Download - Fri 130-3-gaap update
Mary Anne Pipkin, CPA (BKD, LLP)Fred J. Peterson, CPA (Moss Adams LLP)Ron Copher, EVP/CFO (Glacier Bancorp)
November 7, 2014
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Thematerialappearinginthispresentationisforinformationalpurposesonlyandshouldnotbeconstruedasadviceofanykind,including,withoutlimitation,legal,accounting,orinvestmentadvice.Thisinformationisnotintendedtocreate,andreceiptdoesnotconstitute,alegalrelationship,including,butnotlimitedto,anaccountant‐clientrelationship.Althoughthisinformationmayhavebeenpreparedbyprofessionals,itshouldnotbeusedasasubstituteforprofessionalservices.Iflegal,accounting,investment,orotherprofessionaladviceisrequired,theservicesofaprofessionalshouldbesought.
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Fred Peterson has over 15 years of experience in public accounting and is a business assurance partner specializing in audits and reviews of both privately held and publicly registered institutions, including being involved with one of the firm’s largest public companies. Fred also performs effectiveness reviews of governance committees, performs FDICIA attestations and consulting engagements, and prepares peer analysis reports for his clients in industries where available benchmarking data exists. Fred also has significant experience incorporating data analysis software procedures into his audits and consulting engagements and identification of additional value-added services, including recommendations for enhancing internal controls and improving efficiencies that provide realizable benefits to his clients.
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Mary Anne is a member of BKD National Financial Services Group. She has over 25 years experience providing accounting, audit, tax and management consulting services for financial institutions. As the primary client service contact, she oversees all tax and regulatory filing services performed for financial services in the firm’s Southern Missouri practice unit. In addition, she oversees many of the financial statement audits, internal audits, and other attestation engagements for the Springfield office, including Sarbanes-Oxley and FDICIA internal control engagements. BKD frequently uses her knowledge and experience internally to develop and present continuing education for staff members working with the financial institutions industry.
ASU 2014-09: Revenue Recognition
A Single Conceptual Framework
Objectives of the Revenue Standard
Remove inconsistencies and weaknesses in existing standards to improve comparability between industries
Provide more useful information through improved disclosure requirements
Provide a more robust framework for addressing revenue issues Simplify the preparation of financial statements by reducing the
number of standards to be applied down to one revenue framework
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Scope of the Revenue Standard
Applies when there is a customer, an entity, and a contract (contract does not have to be reduced to writing)
Does not apply to:• Lease contracts• Financial instruments (ie. loans receivable, debt and equity securities,
derivatives, etc.)• Insurance contracts issued by insurance entities (ASC 944)• Financial guarantees (other than product or service warranties)• Non-monetary exchanges between entities in the same line of business to
facilitate sales to customers NOTE: Some contracts may be partially in scope of this standard,
and partially in scope of another ASC Topic
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The Five-Step Model
1) Identify the contract(s) with the customer2) Identify the performance obligations in the contract3) Determine the transaction price4) Allocate the transaction price to the performance obligations in the contract5) Recognize revenue when (or as) the entity satisfies a performance obligation
The core principle is:An entity recognizes 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 in exchange for those goods or services
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Contract with a Customer
Can be written, oral, or implied Must meet all of the following:
• Commercial substance• Parties have approved the contract and are committed to their
obligations• Entity can identify each party’s rights regarding goods or services• Entity can identify the payment terms for the goods or services• Probable that the entity will collect the amount of consideration to
which it will be entitled
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Performance Obligations
Separate performance obligations must be:• Capable of being distinct, AND• Distinct within the context of the contract
If both elements do not exist, then there is a single performance obligation
Exception: A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer are a single performance obligation.
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Determining the Transaction Price
The amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer (excluding amounts collected on behalf of third parties)
Includes:• Variable consideration• Financing components• Noncash consideration• Consideration payable to a customer
NOTE: Collectibility is not part of this step. It is embedded in step 1 (contract identification).
