To say regulations around accounting standards are changing is an understatement, and with that in mind, Tasha Kostick, an audit partner for RSM US LLP based in San Francisco, kicked off a breakout session at the recent CUNA CFO Council conference with an overview of accounting rules relating to recognition of financial instruments.
These rules were issued by the Financial Accounting Standards Board in January 2016. Although the effective dates are for fiscal years beginning after Dec. 15, 2018, and Dec. 31, 2019 for calendar year ends, some public companies began adopting for Q1 2018. Kostick said this will allow CUs to see some examples.
Among the impacts will be how CUs account for equity securities, changes to liabilities accounted for under the fair value option, and presentation and disclosure requirements.
Among the new standards CUs need to look for:
- Recognition of changes attributable to credit risk of financial liabilities accounted for under the fair value option.
- The elimination of fair value disclosures for financial instruments not recognized at fair value.
- All existing guidance in Accounting Standards Codification 320-10 (pertaining to equity securities) and ASC 325-20 (pertaining to cost method investments) was deleted.
- ASC 321, Investments – Equity Securities was created.
Kostick said ASC 321 requires equity securities to be carried at fair value through earnings. The election can be made to measure equity securities without readily determinable fair value at cost, minus impairment, and plus or minus observable price changes – known as the “measurement alternative.”
Fair value through “other comprehensive income” is no longer an option, she said.
ASC 321 applies to investments in equity securities and other ownership interests, including investments in partnerships, joint ventures and LLCs. Kostick said ownership interests include common, certain preferred and certain options and/or warrants to acquire an ownership interest. Mutual funds are generally equity securities, she added.
“The measurement alternative is used when you cannot determine the value of a security, which happens frequently with credit unions,” she explained. “The security cannot have a readily determinable fair value, or be eligible for the net asset value practical expedient. Consider relevant transactions that occurred on or before the balance sheet date that are known or can reasonably be known.”
An impairment assessment of securities will be required. Kostick said new disclosures are required for liabilities for which the fair value option was elected and securities accounted for under measurement alternative.
ASU 2018-03 relates to technical corrections to financial instruments. For securities accounted for under the measurement alternative, Kostick said adjustments made to an observed transaction for a similar security should aim to reflect the fair value of the actual security as of the date of the observable transaction for similar security, rather than as of the reporting period end.
Yet another update, known as ASU 2017-08, relates to premium amortization on purchased callable debt securities. This shortens the amortization period for certain callable debt securities held at a premium, and requires the premium to be amortized to the earliest call date.
The revenue recognition standard update will have a “far-reaching impact in some industries, but not much on financial institutions so far,” Kostick said. It will affect service charges on deposit accounts, asset management fees, broker-dealer commissions, foreclosed real estate sales and transfers of in-substance, non-financial assets.
CECL is coming!
Mike Lundberg, partner with RSM and its national director of financial institution services, presented ASU 2016-13, measurement of credit losses on financial instruments – also known by its acronym CECL, for current expected credit loss. Some filers will adopt the new standard in Q1 2020, and it will be required for fiscal periods beginning after Dec. 15, 2020.
“It is broader than the recorded loan portfolio, so it is important to not let it sneak up on you,” Lundberg warned. “We are officially past the halfway point between issued and implemented.”
Just how many credit unions are prepared for CECL? In response to a request for a show of hands, only one person in the room said his credit union was ready to go.
“Early adoption is permitted, and some companies are running a parallel track,” Lundberg noted. “Some people are hoping CECL will be changed before it gets implemented, but that is not realistic. There are only narrow, nuanced changes being discussed.”
“Others are hoping to retire before CECL is implemented,” Lundberg joked.
Credit unions still have time to fully implement the new standards, he noted, and they will be able to see how large public banks adopt CECL. “When you see what their models look like, this will be a reality check,” he said.
Lundberg suggested credit unions test CECL on smaller portfolios to see how it plays out. “Start talking to the board to establish their role in the adoption. Regulatory net worth capital will be impacted December 31, 2021.”
Treatment of leases will be affected by ASU 2016-02, Lundberg continued. He said fundamentally, there will be a lot of similarities, with some changes to execution.
“There will be a change to balance sheet presentation and the impact on capital,” he said. “Remember, it does not have to be called a lease to be a lease. On the balance sheet, you will have to calculate lease liability.”
Some public companies will adopt the new lease rules Q1 2019, and early adoption is permitted. However, unlike CECL, for which credit unions can run dual tracks to test the waters, the new lease rules are “all or nothing,” Lundberg warned.