The American Institute of CPAs (AICPA) held its National Conference on Banks and Savings Institutions in September. The three-day conference featured presentations from various regulatory agencies, the accounting profession and banking industry experts on a variety of topics. As has been the case the last few years, the current expected credit loss (CECL) model played a prominent role in the conference, but wasn’t the overwhelmingly dominant topic this year. Accounting topics also included standards updates for leasing transactions, revenue recognition and hedging transactions. Tax reform, mergers and acquisitions, digital transformation and cybersecurity were some of the other topics presented. While we can’t discuss all the sessions, this article will recap some of the highlights from the general sessions.
The chief accountant from the SEC emphasized three areas his agency will focus on going forward. First was CECL. The SEC will focus on whether the registrants have adequate records in sufficient detail to accurately compute the allowance for credit losses under the new standard. He indicated the SEC would place importance on having a consistent computation from period to period. Registrants also need to revisit internal controls around the adoption and implementation of CECL as there will be new data sets and processes not currently in use. The internal controls should be implemented hand in hand with the new standard. The second item was digital asset activities. He said it’s essential for banks to keep informed of emerging technology and maintain adequate books and records regardless of the nature of the assets. Finally, he discussed the expanded audit report changes for SEC filers. The more subjective part of the revisions is not yet effective. The SEC believes these changes will provide investors with insight into potential issues and significant estimates and how the auditors addressed the issues during their planning and performance of the audit. He encouraged all filers to have a “dry run” of these expanded audit reports before the effective date with their audit committees.
Representatives from the Financial Accounting Standards Board (FASB) discussed their hot topics for 2018. Topics included the two significant accounting standard changes, revenue recognition and leases, that will be effective before the CECL standard. On leases, they reminded attendees of the targeted improvements in Accounting Standards Update (ASU) 2018-11, including the additional transition method option. The current status on CECL emerging issues was discussed as well. As noted in recent BKD Thoughtware® articles, technical corrections and targeted improvements continue to be on FASB’s agenda regarding CECL. An exposure draft with codification improvements related to accrued interest, nonaccrual policies, loan recoveries and transfers between asset classes is expected in the fourth quarter of 2018. FASB staff also discussed the standard update for derivatives and hedging transactions. They noted FASB intended to allow hedge risk to change as long as the hedge was still highly effective, and anticipate revisions to clarify the standard in the first quarter of 2019.
The federal banking regulator chief accountant panel is always one of the more interesting general sessions of this conference. All the agencies addressed the status of CECL from a perspective of “where we are as a profession, as regulators and as an industry.” There was general consensus that progress is being made, but perhaps not quickly enough. Issues are being identified and addressed. The regulators are going to be surveying smaller community banks and specifically addressing the status of the implementation process of all banks in the upcoming examination cycle. On smaller community banks, the regulators said they’ll be looking for a good-faith effort and believe the process will continue to evolve. They want to make sure the banks are working on a plan and making progress toward implementation. They again emphasized they won’t prescribe any calculation method and intend to be flexible for the “smaller, less complex” banks. If any bank intends to use a third-party vendor to assist with CECL calculations, attendees were reminded they must follow the interagency guidance, and management is still responsible for the estimate and understanding how it’s derived, including inputs, outputs and calculations.
According to one of the chief accountants, the regulators have no preconceived level of the effect CECL will have upon its adoption; however, if the allowance goes down they’ll be asking questions. There is a proposal to phase in the effect of CECL for call report capital requirement purposes, for which the comment period just ended. The agencies will be evaluating comments on this proposal and changes may be forthcoming. The regulators continue to express concerns on the risks related to agricultural lending and commercial real estate lending. Regulators are concerned that complacency is creeping into credit decisions, management decisions, internal controls and risk assessment during these good times. They’ll be challenging asset quality, underwriting standards and uncertainty around rising interest rates even more than usual in the current examination cycle.
The keynote address that was particularly interesting was “The Future of Banking: How the Digital Transformation Will Reshape the Industry.” You may have heard of a “VUCA” world where business is volatile, uncertain, complex and ambiguous. The speaker explained how a company must handle these issues with vision, organizational flexibility, critical thinking, strong governance and focus. In the speaker's opinion, the biggest threats for the banking industry are:
- Lack of an “accurate high beam” vision (extend further into the future)
- Weaknesses in an integrated security plan
- Lack of a talented technology-experienced banking workforce
- Unbalanced investments in systems of record
- Misconstructed leadership teams and boards
- Lack of a competitive FinTech strategy
Overall, his message was: 1) Leaders must lead, not just manage; 2) People must learn and keep improving skills; 3) Bank culture must inspire its people; and 4) We must continue to transform or we’ll be left behind.
Several BKD representatives attended the conference and would be pleased to provide more information—contact us today if you’d like to discuss in more detail.