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Allocate the Transaction Price and Recognize Revenue Transaction price is allocated to the identified performance
obligations Revenue is recognized when, or as, the separate performance
obligations are met• Recognize over time if one of the following exists:
• Customer simultaneously receives and consumes the benefits as the entity performs the obligation
• Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced
• Entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date
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Point-in-time vs. Over Time – Banking Examples
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Revenue Recognition Standard - Adoption
Public Business Entities: Fiscal years and interim periods within those years beginning after 12/15/2016 (No early adoption)
All other entities: • Fiscal years beginning after 12/15/2017• Interim periods within fiscal years beginning after 12/15/2018• Can adopt early, at same time as Public Business Entities
Transition Options:• Full Retrospective, OR• Cumulative Effect Adjustment
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Revenue Recognition – Tax Considerations
Changes in book/tax differences Possible change in tax accounting methods Revenue-based apportionment factors used for state and
local calculations Changes to amount and timing of revenue recognition
may impact transfer pricing• Need to reconsider transfer pricing strategy and documentation
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ASU 2014-01, Investments –Equity Method & Joint Ventures (Topic 323)Accounting for Investments in Qualified Affordable Housing Projects
Qualified Affordable Housing Projects
Issued January 2014 Effective dates
• Public – Annual periods & interim reporting periods within those periods beginning after December 15, 2014
• Other entities – Annual periods beginning after December 15, 2014 & interim periods within annual periods beginning after December 15, 2015
Applied retrospectively to all periods presented Early adoption is permitted Does not apply to other tax credit investments
• Historic Tax Credits• New Market Tax Credits
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Current U.S. GAAP
Elect to account for investment using the effective yield method if all conditions are met• Availability of tax credits allocated to investor is guaranteed by a
creditworthy entity through a letter of credit, tax indemnity agreement or similar arrangement
• Investor’s projected yield based solely on cash flows from the guaranteed tax credits is positive
• Investor is a limited partner for both legal and tax purposes and liability is limited to capital investment
If not using effective yield method, either the equity method or the cost method is required• Equity method or cost method recognizes loss above the line and tax
benefit below the line
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Main Difference from Previous GAAP
To apply new standard, all of the following conditions must be met• Probable the tax credits will be available• Lack of significant influence• Substantially all benefits from tax credits & other tax benefits• Positive projected yield based solely on tax benefits• Limited liability investor
Intent is to allow for a net presentation of the investment and tax benefits• Amortization of cost of investment and tax benefits all recognized as a
component of income tax expense (benefit)
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Proportional Amortization
Initial cost amortized in proportion to the tax credits & other tax benefits allocated to the investor• Initial investment less expected residual multiplied by percentage of actual
credits & benefits divided by total expected credits & benefits
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Proportional Amortization MethodYear Net Investment
(1)Amortization of Investment
(2)
Tax Credits(3)
Net Losses/TaxDepreciation
(4)
Other Tax Benefits(5)
Tax Credits and Other Tax Benefits
(6)
Tax Credits and Other Tax Benefits, Net of Amortization
(7)
1 90,909 9,091 8,000 7,273 2,909 10,909 1,818
2 81,818 9,091 8,000 7,273 2,909 10,909 1,818
3 72,727 9,091 8,000 7,273 2,909 10,909 1,818
4 63,636 9,091 8,000 7,273 2,909 10,909 1,818
5 54,545 9,091 8,000 7,273 2,909 10,909 1,818
6 45,454 9,091 8,000 7,273 2,909 10,909 1,818
7 36,363 9,091 8,000 7,273 2,909 10,909 1,818
8 27,272 9,091 8,000 7,273 2,909 10,909 1,818
9 18,181 9,091 8,000 7,273 2,909 10,909 1,818
10 9,090 9,091 8,000 7,273 2,909 10,909 1,818
11 6,666 2,424 7,273 2,909 2,909 485
12 4,242 2,424 7,273 2,909 2,909 485
13 1,818 2,424 7,273 2,909 2,909 485
14 1,818 5,451 2,183 2,183 365
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Total 100,000 80,000 100,000 40,000 120,000 20,000
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Proportional Amortization Method
(1) End of year investment for a 5% limited liability interest in the project net of amortization in column (2)
(2) Initial investment of $100,000 x (total tax benefits received during the year in column (6)/total anticipated tax benefits over the life of the investment of $120,000)
(3) 4 % tax credit on $200,000 tax basis of underlying assets (4) Depreciation (on $200,000 tax basis of underlying assets) using
the straight-line method over 27.5 years up to the amount of the initial investment of $100,000
(5) Column (4) x 40% tax rate (6) Column (3) + Column (5) (7) Column (6) – Column (2)
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Financial Instruments -Impairment
Current Expected Credit Loss Model (CECL)
Background and Objectives
Following financial crisis of 2007 & 2008, there was a perception that existing standards delayed recognition of credit losses• Incurred loss model
