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2015 BKD FINANCIAL SERVICES SYMPOSIUM 2015 Standards Update

AGENDA

Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASU) Update on FASB proposals open for comment Current Expected Credit Loss (CECL) model update Public Company Accounting Oversight Board (PCAOB) Auditing Standards Update Committee of Sponsoring Organizations of the Treadway Commission (COSO) Matters

2 // experience clarity

PUBLIC BUSINESS ENTITY DEFINITION

As a reminder – what constitutes a Public Business Entity? An entity required by the SEC to file financial statements with the SEC or does file financial statements with the SEC An entity required by the Securities Exchange Act of 1934 to file financial statements with a regulatory agency other than the SEC An entity required to file financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer An entity has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an OTC market An entity has one or more securities that are not subject to contractual restrictions on transfer and is required by law, contract or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis. An entity must meet both of these criteria


PRIVATE COMPANY COUNCIL ALTERNATIVES Intangibles and Other (Topic 350): Accounting for Goodwill – A Consensus of the Private Company Council (ASU 2014-02)

BKD Thoughtware®: Accounting for Goodwill Derivatives and Heding (Topic 815): Accounting for Certain Receive-Variable Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach – A Consensus of the Private Company Council (ASU 2014-03)

BKD Thoughtware®: Simplified Hedge Accounting for Certain Interest Rate Swaps Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements – A Consensus of the Private Company Council (ASU 2014-07)

BKD Thoughtware®: Common Control Leasing Arrangements Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (ASU 2014-12) Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination – A Consensus of the Private Company Council (ASU 2014-18)

BKD Thoughtware®: Simplifying Accounting for Intangible Assets Acquired in a Business Combination


http://www.bkd.com/articles/2014/private-company-reporting-accounting-for-goodwill.htm

http://www.bkd.com/articles/2014/private-company-reporting-simplified-hedge-accounting-for-certain-interest-rate-swaps.htm

http://www.bkd.com/articles/2014/private-company-reporting-common-control-leasing-arrangements.htm

http://www.bkd.com/articles/2015/simplifying-accounting-for-intangible-assets-acquired-in-a-business-combination.htm

http://www.bkd.com/articles/2015/simplifying-accounting-for-intangible-assets-acquired-in-a-business-combination.htm

Issued: January 2014

Summary Permit entities to make an accounting policy election to account for their investments

in qualified affordable housing projects using the proportional amortization method Under this method, an entity amortizes the initial cost of the investment in proportion

to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense

There are five criteria which must be met in order to use this method


INVESTMENTS – EQUITY METHOD AND JOINT VENTURES (TOPIC 323): ACCOUNTING FOR INVESTMENTS IN QUALIFIED AFFORDABLE HOUSING PROJECTS (ASU 2014-01)

INVESTMENTS – EQUITY METHOD AND JOINT VENTURES (TOPIC 323): ACCOUNTING FOR INVESTMENTS IN QUALIFIED AFFORDABLE HOUSING PROJECTS (ASU 2014-01)

Why is this an Improvement?

Will enable more entities to qualify for the proportional amortization method and will help enhance financial statements users’ understanding of such investments

Effective Date and Transition

For public business entities – annual periods and interim reporting periods beginning after December 15, 2014. For all other entities – annual periods beginning after December 15, 2014, and annual reporting periods beginning after December 15, 2015. Early adoption is permitted

BKD Thoughtware®: Qualified Affordable Housing Projects


http://www.bkd.com/articles/2014/accounting-guidance-update-for-investments-in-qualified-affordable-housing-projects.htm

RECEIVABLES – TROUBLED DEBT RESTRUCTURINGS BY CREDITORS (SUBTOPIC 310-40): RECLASSIFICATION OF RESIDENTIAL REAL ESTATE COLLATERALIZED CONSUMER MORTGAGE LOANS UPON FORECLOSURE (ASU 2014-04)


Summary An in-substance repossession or foreclosure occurs, and a creditor is

considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either:

1) The creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or

2) The borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan



How Does This Differ from Current Guidance? To reduce diversity in practice, this clarifies when an in substance repossession

or foreclosure occurs – when a creditor should be considered to have received physical possession

Holding foreclosed real estate property presents different operational and

economic risk to creditors compared with holding an impaired loan; therefore, consistency in the timing of loan derecognition and presentation of foreclosed property is of qualitative significance to users



Effective Date & Transition

For public business entities – annual periods and interim periods within those annual periods, beginning after December 15, 2014. All other entities – annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.

