July 22, 2010

FASB Issues New Loan/ALLL Disclosure Requirements
FASB has issued their Accounting Standards Update (ASU) that significantly expands required disclosures for the Allowance for Loan and Lease Losses (ALLL).  Exposed for comment in August 2009, changes have been made from the exposure draft and the process was slowed down because of various comments made by banks and the AmBA . 

The effective date for the requirements are broken up in phases:

·         For non-publics entities, it is effective for annual reporting periods ending after December 15, 2011 – next year end.

·         For public entities, the disclosures of period-end balances are effective for interim/annual reporting periods ending after December 15, 2010 – this year end.

·         For public entities, the disclosures of activity are effective for interim/annual reporting periods beginning on or after December 15, 2010 – first quarter 2011.

The main disclosures include:

·         Qualitative discussion of the ALLL process and how credit quality is determined and ranked.  Discussion is also required of any changes in ALLL methodology and a quantification of those changes.

·         Roll forward of activity in the ALLL account (provisions, charge-offs, recoveries, etc.) disaggregated by portfolio segment.

·         Ending balances of ALLL and loans receivable by segment, by individually vs. collectively evaluated for impairment, and by SOP 03-3 loans.

·         Ending balances by credit quality (whether by public rating or internally-rated) and performing vs. non-performing.

·         Aging of past due balances, balances of impaired loans with no ALLL recorded, and loans on nonaccrual status.

·         Number and balances of troubled debt restructurings (TDRs), including pre- and post-modification balances, with TDRs that have re-defaulted.

This is a lot.  However, the requested information at least appears understandable from a user perspective, and much of this information is already prepared by banks. It could have been worse.  Key changes from the ED, all of which AmBA had voiced concern over, include:

·         No requirement to roll forward the carrying amount of receivables (only the ending balance is required).The ED had also disaggregated the roll forward by impairment methodology (FAS 5 vs. FAS 114).

·         No requirement to link internal risk ratings of credit quality to external ratings.  Qualitative descriptions are required, though.

·         No requirement of disclosing fair values by portfolio segment.

·         Loans measured at fair value or at lower of cost or fair value are excluded.

·         No separate aging of purchased credit-impaired loans is required.

For a link to the FASB document, click here.  For more information, contact Mike Gullette.

FASB Issues Updated Exposure Draft on Loss Contingency Disclosures

Following up on a 2008 exposure draft (ED) that was heavily criticized by virtually all industries, FASB has issued a revised ED called Disclosures of Certain Loss Contingencies.  As you may recall, respondents to the 2008 ED voiced concerns related to making reliable estimates of the exposure, specific legal issues on what was being divulged, and the level of obtainable assurance that could be obtained by the disclosures.  Over 300 responses were received on that ED and, except for a couple of groups representing financial statement users, almost all were vehemently opposed to the 2008 ED.

This ED addresses most, but not all, of the concerns.  With that in mind, the key elements of the ED, which does not change which liabilities are recorded in the financial statements, are:

·         Qualitative and quantitative information is required regarding the nature, potential magnitude and potential timing (if known) of the contingency.

·         As the case progresses, more information is expected.

·         Certain “remote” contingencies will require disclosure if, because of their nature, potential magnitude, or potential timing, disclosure would be necessary “to inform users about the entity’s vulnerability to a potential severe impact”.

·         More qualitative information regarding the contingencies will be required, and quantitative public information must be referred to.

·         A roll forward of the liability balance is required, with increases in new contingencies, settlements, and re-estimates of existing cases.

The comment period for this ED ends August 20, 2010, with a proposed effective date of year end 2010 for public companies and year end 2011 for non-public companies.  For a link to the ED, click here.  For more information, contact Mike Gullette.

June 30, 2010

AmBA Opposes IASB's Proposed Expected Cash-Flows Model
AmBA supports the International Accounting Standards Board's efforts to develop an impairment model that provides earlier loss-recognition, but it does not support the board's proposed expected cash-flows model for both operational and conceptual reasons, the association said yesterday in a comment letter.

"In short, the model requires extremely detailed and complex operational processes, produces confusing information for financial statement users, and does not reflect how banks manage credit. Thus, it is not operational in any cost-effective manner," AmBA said. "We also note that the proposed model will do nothing to reduce procyclicality and could, over time, prove to increase procyclicality."

AmBA explained that in the United States, the AICPA Statement of Position 03-3 -- SOP 03-3 -- requires an expected cash-flow approach to account for loans and debt securities that are purchased with evidence of credit impairment, and that is similar to IASB's proposed model. "The experience with SOP 03-3 indicates that the resulting information will provide little, if any, incremental improvement for financial statement users, while requiring substantially large upfront and ongoing costs to administer these systems," the association said.

AmBA noted that its comments on IASB's proposal, "Financial Instruments: Amortized Cost and Impairment," are intended to help the board as it works with the Financial Accounting Standards Board on the convergence of an impairment model that preparers and auditors can apply to provide consistent and comparable user information.

The association, which also recommended principles on which the IASB should base an impairment framework, urged the board to consider extending its comment period to coincide with the Sept. 30 comment deadline on the FASB’s proposed accounting standards update, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.” "An extension ... would permit companies to perform a comprehensive review of the FASB’s recommendations and ... provide comments to the IASB on both models based on additional insight gained during that review," AmBA said. Read the letter. For more information, contact AmBA 's Mike Gullette.