Wanted to reduce complexity by having a single impairment model• Replaces multiple current impairment models
• Other-than-temporary impairment (partially)• Allowance for loan losses• ASC 310-30 (SOP 03-3)• ASC 325-40 (EITF 99-20)
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Background and Objectives
FASB and IASB jointly proposed credit impairment model in 2011 Due to strong feedback, FASB developed an alternative model
• CECL December 2012 – FASB issued proposed ASU 2012-260 Currently redeliberating Potential issuance in first half of 2015
• Effective date unknown• Not likely to be before 2017-2018 (public) or 2018-2019 (non-public)• No early adoption permitted
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Scope
Included – financial assets measured at amortized cost• Loans held for investment• Held to maturity securities• Trade receivables • Lease receivables• Loan commitments• Reinsurance receivables
Excluded • Available for sale securities (as of 8/13/2014 meeting)
• Apply modified impairment guidance in Topic 320• Assets accounted for at fair value through net income
• Loans held for sale• Trading securities
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Measurement
Eliminates the “probable” recognition threshold Entity recognizes credit impairment allowance for its current estimate
of contractual cash flows not expected to be collected on loans held at the reporting date
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Measurement
Broadens the information an entity is required to consider in developing its credit loss estimate• Current GAAP – entity generally considers past events & current
conditions• New standard would require estimate based on relevant information about
past events, current conditions and reasonable and supportable forecasts that affect the expected collectability of the remaining contractual cash flows
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Measurement
Under the CECL model, credit deterioration reflected in the income statement will include changes in the estimate of expected credit losses resulting from any of the following:• Changes in the credit risk of assets held by the entity• Changes in the historical loss experience for assets like those held at the
reporting date• Changes in conditions since the previous reporting date• Changes in reasonable and supportable forecasts about the future
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Measurement
At each reporting date, recognize credit impairment allowance for current estimate of contractual cash flows not expected to be collected on assets held at the reporting date• Highly judgmental• Careful consideration to gathering and selecting the most appropriate
historical data and market indicators• Externally sourced data would need to be adjusted to reflect a specific
entity’s portfolio characteristics
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Loss Probabilities
Estimate must incorporate a range of at least two possible outcomes• Both the possibility that a credit loss results and that no credit loss results• Prohibited from estimating expected credit losses based solely on the most
likely outcome
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Time Value of Money
Must be reflected in the estimate of expected credit losses either explicitly or implicitly• Discounted cash flow model is an example of an explicit method• Loss-rate method, roll-rate method and probability-of-default methods are
implicit models
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Write-Offs
Proposed ASU carries forward the existing requirements for write-offs• When there is no reasonable expectation of future recovery
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Implications
Proposed ASU likely increase the credit loss allowance• Entities will need to modify or significantly enhance existing financial and
risk systems to include larger asset population and additional inputs• Forward looking economic factors• Probabilities of default • Exposures to default for additional asset classes
Cumulative-effect approach• Record a cumulative effect adjustment as of the beginning of the first
reporting period the guidance is effective
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Purchased Loans
Accounting for purchased credit-impaired loans would change• All loans – whether purchased or originated – would be treated similarly
CECL model requires an ALLL to be recorded at acquisition, representing the assessment of expected credit losses• Current guidance requires ALLL for credit deterioration subsequent to the
purchase date• Portion of the original purchase discount attributed to expected credit
losses would not be recognized in interest income Non-credit discount/premium amortized using the interest method
loan by loan• No more pools
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Loan Modifications
CECL model would apply to all modified assets such as TDR• Does not change existing accounting for derecognition or what constitutes
a TDR Expected credit losses recognized on expected shortfall in post-
modification contractual cash flows discounted using the new post-modification effective interest rate
Cost basis of TDR adjusted so the effective interest rate post-modification is the same as the original effective interest rate, given the new series of contractual cash flows
Basis adjustment would be calculated as the amortized cost basis before modification less the PV of the modified contractual cash flows (discounted at the original effective interest rate)
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Loan Modifications
Redeliberations• Board decided that TDR classification remains relevant under the CECL
