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Banking and Securities
Accounting and Financial Reporting Update (2016)
The ninth edition of our annual banking and securities (B&S) update highlights selected accounting and reporting developments that may be of interest to B&S entities. Among other topics, the publication discusses the issuance of new guidance on (1) the measurement of credit losses on financial instruments, (2) classification and measurement of financial instruments, and (3) the accounting for leases. Also discussed are the issuance of refinements to the new guidance on recognition of revenue from contracts with customers and the SEC’s continued focus on rulemaking, particularly regarding its completion of mandated actions under the Dodd-Frank Act.
The year 2016 has seen continued economic improvement, as evidenced by increasing consumer confidence, strong market performance, and the Federal Reserve’s continued focus on raising the federal funds rate. 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; however, expenses associated with complying with new regulations will continue to put downward pressure on earnings.
The banking and securities industry continues to be affected by costs and complexities of litigation as well as increasing domestic and global regulatory requirements. Residential, commercial, and consumer lending have continued to grow, and allowances for loan-loss provisions have dropped and remain at pre-crisis levels. However, institutions with high concentrations of credits in certain industries, especially the oil and gas industry, have faced and may continue to face increased allowances for loan losses because of the significant challenges in these industries — specifically, the significant decrease in oil and gas prices since the fourth quarter of 2015.
Financial Reporting Developments
New Revenue Recognition Standard
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 throughout 2015 and 2016. 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 business entities (as well as not-for-profit entities and conduit bond obligors), 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.
In 2016, the FASB issued a number of ASUs that refine the guidance in the new revenue standard, including ASU 2016-08, which addresses certain principal-versus-agent considerations specific to reporting revenue gross versus net. The transition resource group (TRG) for revenue recognition will continue to discuss activities related to banking and securities institutions’ implementation of the new revenue standard.
New Guidance on Measurement of Credit Losses on Financial Instruments
After several years of deliberations and exposure drafts, the FASB issued ASU 2016-13 on measurement of credit losses on financial instruments. The ASU introduces the current expected credit loss (CECL) model to U.S. GAAP. This CECL model will require entities to record all losses that are expected for the life of the financial instrument. The ASU does not provide specific methods for measuring the expected credit losses; rather, the principles-based guidance allows individual institutions to develop their own calculations to reflect their expected credit losses, and it permits certain practical expedients. In addition, the ASU makes certain improvements to the existing other-than-temporary impairment model in ASC 320 for certain available-for-sale (AFS) debt securities to eliminate the concept of “other than temporary” from that model.
For public business entities that meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For public business entities that do not meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The FASB continues to work diligently toward improving 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). The FASB issued guidance in 2016 on simplifying the transition to equity method accounting as part of ASU 2016-07 and is in various stages of deliberations and drafting exposure drafts on a variety of other simplification projects.