By Josh SteinLast month, the American Institute of Certified Public Accountants held its annual conference on banks and savings institutions, which brought together the key players in the bank accounting space, including the banking agencies, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, as well as large and small banks and audit firms. It is a key forum for public statements from these institutions, and this year’s conference included some items to note:
The allowance and PCAOB inspections
“One of the most frequent areas of audit defense deficiencies relate to auditing the allowance the loan loss and other accounting estimates,” said Glenn Tempro, who heads the financial institution practice for PCAOB’s division of Registration and Inspections. While Tempro listed many specific areas for which audit deficiencies were identified, there remain a few that may be more challenging for banks. First, the failure to identify the assumptions used to determine the collateral fair value for loans that were individually evaluated for impairment. This may be additionally challenging in the current COVID-19 environment and the additional challenges it causes to getting appraisals. Second, while auditors reviewed credit meeting minutes to determine they occurred, the PCAOB identified the failure by the auditor to determine if the meeting accomplished the control function. This may mean more engagement and additional critiques from auditors related to credit meetings. After the PCAOB’s presentation, I called to clarify the comments and was told that the intention was to communicate there are still issues related to the allowance but it is not necessarily getting worse, the issues are not specific to CECL, nor are they specific to the new PCAOB auditing estimates standard that is in effect. That being said, it is an area ABA will continue to monitor.
Part 363 thresholds
The interim final rule to provide temporary relief from Part 363 Audit and Reporting Requirements, and whether the IFR might be extended beyond this year is top of mind for impacted banks. John Reiger, chief accountant at the FDIC, didn’t mince words when he said regarding potential extension of the relief, “I am continually bringing it up [to FDIC leadership]and saying, ‘I think these folks want to know about it.’ And I’m right now told that it’s on hold. But they’re aware of it, and I’m probably irritating them because I [constantly bring it up].” Therefore, the short answer is ABA will continue to advocate for relief and stay tuned.
Throughout this year, the Federal Reserve Board has emphasized that banks need to work on their transition from LIBOR and, specifically, that they do not want to see new LIBOR products being written after Dec. 31. A challenge for many bankers has been what rate to transition to with several viable but imperfect replacements. Now the Fed has weighed in and Lara Lylozian, chief accountant at the Federal Reserve, provided clarification on expectations should a bank choose to transition from LIBOR to a rate other than SOFR. “[The] agencies have not endorsed a specific rate specific rate for loans, [however]if you’re moving to a rate other than SOFR, it does mean a little extra work for you to make sure you are demonstratively making a responsible decision,” she said. “I think there is a higher expectation and that whatever rate is chosen … market participants should ensure that they understand how their chosen reference rate is constructed and that they’re aware of any fragilities associated with that rate and the markets that underlie it.” These comments suggest that while a rate other than SOFR may be the right choice for certain products, banks will want to have all their ducks in a row when making that decision.
The Federal Reserve’s Scalable CECL Allowance for Losses Estimator, or SCALE model, which was introduced in July, was a topic often discussed during the conference. While reiterating that SCALE would not be allowed for banks with under $1 billion in assets, Lylozian shed no new light on practice expectations beyond what was discussed during the “Ask The Fed” webinar that unveiled the model. Surprisingly, Securities and Exchange Commission staff indicated that, while they haven’t yet examined SCALE in detail, it may be possible for an SEC registrant to use it if performed in a well-controlled manner that was consistent with GAAP. Read more about SCALE and ABA’s analysis.
Stephanie Sullivan from the SEC’s Division of Corporation Finance said a “good example of how the allowance estimate has changed over the relevant period is a row for the allowance with separate quantification of portfolio changes, which represents things like the impact of increases and decreases in loan balances due to new origination and purchases [payoffs and charge off activity]. Then, separately, the quantification of economic or quantitative factors, which represent things like the determination of economic forecast applied to the loan portfolio.” Essentially this entails a roll forward of the allowance and has been useful to investors and users of the financial statements.