BKD Thoughtware®: Classification of TDRs


http://www.bkd.com/articles/2014/fasb-issues-new-standard-on-classification-of-tdrs.htm

REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606)

Issued: May 2014

Summary Core principle is that an entity should recognize revenue to depict the transfer

of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services

Minimal impact on financial institutions directly, but could impact customers



AICPA Rev Rec Task Force to Address: Bank service charges Bundled arrangements Interchange & merchant revenue Rewards programs Cardholder fee revenue Asset and investment management/trust fees Broker/dealer revenue issues




July 9th – FASB approved deferral of effective date by one year

BKD Thoughtware®: Revenue Recognition


Original Effective Date Revised Effective Date

Public entities

Fiscal years beginning after 12/15/16, including interim periods therein

Fiscal years beginning after 12/15/17, including interim periods therein

Nonpublic entities

Fiscal years beginning after 12/15/17 & interim periods in fiscal years beginning after 12/15/18

Fiscal years beginning after 12/15/18 & interim periods in fiscal years beginning after 12/15/19

http://www.bkd.com/hot-topics/revenue-recognition.htm

TRANSFERS AND SERVICING (TOPIC 860): REPURCHASE-TO-MATURITY TRANSACTIONS, REPURCHASE FINANCINGS AND DISCLOSURES (ASU 2014-11)

Issued: June 2014

Summary Will require two accounting changes: Change accounting for repurchase-to-maturity transactions to secured

borrowing accounting For repurchase financing arrangements, require separate accounting for a

transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement



Required Disclosures For those transactions comprising: 1) Transfer of a financial asset accounted for as a sale, and 2) Agreement with the same transferee entered into in contemplation of the

initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred asset throughout the term of the transaction

Several new disclosures related to these transactions




For public business entities – the first interim or annual period beginning after December 15, 2014. For all other entities – annual periods beginning after December 15, 2014, and interim periods beginning after December 31, 2015.


RECEIVABLES – TROUBLED DEBT RESTRUCTURINGS BY CREDITORS (SUBTOPIC 310-40): CLASSIFICATION OF CERTAIN GOVERNMENT-GUARANTEED MORTGAGE LOANS UPON FORECLOSURE (ASU 2014-14)

Issued: August 2014

Summary Require that a mortgage loan be derecognized and that a separate other receivable be

recognized upon foreclosure if the following conditions are met: The loan has a government guarantee that is not separable from the loan before

foreclosure At the time of foreclosure, the creditor has the intent to convey the real estate property

to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim

At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed


RECEIVABLES – TROUBLED DEBT RESTRUCTURINGS BY CREDITORS (SUBTOPIC 310-40): CLASSIFICATION OF CERTAIN GOVERNMENT-GUARANTEED MORTGAGE LOANS UPON FORECLOSURE (ASU 2014-14)


For public business entities – annual periods, and interim periods within those annual periods, beginning after December 15, 2014. All other entities – annual periods ending after December 15, 2015, and interim period beginning after December 15, 2015.

BKD Thoughtware®: Foreclosed Government-Guaranteed Loans


http://www.bkd.com/articles/2014/fasb-standardizes-presentation-of-foreclosed-government-guaranteed-loans.htm



BUSINESS COMBINATIONS (TOPIC 805): PUSH DOWN ACCOUNTING (ASU 2014-17)

Issued: August 2014

Summary Provide an acquired entity with an option to apply pushdown accounting

in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity

Issued because previous GAAP offered limited guidance for determining

whether and at what threshold pushdown accounting should be established in an acquired entity’s separate financial statements

If pushdown accounting is applied to an individual change-in-control event,

that election is irrevocable


BUSINESS COMBINATIONS (TOPIC 805): PUSH DOWN ACCOUNTING (ASU 2014-17)


November 18, 2014 BKD Thoughtware®: New Pushdown Accounting Guidance


http://www.bkd.com/articles/2014/new-pushdown-accounting-guidance.htm

INCOME STATEMENT – EXTRAORDINARY AND UNUSUAL ITEMS (SUBTOPIC 225-20): SIMPLIFYING INCOME STATEMENT PRESENTATION BY ELIMINATING THE CONCEPT OF EXTRAORDINARY ITEMS (ASU 2015-01)


Summary The guidance allows companies to simplify their accounting by

eliminating need to determine whether to classify an item as an extraordinary item

The ASU requires entities to separately present activities that are

both unusual & infrequent within income from continuing operations on a pretax basis

Separate net-of-tax presentation after income from continuing

operations no longer will be allowed


INCOME STATEMENT – EXTRAORDINARY AND UNUSUAL ITEMS (SUBTOPIC 225-20): SIMPLIFYING INCOME STATEMENT PRESENTATION BY ELIMINATING THE CONCEPT OF EXTRAORDINARY ITEMS (ASU 2015-01)


For calendar year-end entities, guidance is effective for interim & annual periods beginning in 2016. Early adoption is permitted, but adoption must occur at beginning of year. Entities can elect to apply the guidance prospectively or retrospectively.