June 25, 2010

AmBA Asks Geithner, Bernanke to Consider Accounting Proposals’ Effect at G-20 Summit
AmBA yesterday asked Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke to consider the impact of current accounting proposals during this weekend’s G-20 summit in Toronto. “Some of the pending proposals will increase the differences between domestic and international accounting standards rather than move toward international convergence, will likely increase procyclicality, and will not improve transparency -- principles that the G20 has requested standard-setters to consider,” AmBA said in a letter. The association added that the sheer volume of pending changes makes it unlikely that sufficient consideration can be given to those issues.

AmBA generally agrees with the accounting recommendations in the G20 paper, “Declaration on Strengthening the Financial System,” but has serious concerns about the direction accounting standard-setters are taking, and believes the results of their deliberations will not achieve -- and in the U.S., directly contradict -- what the G20 had hoped to achieve, the association said.

For example, the Financial Accounting Standards Board recently issued proposed rules -- dramatically different from the International Accounting Standards Board’s final rules -- that would increase the use of mark-to-market accounting, which experts believe is procyclical, by requiring mark to market for all financial instruments, AmBA said. FASB and the IASB also are proposing to change the income-statement format in a manner that will imply an increased importance on mark to market, which AmBA believes will be misleading to many financial-statement readers.

AmBA recommended that the G20 ask the IASB and FASB to provide a summary of how their proposals are expected to address the G20 recommendations before the stand-setters finalize their rules. The G20 also should ask the IASB and FASB to provide an analysis of their outstanding and anticipated proposals, including a timeline for release, comment periods, implementation dates, and an assessment of industry participants’ ability to respond and implement their proposals, AmBA said. Read the letter. For more information, contact AmBA ’s Donna Fisher. 

June 17, 2010

Calling All Investors: AmBA Website to Help Investors Write Mark-to-Market Letters
AmBA yesterday opened a new website to help bank investors write comment letters to the Financial Accounting Standards Board on its recently issued proposal to mark all financial instruments to market -- including loans. The proposal took many bank investors by surprise, and because FASB is focused primarily on the informational needs of investors -- some reportedly told the board they want mark to market -- it is important that they understand the proposal and write to FASB during the current comment period.

AmBA is encouraging banks of all sizes to provide the new website’s address to their investors, and to ask them to write. Bankers should emphasize to investors that they should compose their own letters, because FASB historically has not responded well to “form” letters. AmBA staffers are willing to help with the letters, and their contact information is provided on the website. The comment deadline is Sept. 30, and letters may be submitted via e-mail. Go the AmBA’s investors’ page.

June 3, 2010

FASB Proposes Mark to Market Accounting
The Financial Accounting Standards Board this afternoon released its exposure draft, “Accounting for Financial Instruments,” which promises to be the biggest change ever to bank accounting.

The exposure draft proposes three main changes: (1) all financial assets and liabilities -- including loans, loan commitments, deposits, etc. -- will be recorded at “fair value” on the balance sheet; (2) loan loss reserves will be measured on a forward-looking “expected loss” -- versus the existing “incurred loss” -- basis; and (3) requirements for hedge accounting will be streamlined.

Certain mark-to-market changes will be reported in earnings, while others will be reported in “other comprehensive income.” (However, see the “FASB Proposes New Income Statement” story below.)

FASB did not specify an effective date, other than to say it will be determined in the future and that nonpublicly held banks with assets under $1 billion will have their effective date delayed for four years. The comment deadline on the exposure draft is Sept. 30.

AmBA President and CEO Ed Yingling said that FASB’s mark-to-market accounting proposal presents significant problems, not only for banks, but also the general economy. “If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made,” Yingling said.

“The mark-to-market principles in the proposal also conflict with the recommendations of the G-20 and the Basel Committee, and the proposal is also dramatically different from the new International Accounting Standards Board rules, which are based on an entity’s business model. This puts into peril the potential for convergence of international accounting principles,” he explained.

Yingling added that when mark-to-market is misapplied, it increases pro-cyclicality in the financial system -- an important concern and focus of world leaders. “Given the role that mark-to-market has played in exacerbating the current economic crisis, it is hard to understand the rationale for expanding it without regard to the business model,” he said.

Read FASB's exposure draft.

AmBA will hold a free telephone briefing -- for AmBA bank and state association members only -- on the key aspects of the FASB proposal at 2 p.m. EDT on Tuesday, June 1. Sign up for the briefing here.

AmBA also has set up a regularly updated online page where bankers can obtain resources to help them understand and respond to the proposal. It is very important that bank investors provide input to the FASB, and AmBA can help. For more information, go to the online page or contact AmBA 's Mike Gullette.

1.       All financial assets and liabilities (including loans, unfunded loan commitments, and deposits) will be recorded at fair value on the balance sheet,

2.       Loan loss reserves will be measured on a forward-looking “expected loss” (vs. “incurred loss”) basis, and

3.       Requirements for hedge accounting are being streamlined.  While there is a four year deferral of the mark-to-market requirements for non-publicly held banks with assets under $1 billion, most of these banks will still be required to significantly increase their processes to estimate the fair values of loans that are disclosed in the footnotes to the financial statements.  Many banks present their FASB 107 fair value disclosures for loans at an “entrance price”, without adjusting for liquidity discounts inherent in the loan market.In emphasizing the mark-to-market of loans on the balance sheet (fair value changes will run through other comprehensive income – see changes to reporting other comprehensive income below), FASB seems to be moving against not only the actions of the International Accounting Standards Board (IASB, who recently finalized their standard that does not automatically mark all loans and securities to market), but also bank analysts and other investors world-wide.  In fact, banking analysts we’ve spoken to are almost unanimously against mark-to-market accounting.  So, it is very interesting to FASB move in this direction.

Impairment Proposals Offer Challenges, Compromise May be in the Works