model• Revise the CECL model to require that, in certain TDRs, an entity may be
required to increase the cost basis of the restructured financial asset through a corresponding increase in the allowance for expected credit losses
• Entity may consider prepayment expectations and prospectively reflect an adjusted yield if prepayment speeds are different than expected
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Collateral-based Practical Expedients
At the August 2014 meeting, the Board decided• For a collateral-dependent financial asset, the allowance for expected
credit losses would be measured as the difference between the collateral’s fair value (adjusted for selling costs, when applicable) and the amortized cost basis of the asset
• For a financial asset in which borrower must continually adjust the amount of collateral securing the financial asset, the allowance for expected credit losses would be limited to the difference between the collateral’s fair value (adjusted for selling costs) and the amortized cost basis of the asset
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Other Recent Decisions
For periods beyond which the entity is able to make or obtain reasonable and supportable forecasts• Allowed to revert to historical credit loss experience over
• Financial asset’s estimated life on a straight-line basis or• A period and in a pattern that reflects the entity’s assumptions about expected
credit losses over that period
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Other Recent Decisions
Loans Subsequently Identified for Sale• Upon transfer of loans not previously classified as HFS, cost basis
(excluding the allowance for expected credit losses) is the loan’s cost basis• Recognize a valuation allowance equal to the amount amortized cost basis
exceeds fair value Debt Securities Subsequently Identified for Sale
• Entity should adjust its impairment allowance for the debt security to be equal to the difference between FV and amortized cost basis
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Other Recent Decisions
Certain Beneficial Interests in Securitized Financial Assets• Measure and recognize an allowance for expected credit losses on
purchased and retained beneficial interests for which there is a significant difference between contractual and expected cash flows
• Consistent with recognition and measurement of the allowance for purchased credit-impaired assets
• Changes in expected cash flows due to factors other than credit should be accreted into interest income over the life of the asset
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Other Recent Decisions
Impairment of Debt Securities• Available for sale debt securities excluded from the scope of the CECL
model• Impairment guidance in Topic 320 should be modified as follows
• Allowance approach should be used for recognizing impairment losses, which would allow reversals of credit losses
• Requirement to consider length of time that FV has been less than amortized cost should be removed
• Entity should no longer be required to consider recoveries or additional declines in FV after the balance sheet date
• Affirmed that CECL model applies to held for maturity securities
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Nonaccrual Accounting
Current practice of nonaccrual accounting originates from guidance issued by regulatory bodies• Fed, FDIC, OCC
Originally, the proposed ASU added a nonaccrual accounting principle to U.S. GAAP• When it is not probable entity will receive substantially all of the principal or
interest At a meeting in February 2014, the Board decided to delete this
guidance from the final ASU• Will consider adding as pre-agenda research
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Private Company Council
FASB’s Adoption of PCC Proposed Accounting Standards
Private Company Council - Background
GAAP has gotten more complex in the last 10 years FASB Chair, Russ Golden, has outwardly indicated the Board has as
an objective of “reducing complexity and promoting simplification” of GAAP over the next three years
FASB finished 2013 with ASU 2013-12, Definition of a Public Business Entity• Laid the groundwork for them to entertain and adopt new standards during
2014 going forward that were proposed by the Private Company Council
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Private Company Council – New ASUs
ASU 2014-02 – Accounting for Goodwill
ASU 2014-03 – Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
ASU 2014-07 – Applying VIE Guidance to Common Control Leasing Arrangements
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ASU 2014-02 – Accounting for Goodwill
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ASU 2014-02, Goodwill
Main provisions:• Amortize goodwill straight-line basis over 10 years (or less, with support)• Test for goodwill impairment only when a triggering event occurs
• When fair value of an entity (or reporting unit) may be below its carrying amount• Qualitative assessment first, then quantitative
• Impairment loss simply excess of FV over cost Transition:
• For annual periods beginning after December 15, 2014• Interim periods within annual periods beginning after December 15, 2015• Early application is permitted• Applied prospectively to existing goodwill
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ASU 2014-03, Simplified Hedge Accounting
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ASU 2014-03, Simplified Hedge Accounting
Main provisions:• Provides for a simplified hedge accounting approach• Income statement charge for interest will be similar to amount incurred for
fixed-rate debt• Must meet certain criteria• Measure swap at settlement value, which is a present value calculation • Document accounting approach prior to issuance of financials