BKD Thoughtware®: Extraordinary Items Eliminated


http://www.bkd.com/articles/2015/extraordinary-items-eliminated.htm

CONSOLIDATION (TOPIC 810) – AMENDMENTS TO THE CONSOLIDATION ANALYSIS (ASU 2015-02)

Issued: February 2015

Summary Targeted changes to the current consolidation guidance: • Eliminates presumption a general partner should consolidate a limited partnership • Eliminated consolidation model specific to limited partnerships • Ends a deferral granted to investment companies & grants scope exception • Relaxes criteria for determining when fee arrangements do not represent a variable

interest • Reduces use of related-party tie-breaker test


CONSOLIDATION (TOPIC 810) – AMENDMENTS TO THE CONSOLIDATION ANALYSIS (ASU 2015-02)


Effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other entities have an additional year for transition, for fiscal years beginning after December 15, 2016, and for interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period.

BKD Thoughtware®: FASB’s New Consolidation Guidance


http://www.bkd.com/docs/pdf/FASB-New-Consolidation-Guidance.pdf


INTANGIBLES – INTERNAL USE SOFTWARE (SUBTOPIC 350-40) – CUSTOMER’S ACCOUNTING FOR FEES PAID IN A CLOUD COMPUTING ARRANGEMENT (ASU 2015-05)

Issued: April 2015

Summary Cloud computing environment: • Software as a service • Platform as a service • Infrastructure as a service • Other similar hosting arrangements

Issued to provide guidance to customers about whether a cloud computing arrangement includes a software license



Applies only to internal-use software that a customer obtains access to in a hosting arrangement if both of the following are met: Contractual right to take possession of the software at any time during hosting period

without significant penalty Feasible for the customer to either run the software on its own hardware or contract with

another party unrelated to the vendor to host the software




Effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other entities for fiscal years beginning after December 15, 2015, and for interim periods beginning after December 15, 2016.

BKD Thoughtware®: FASB’s New Consolidation Guidance




BUSINESS COMBINATIONS (TOPIC 805): SIMPLIFYING THE ACCOUNTING FOR MEASUREMENT-PERIOD ADJUSTMENTS

Issued: September 2015

Summary Issued as part of the Simplification Initiative and eliminates the requirement to restate

prior period financial statements for measurement period adjustments. Requires the cumulative impact of a measurement period adjustment, including impact

on prior periods, be recognized in the reporting period it was identified. The impact of the prior period adjustment should be presented on the face of the income

statement or disclosed in the notes.


BUSINESS COMBINATIONS (TOPIC 805): SIMPLIFYING THE ACCOUNTING FOR MEASUREMENT-PERIOD ADJUSTMENTS


Effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other entities for fiscal years beginning after December 15, 2016, and for interim periods beginning after December 15, 2017.


UPDATE ON FASB PROPOSALS


ACCOUNTING FOR FINANCIAL INSTRUMENTS - CLASSIFICATION AND MEASUREMENT

Estimated completion in the 4th quarter of 2015 Tentative decisions Entities will follow current US GAAP classification and measurement models for

financial assets except for investments in equity securities which will be at fair value with subsequent changes recognized in net income (with some minimal exceptions)

Permitted to elect fair value option in Topic 825 Deferred tax assets related to AFS debt securities must be evaluated for

valuation allowance with other deferred tax assets Follow current US GAAP for financial liabilities Disclosure changes

Good news – Tentatively decided to scrap the core deposit liability disclosure


FASB EXPOSURE DOCUMENTS OPEN FOR COMMENT

Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), and Derivative and Hedging (Topic 815): Effective Date and Transition Guidance


CURRENT EXPECTED CREDIT LOSS MODEL UPDATE


THE FASB CECL MODEL


Expected credit loss model reflecting more forward-looking information

Basic estimation objective is consistent from period to period – no need to define a “transfer notion” that determines the measurement objective in each period

• Includes changes in the estimate of expected credit losses resulting from, but not limited to: •Changes in credit risk of assets held by entity •Changes in conditions since previous reporting date •Changes in reasonable & supportable forecasts about the future

