate sharing of cash flows?
• Does it have the same priority (no subordination) of cash flows?
• If, no Secured Borrowing
• If, yes Examine Sale Criteria
slide 39
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MPP – Accounting
Considerations ASC 860 – Transfers of Financial Assets
Sale Criteria
• Legal isolation of transferred assets – examine the
facts/assumptions/limitations of legal opinion
• Transferee has ability to pledge/sell – often cannot due to takeout
commitment
• Effective control – likely retained by transferor due to servicing and
takeout commitment
Examine each MPP closely
• If fails sale criteria accounting treatment Secured Financing
slide 40
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MPP – Regulatory Issues
Regulatory Issues & Call Report Information
Risk Weighting – 100%, 50%, or 20%?
• If the transaction does not qualify for accounting sales treatment (purchase
by bank), it is accounted for like a warehouse line of credit (WLC) and RBC
treatment of 100%
• Risk Weight: WLC = 100%; Mortgage Loans = 50% or 20% (FHA/VA
guaranteed portion)
Legal Lending Limit Implications
• May get credit for government-guaranteed portions of underlying mortgages
• The accounting treatment does not dictate the legal determination of
whether there is a loan from the bank to the mortgage originator for the
purposes of the regulation on legal lending limit
March 2013 Supplemental Call Report Instructions – MPP guidance
• Governing contracts may be structured to meet legal isolation, but fail to get
sale accounting due to the mortgage originator retaining effective control
• As a result, report as a loan to mortgage originator, requiring a 100% risk
weight
slide 41
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Other Real Estate Owned
(OREO) – Physical Possession Background:
OCC exam team inquiry based on definition of physical possession
• Bank Accounting Advisory Series (BAAS) Section 5A., OREO Question 2
(“redemption period”)
Increases in vacant or abandoned residential properties
Foreclosure processes extended
Diversity in practice on when mortgage loans are transferred to OREO
• Legal “title” is obtained or borrower surrenders property (deed in lieu of
foreclosure – DILF)
• Property access and maintenance
Issue for Clarification:
When does “physical possession” constitute in-substance a
repossession or foreclosure by the creditor?
Neither the Call Report nor U.S. GAAP define “physical possession” or
“in-substance a repossession or foreclosure”
slide 42
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OREO – Call Report Glossary
& U.S. GAAP Guidance
Call Report Instructions:
“For purposes of these reports, foreclosed assets include loans
where the bank, as creditor, has received physical possession of a
borrower's assets, regardless of whether formal foreclosure
proceedings take place.”
U.S. GAAP (ASC 310-40-40-6)
“…a troubled debt restructuring that is in substance a repossession
or foreclosure by the creditor, that is, the creditor receives physical
possession of the debtor's assets regardless of whether formal
foreclosure proceedings take place…” [emphasis added]
Essentially, this means report OREO at the earlier of
foreclosure or physical possession
slide 43
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OREO – When to Recognize
What constitutes physical possession?
Imminent foreclosure
• Bank has real estate risk
Narrow view
• Right to exclude the borrower (sole possession -
title/deed-in lieu foreclosure completed/sheriff sale)
Facts and circumstances view
• Bank has access to and maintains vacant property in
process of foreclosure (delinquent nonresponsive
borrower)
• Bank has real estate risk
slide 44
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OREO – Next Steps
OCC white paper outlining 3 points for clarification:
1. Defining physical possession
• At what point does a bank obtain physical possession, considering the
legal rights of the borrower and bank when property is vacated or
abandoned?
• Concepts of bank and/or borrower access to the property
2. Diversity in subsequent accounting of the FHA guaranteed loan
properties after foreclosure
• How to consider the guarantee amount?
3. Interest accrual on past due FHA guaranteed loans
OCC provided paper to the SEC & FASB
SEC requested this be added to the agenda of the FASB’s Emerging
Issues Task Force (EITF)
First issue has been added to the June agenda, and the second issue
will be added to the September agenda
slide 45
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Audit Committees
For institutions subject to Part 363 of the FDIC’s
regulations (> $500 million in total assets), audit
committee duties include appointment, compensation,
and oversight of accounting firm performing audit
services
To carry out these duties, audit committee should review and
satisfy itself as to firm’s compliance with the required
qualifications for accounting firms, including
• Auditor independence
• Peer review and, if available, inspection reports
For other institutions, audit committee performance of
these duties, including reviewing auditor independence
and peer review/inspection reports, is a sound practice
slide 46
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Audit Committees
PCAOB Release: Information for Audit Committees
About the PCAOB Inspection Process (Aug. 1, 2012) http://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf
Provides information about the meaning and significance of
PCAOB inspection findings in both engagement reviews and
quality control reviews
Highlights areas of inquiry that audit committees may wish to
address with their auditors, including:
• Whether the institution’s own audit was selected by the PCAOB for
an inspection and whether any findings were made
• Potentially relevant inspection findings on other audits performed
by the audit firm, particularly other financial institutions
• Audit firm's response to PCAOB’s inspection findings and its
remedial efforts to address any quality control deficiencies
identified by PCAOB
slide 47
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Internal Control Framework
COSO issued an updated version of Internal Control –
Integrated Framework on May 14, 2013
Responds to changes in business and operating environments,
including increased complexity and changes in technology
Retains core definition and five components of internal control
plus three categories of objectives from original 1992
framework
Explicitly articulates 17 principles for assessing whether the
five components are present and functioning that were
previously implicit in the components