Transition:• For annual periods beginning after December 15, 2014• Interim periods within annual periods beginning after December 15, 2015• Early adoption is permitted• Modified or full retrospective application
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ASU 2014-07, Common Control Leasing
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Applying VIE Guidance to Common Control Leasing Arrangements
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ASU 2014-07, VIE Accounting for Leasing Entities
Main provisions:• Private companies can elect NOT to apply VIE accounting to certain
entities• Accounting policy election applied to ALL lessor entities under common
control• No VIE disclosures, but certain other disclosures
• Amount and key terms of liabilities of lessor• Qualitative description of risks with lessor• Other related party disclosures
Transition:• For annual periods beginning after December 15, 2014• Interim periods within annual periods beginning after December 15, 2015• Early adoption is permitted• Retrospective application
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Additional PCC Agenda Items
Recognition of intangible assets in a business combination
Stock-based compensation
Partnership accounting
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Leases
Project Update - 2014
Leases Project - 2014
More than 600 comment letters received on the 2013 exposure draft Overarching theme of the feedback was concern over the cost &
complexity of applying the proposal with little benefit to the users of the financial statements• Cost to periodically reassess lease assets and lease liabilities due to
changes in lease term, or rate and index-based variable lease payments Final standard expected in 2015 Likely have an effective date for fiscal years 2017 or 2018
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Leases Project - 2014
FASB decided on a dual approach• Lease classification accordance with principle in existing lease
requirements• Type A leases – capital/finance leases
• Recognize amortization of right-of-use separately from interest on lease liability• Type B leases – operating leases
• Recognize single total lease expense
Lease term• Lessee should reassess lease term only upon occurrence of a significant
event or significant change in circumstances that are within their control• Lessor should not reassess lease term
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Leases Project - 2014
Nonpublic business discount rate• Retain the accounting policy election to use the risk-free rate
Related party leases• Retain related party leases guidance as proposed• Accounted for on the basis of legally enforceable terms & conditions
Sale/leaseback• Follow recently issued revenue recognition guidance
Leveraged leases• Reaffirmed that leveraged lease accounting should be eliminated• Existing leveraged leases should be grandfathered
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Leases Project - 2014
FASB decisions also reached on a variety of items including• Lease modifications• Combining certain contracts• In-substance fixed lease payments• Separating lease and nonlease components• Initial direct costs• Accounting for short-term leases• Index and rate based variable lease payments• Small ticket leases• Lessee balance sheet presentation• Subleases• Cash flow presentation• Lessor disclosures
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ASC 860: Transfers and Servicing
Refreshers and Reminders
Transfers and Servicing (ASC 860)
New GAAP related to analyzing and accounting for repurchase agreements• ASU 2014-11 requires repurchase-to-maturity agreements to
be accounted for as secured borrowings instead of as sales Evaluate each transfer separately Evaluate all related documents contemporaneously
• Subordination agreements• Servicing agreements• Collateral assignment agreements• Repurchase agreements
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Business Combinations
Refreshers and Reminders
Business Combinations – Reminders and Refreshers
If a bargain purchase gain is computed, GAAP requires revisiting the assumptions. Careful consideration of purchased credit impaired loans
is still required.• Evaluate the benefits and costs associated with evaluating
loans in pools versus at the loan level.• Ensure systems are in place to adequately track, manage,
and account for PCI loans (tax basis, GAAP basis, borrower’s basis)
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COSO’s 2013 Internal Control Framework
Enhanced Guidance for Internal Control over External Financial Reporting
2013 COSO Framework
Released in May 2013 – updated version of Internal Control –Integrated Framework
Intended to supersede the previously issued 1992 Framework COSO stated that it considers the 1992 Framework superseded
effective December 15, 2014 SEC will continue to allow issuers to use the 1992 Framework for a
period of time beyond COSO’s transition date• Both are “acceptable” frameworks• Should implement sooner rather than later
The longer issuers continue to use the 1992 Framework, the more likely it is that comments from the SEC will arise
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2013 COSO Framework
Reflects the consideration of many changes that have occurred in the business operating environment over the past decades• Expectations of governance oversight• Globalization of markets and outsourced operations• Increased complexities in business structures, laws, rules, regulations and
standards• Use of, and reliance on, technology• Expectations for preventing and detecting fraud
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Original COSO Cube
1992
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What is the same?