At each reporting date, an organization recognizes a credit impairment allowance for its current estimate of the expected credit losses on financial assets held at the reporting date

Provides enhanced disclosures compared to current GAAP

Should leverage existing processes Vintage loss history may become more important Small banks don’t need big models Consider now what you need later Consider industry data No early incorporation or soft adoption of CECL concepts Believe that it is likely to increase allowance in the year of adoption


REGULATOR EXPECTATIONS REGULATOR EXPECTATIONS

Impairment method for collateral dependent loans will not change For all other loans evaluate on a collective (pool) basis when similar risk characteristics exist (similar to ASC450)

Determine historical life of the loan loss rates for each pool Vintage loss rates or industry loss rates may be best route

Adjust the historical loss rates for current conditions that are not present in the historical loss rates (similar to current Q factor adjustment) Adjust loss rates for reasonable and supportable future events


LEVERAGING YOUR EXISTING LOSS RATE MODEL

BASEL COMMITTEE ON BANKING SUPERVISION GUIDANCE ON ACCOUNTING FOR EXPECTED CREDIT LOSSES

First formal regulatory guidance on expected credit loss models Currently in consultative stage (exposure draft) Proposal contains 11 principles for sound credit risk practices that interact with ECL accounting models

Eight principles to bank’s application Three principles related to regulators application

Aimed more at internationally active banks (IFRS 9) and those with complex business lending however will effect all institutions Does not aim to drive convergence between IFRS and GAAP Excludes debt securities Comment period ended April 30, 2015



Key takeaways on the 11 principles May need to validate your model at least annually. Would have to be performed by someone independent. May need to perform back-testing to determine reliability of model. May be required to perform scenario analysis to demonstrate how your model will fluctuate with changes in scenarios The consideration of forward-looking information is critical to the process and must not be avoided on the basis of excessive or unnecessary cost You credit risk rating system may need to take into account forward looking information



Despite this guidance being more applicable to internationally active banks and complex lending institutions, the guidance is important as it is the first

regulatory authoritative guidance to be issued and more than likely will be an important factor in the prudential regulators’ guidance on applying CECL


FASB NEXT STEPS ON CECL

A final standard is expected in Q1 2016 with following implementation dates:

SEC filers – fiscal years beginning after December 15, 2018, including interim periods Non-SEC filer public business entities – fiscal years beginning after December 15, 2019, including interim periods All other entities – fiscal years beginning after December 15, 2019, and for interim periods beginning after December 15, 2020

Expected that entity would record a cumulative effect adjustment as of the beginning of first reporting period in which the guidance is effective


OTHER FASB PROJECTS ON THE HORIZON


OTHER PROJECTS

Disclosure Framework – Interim reporting Disclosure Framework – Fair Value Measurements Disclosures about interest income on purchased debt securities and loans Effect of derivative contract novation on existing hedge relationships Classification of certain cash receipts and cash payments on the cash flow statement


PCAOB UPDATE


PCAOB – RELATED PARTIES AMENDMENTS TO CERTAIN PCAOB STANDARDS REGARDING SIGNIFICANT UNUSUAL TRANSACTIONS AND OTHER AMENDMENTS

Issued: June 2014

Summary Requires specific audit procedures for the auditor’s evaluation of a company’s

identification of, accounting for and disclosure of transactions and relationships between a company and its related parties

The auditor is directed to consider the linkage, or “connect the dots”, between a

company’s relationships and transactions with related parties, significant unusual transactions and financial relationships and transactions with its executive officers


PCAOB – RELATED PARTIES AMENDMENTS TO CERTAIN PCAOB STANDARDS REGARDING SIGNIFICANT UNUSUAL TRANSACTIONS AND OTHER AMENDMENTS


For fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within these fiscal years

BKD Thoughtware®: Related-Party Transactions Soon to Receive Increased

Auditor Scrutiny


http://www.bkd.com/articles/2014/related-party-transactions-soon-to-receive-increased-auditor-scrutiny.htm




COSO MATTERS


COSO’S 2013 INTERNAL CONTROL FRAMEWORK

Issued: May 2013

Summary The mandatory principles have been updated to reflect today’s business environment – an environment of increased governance, regulatory and compliance demands and increased use of technology and complex business models Original framework still may be used through December 15, 2014; beyond that date, COSO will consider the original framework obsolete


THANK YOU

FOR MORE INFORMATION // For a complete list of our offices & subsidiaries, visit bkd.com or contact:

Matt Phillips, CPA // Senior Manger [email protected] //972.702.8262

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