Describes “points of focus” to assist management in designing,
implementing, and maintaining internal control and in
assessing the 17 principles
slide 48
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Internal Control Framework
Transition
COSO will continue to make original 1992 framework available
through Dec. 15, 2014, after which it will consider the 1992
framework superseded by the 2013 framework
COSO Board believes continued use of the 1992 Framework
during transition period is appropriate
During transition, entities subject to external reporting on
internal control over financial reporting should clearly disclose
which version of the framework is being used
COSO also issued Illustrative Tools for Assessing
Effectiveness of a System of Internal Control and Internal
Control over External Financial Reporting (ICEFR): A
Compendium of Approaches and Examples
slide 49
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Internal Control Framework
Part 363 of the FDIC’s regulations identifies COSO
Framework as a suitable and recognized framework
for purposes of assessing the effectiveness of the
institution’s internal control over financial reporting
Institutions subject to Part 363 > $1 billion in total assets
should plan to transition to the 2013 framework by Dec. 15,
2014, for purposes of management’s internal control
assessment
slide 50
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Purchased Credit-Impaired
(PCI) Loans
Call Report instructions for “Purchased Credit-
Impaired Loans and Debt Securities” substantially
revised effective June 30, 2012
Glossary entry now addresses aggregation of individual PCI
loans acquired in same fiscal quarter that have common risk
characteristics, where pool becomes the unit of account
Common risk characteristics include similar credit risk or risk
ratings and one or more predominant risk characteristics
Contrasts modification of a PCI loan within a pool (loan not
removed from pool even if considered a troubled debt
restructuring) versus modification of PCI loan accounted for
individually (subject to the TDR accounting provisions of ASC
310-40)
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Nonaccrual treatment for PCI loans
• When amount and timing of cash flows on a PCI loan or a PCI loan
pool cannot be reasonably estimated, place loan or pool in
nonaccrual status
Do not report individual loans in a nonaccrual pool as past due
Reporting PCI loans as past due
• For a PCI loan accounted for individually and on accrual,
determine and report past due status of individual loan in
accordance with its contractual repayment terms
• For PCI loans accounted for on a pool basis when pool is on
accrual, determine and report delinquency status of individual
loans in the pool in accordance with each loan’s contractual
repayment terms
Do not report individual loans in an accrual pool as nonaccrual
Purchased Credit-Impaired
(PCI) Loans
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Once a pool is assembled, integrity of pool should be
maintained
Remove loan from a pool only if institution sells, forecloses, or
otherwise receives assets in satisfaction of the loan, or the
loan is written off
Remove loan from pool at its carrying amount, i.e., loan’s
current contractually required payments receivable less its
remaining nonaccretable difference and accretable yield
• An acceptable approach is a pro rata allocation of pool’s total
remaining nonaccretable difference and accretable yield to an
individual loan in proportion to loan’s current contractually
required payments receivable compared to pool’s total
contractually required payments receivable
Purchased Credit-Impaired
(PCI) Loans
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Call Report Revisions
New Schedule RI-C, Disaggregated Data on the
Allowance for Loan and Lease Losses
Added in March 2013 for institutions > $1 billion in assets
Modeled after disclosure required by ASU 2010-20
6 loan portfolio segments and 3 impairment measurements
New and Revised Items for June 30, 2013
For large and highly complex institutions (> $10 billion in
assets)
• Certain higher-risk loans, foreign office real estate loans and
commitments, and U.S. government-guaranteed assets plus a
new table of consumer loans by loan type and probability of
default
• Higher-risk loans and PD table would be confidential
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Call Report Revisions
Other Call Report Revisions Proposed for June 2013
Remain under study and will not take effect in June 2013
Any resulting new reporting requirements would be
implemented no earlier than:
• December 31, 2013, for
Information on international remittance transfers
Trade names used to identify physical branches and Internet
Web sites that differ from institution’s legal title
• March 31, 2014, for
Consumer deposit account balances (institutions > $1 billion
in total assets)
Consumer deposit account service charges
See http://www.fdic.gov/news/news/financial/2013/fil13024.html
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Call Report Revisions
Call Report Changes for Basel III
Any regulatory reporting changes necessary to implement
Basel III capital rules would be issued for industry comment
after banking agencies adopt any final rules for Basel III
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2013 Bank Accounting Advisory
Series (BAAS) Update
The 2013 BAAS includes new questions and
edits/updates to existing questions
Some of the new questions that we anticipate adding
to the BAAS:
TDR
• Treatment of legal (and other direct costs) incurred in a TDR
Acquired Loans
• For PCI loans subject to TDR when does a modification
constitute a concession?
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2013 Bank Accounting Advisory
Series (BAAS) Update
Some of the new questions that we anticipate adding to the
BAAS:
OREO
• If the Bank finances the sale of an OREO property where the buyer
pledges additional collateral can the value of the excess collateral be
included in the initial investment for use of the full accrual method?
• If the Bank finances the sale of an OREO property where the buyer
makes no down payment and the sales prices is lower than the
appraised amount which value (sales price or appraised value) is used
for the initial investment calculation?
Fair Value Accounting
• Clarifying the requirement for consistent valuation methodologies for
derivatives
Target issuance of BAAS update: July/August 2013
www.occ.gov/publications/publications-by-type/other-publications-reports/baas.pdf
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