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Banking and Securities
Accounting and Financial Reporting Update (2017)
The 2017 edition of our annual update highlights selected accounting and reporting developments that may be of interest to entities in the banking and securities sector. Among other topics, the publication discusses (1) implementation issues related to the guidance on measurement of credit losses on financial instruments, (2) the issuance of targeted improvements to hedge accounting, and (3) application of the new revenue recognition and leasing standards.
The year 2017 has been a strong growth year to date, as shown by solid market performance and the Federal Reserve’s continued focus on raising the federal funds rate. Banking and securities institutions have remained focused on complying with industry regulations while managing expenses.
The banking and securities industry continues to be affected by costs and complexities of litigation as well as increasing domestic and global regulatory requirements, although the current political environment may bring about changes in the level of regulations imposed. Residential, commercial, and consumer lending has continued to increase, albeit at a slower pace than in the prior year.
Financial Reporting Developments
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.
In 2017, the FASB and the transition resource group (TRG) for credit losses addressed a number of implementation issues, including (1) how to determine the effective interest rate (EIR) under the CECL model, (2) the scope of the guidance on purchased financial assets with credit deterioration (“PCD assets”) for beneficial interests accounted for under ASC 325-40, (3) application of the transition guidance to pools of purchased credit-impaired assets under ASC 310-30, (4) the accounting for troubled debt restructurings (TDRs) under the CECL model, and (5) estimation of the life of a credit card receivable under the CECL model. The TRG will continue to meet on an as-needed basis throughout the implementation period.
For public business entities (PBEs) that meet the U.S. GAAP definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For PBEs 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.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815. The Board’s objectives in issuing the ASU were to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity, and simplify the application, of hedge accounting by preparers.
For PBEs, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods therein. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. All entities are permitted to early adopt the new guidance in any interim or annual period after issuance of the ASU.
New Revenue Recognition Standard
In 2014, the FASB and IASB issued new guidance (ASU 2014-09 and IFRS 15, respectively) on the recognition of revenue from contracts with customers (the “new revenue standard”). The FASB amended this guidance in 2015, 2016, and 2017. In 2015, for example, in response to requests from stakeholders and continued feedback from primary financial statement users and preparers, the FASB issued ASU 2015-14, which defers implementation of the new revenue standard by one year for all entities and permits early adoption on a limited basis. For PBEs, certain not-for-profit entities, and certain employee benefit plans, the new revenue 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 and 2017, the FASB issued a number of ASUs that refine the guidance in the new revenue standard. These include ASU 2016-08, which addresses certain principal-versus-agent considerations specific to reporting revenue gross versus net, and ASU 2017-05, which clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The TRG for revenue recognition will continue to discuss activities related to implementation of the new revenue standard.
For additional information about industry issues and trends, see Deloitte’s 2017 Financial Services Industry Outlooks.