Continues the core definition of internal control and the defined five components of internal control• Control environment• Risk assessment• Control activities• Information and communication• Monitoring activities
Entities are still required to consider the five components when assessing the effectiveness of internal control
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What is different?
Significant change is the formalization of 17 guiding principles associated with the five components• For a component to be deemed present and functioning, the related
principles associated with that component must also be present and functioning
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What is different?
More detailed points of focus designed to help companies determine whether relevant principles are present & functioning• Example:
• Principle 1: Organization demonstrates commitment to integrity and ethical values.
• Supporting points of focus:• Sets the tone at the top• Establishes standards of conduct• Evaluates adherence to standards of conduct• Addresses deviations in a timely manner
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What is different?
Expands operations objectives• Effectiveness and efficiency of the entity’s operations, including operational
and financial performance goals, and safeguarding assets against loss
Broadens reporting objectives • Internal and external financial and non-financial reporting and may
encompass reliability, timeliness, transparency, or other terms as set forth by regulators, recognized standard setters or the entities policies
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Revised COSO Cube
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2013 COSO Framework
During the transition to the new framework, entities must assess• Whether each of the 17 principles are relevant • Then whether they are present and functioning
Transition process• Mapping existing controls to relevant principles• Determine where any gaps might exist
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Control Environment - Principles
Organization’s commitment to integrity & ethical values
Board demonstrates independence from management & exercises oversight of development & performance of IC
Management establishes structures, reporting lines & authorities & responsibilities in pursuit of objectives
Organization demonstrates a commitment to attract, develop & retain competent individuals in alignment with objectives
Organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives
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Risk Assessment - Principles
Organization specifies objectives with sufficient clarity to enable the identification & assessment of risks relating to objectives
Organization identifies risks to achievement of its objectives across the entity & analyzes risks as a basis for determining how the risks should be managed
Organization considers the potential for fraud in assessing risks to the achievement of objectives
Organization identifies & assesses changes that could significantly impact the system of internal control
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Control Activities - Principles
Organization selects & develops control activities that contribute to mitigation of risks to achievement of objectives to acceptable levels
Organization selects & develops general control activities over technology to support achievement of objectives
Organization deploys control activities through policies that establish what is expected & procedures that put policies into action
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Information & Communication - Principles
Organization obtains or generates & uses relevant, quality information to support functioning of other components
Organization internally communicates information, including objectives & responsibilities for internal control, necessary to support functioning of other components
Organization communicates with external parties regarding matters affecting functioning of other components
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Monitoring Activities - Principles
Organization selects, develops & performs ongoing &/or separate evaluations to ascertain whether components of internal control are present & functioning
Organization evaluates & communicates internal control deficiencies in a timely manner to parties responsible for taking corrective action, including senior management & board of directors, as appropriate
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2013 COSO Framework
Related publications in addition to the Framework itself• Executive Summary• Internal Control over External Financial Reporting: A Compendium of
Approaches and Examples• Illustrative Tools for Assessing Effectiveness of a System of Internal
Control
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Speaker Contact Information
Mary Anne Pipkin, CPATax Partner | BKD, LLP(417) [email protected]
Fred J. Peterson, CPAAudit Partner | Moss Adams LLP(503) [email protected]
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Ron CopherEVP/CFO | Glacier Bancorp(406) [email protected]