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Banking and Securities
Accounting and Financial Reporting Update (2015)
The eighth edition of the annual update highlights selected accounting and reporting developments that may be of interest to banking and securities entities. Topics discussed include (1) the issuance of new guidance modifying the FASB’s new standard on the recognition of revenue from contracts with customers; (2) the FASB’s continued work on the accounting for credit impairment, leases, and financial instruments; and (3) the SEC’s continued focus on rulemaking, particularly in connection with its efforts to complete mandated actions under the Dodd-Frank Act.
The economic momentum gathered by the banking and securities sector in 2013 and 2014 was slowed by market fluctuations in 2015. Uncertainties in the Federal Reserve’s timing for raising interest rates contributed to this deceleration and have begun weighing on investor sentiment. Increased profitability has continued as a result of lower loan-loss provisions and a focus on cutting costs throughout all aspects of banking and securities institutions, and expenses associated with complying with new regulations will continue to put pressure on earnings.
Credit markets continue to expand as banks ease underwriting requirements. Residential, commercial, and consumer lending have continued to grow, and allowances for loan-loss provisions have dropped and remain at pre-crisis levels. Institutions with high concentrations of credits in certain industries, specifically the oil and gas industry, may face increased allowances for loan losses due to the significant challenges in these industries. The banking and securities industry continues to be affected by costs and complexities of litigation and global regulatory requirements.
Financial Reporting Developments
In 2014, the FASB and IASB issued new guidance on the recognition of revenue from contracts with customers (ASU 2014-09 and IFRS 15, respectively). The FASB continued to refine this guidance in 2015. In response to requests from stakeholders, as well as continued feedback from primary financial statement users and preparers, the FASB issued ASU 2015-14, which defers implementation of the revenue standard by one year for all entities and permits early adoption on a limited basis. For public entities, the standard is effective for annual reporting periods beginning after December 15, 2017. For nonpublic entities, the standard is effective for annual reporting periods beginning after December 15, 2018.
The FASB is currently drafting its final standard on credit losses, which it expects to issue in the first quarter of 2016. Under this guidance, an entity would recognize as an allowance its estimate of expected credit losses (i.e., all contractual cash flows that the entity does not expect to collect). All debt instruments that are financial assets (other than those measured at fair value through net income), lease receivables, and loan commitments would be within the scope of the model, while available-for-sale (AFS) debt securities would be excluded. AFS debt securities would continue to be assessed for impairment under ASC 320 (subject to potential changes as part of the FASB’s impairment project). In addition, the Board has decided to retain existing requirements related to classification and measurement of financial instruments other than equity investments. Under the FASB’s tentative approach, entities will be required to carry all investments in equity securities (except investments that qualify for the equity method or for which a practicability exception to fair value measurement has been elected) at fair value through net income.
In 2015, the FASB continued to focus on a number of other miscellaneous topics, including (1) drafting a final standard on the accounting for classification and measurement of financial instruments, (2) drafting the final leases standard, and (3) making improvements to existing accounting guidance under its simplification initiative (i.e., the Board’s effort to reduce the cost and complexity of current U.S. GAAP while maintaining and enhancing the usefulness of the related financial statement information).