Beyond the “Big 3,” financial institutions should have implementation plans in place for share-based payments, premiums on callable debt securities, and the goodwill impairment test.
The level of new accounting standards over the last decade has been significant. These new standards include guidance related to credit losses (CECL), revenue recognition, and leases (aka “the Big 3”). However, updates for share-based payments, premiums on callable debt securities, and the goodwill impairment test should be considered now as well. With several standards having effective dates fast approaching, it’s important you have implementation plans in place.
The credit loss standard was finalized by the Financial Accounting Standards Board (FASB) approximately one year ago, and the industry has digested the theory. The next step for CECL implementation is to put pen to paper with examples. Our fall 2017 webinar will cover this topic as well as an addendum to our CECL Guide, which will further assist you in developing your calculation.
The new revenue recognition guidance will be effective in 2018 for public business entities (PBEs) and 2019 for nonpublic business entities (non-PBEs). Due to interest income being scoped out of the new standard, the impact on financial institutions lies within the sources of noninterest income. You should inventory the sources of any noninterest income to determine if there are any areas that might be impacted. Keep in mind that revenue recognition is tied to the legal language of contracts, and assessing impact should take that into consideration.
The primary areas financial institutions should focus on are credit card income, debit card income and loyalty point programs, certain deposit service charges, certain trust income, certain brokerage income, financed sales of other real estate owned, and sale/leaseback transactions. You’ll be required to adopt the new standard in either a modified retrospective approach with any impact being recorded as of January 1 in the year of adoption, or a full retrospective application so as to have all periods in financial statements presented consistently. We expect most financial institutions to apply the modified retrospective approach for simplicity purposes.
The new lease guidance will be effective in 2019 for PBEs and 2020 for non-PBEs. Most operating leases will be placed on the balance sheet with the asset given a 100 percent risk weighting for regulatory capital purposes. There are three main factors included in the calculation of the asset and related liability: contractual rental payments, the incremental borrowing rate (e.g. the rate an institution could obtain from a correspondent lender), and the term of the lease. Subsequent to the recording of the right of use asset and the related lease liability, the reporting within the income statement will be generally consistent with current practice. Adopting this standard will be applied on a modified retrospective application to the earliest period presented.
Upcoming Accounting Standards
There are few other accounting standards that will have an impact as soon as 2017 for PBEs and 2018 for non-PBEs:
- Improvements to share-based payments | This standard simplifies the accounting for share-based payments by allowing an accounting policy election to record forfeitures as they occur rather than upfront estimation, allowing statutory withholdings to be permitted up to the maximum amount versus the minimum so as to not cause equity classification into question, and requiring all excess tax benefits or windfalls being recorded through income tax expense rather than additional paid in capital.
- Premiums on callable debt securities | This standard causes the amortization of callable debt securities to be through the earlier call date than the maturity date and will be effective in 2019 for PBEs and 2020 for non-PBEs with early adoption permitted.
- Goodwill | This standard eliminates the Step 2 analysis from the goodwill impairment test and will be effective in 2020 for those entities registered with the Securities and Exchange Commission (SEC), PBEs that aren’t registered with the SEC in 2021, and all non-PBEs in 2022.
We’re here to help ensure your road to adoption is smooth. For guidance on any of these topics, please give us a call.
Plante Moran is a WBA Silver Associate Member. Visit their website for more information about how changing regulations affect banks. You can also register for their complimentary September 27 webinar, "Implementing the new credit loss model."