Community Banking Forum 2014 Accounting and Financial ... › assets › AA-Update1.pdf · No part...

Community Banking Forum 2014 Accounting and Financial Reporting Update

© 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC

Tuesday December 2, 2014 Garry Rank Shareholder, Elliott Davis

This material was used by Elliott Davis during an oral presentation; it is not a complete record of the discussion. This presentation is for informational purposes and does not contain or convey specific advice. It should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor. No part of the presentation may be circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis.

2 © 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC

2014 Accounting and Financial Reporting Update

AGENDA • 2014 Accounting Standards Updates Applicable to Community Banks • COSO Framework Revised • Documenting your Reading of SOC Reports • 2014 Frequently Asked Questions • Revenue from Contracts with Customers (ASU 2014-09) • Proposed CECL Model


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2014 Accounting Standards Updates (ASU) Applicable to Community Banks


Pronouncement Affects Effective Date and Transition ASU 2014-15, Disclosure of Uncertainties About and an Entity’s Ability to Continue as a Going Concern

All entities. Effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

ASU 2014-14, Troubled Debt Restructurings by Creditors

Creditors who hold government guaranteed mortgage loans (including guarantees of FHA and VA)

Effective for public entities annual periods and interim period beginning after December 15, 2014. For non-public entities annual periods and interim periods beginning after December 15, 2015.

ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

Entities that issue share-based payments when the terms of an award stipulate that a performance target could be achieved after an employee completes the requisite service period.

Effective for all entities for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date.


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Pronouncement Affects Effective Date and Transition ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures

Entities that enter into repurchase agreements, securities lending transactions, and repo-to-maturity transactions.

Effective for public business entities for the first interim or annual period beginning after December 15, 2014. For all other entities, the accounting changes are effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited; however, all other entities may elect to apply the requirements for interim periods beginning after December 15, 2014. For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. For all other entities, both new disclosures are required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015.


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Pronouncement Affects Effective Date and Transition ASU 2014-09, Revenue from Contracts with Customers

All entities. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. For all other entities (nonpublic entities), the guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as of the following:

• An annual reporting period beginning after December 15, 2016, including interim periods within that reporting period (public entity effective date)

• An annual reporting period beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017

• An annual reporting period beginning after December 15, 2017, including interim periods within that reporting period.

An entity should apply the guidance either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying guidance at the date of initial application.


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Pronouncement Affects Effective Date and Transition ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure — a consensus of the FASB Emerging Issues Task Force

Creditors who obtain physical possession (resulting from an in-substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.

Effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For other entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early implementation of the guidance is permitted. The guidance can be implemented using either a modified retrospective transition method or a prospective transition method.

ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects—a consensus of the FASB Emerging Issues Task Force

For reporting entities that meet the conditions, and that elect to use the proportional-amortization method, to account for investments in qualified affordable housing projects, all amendments in this ASU apply. For reporting entities that do not meet the conditions or that do not elect the proportional-amortization method, only the disclosure-related amendments in this ASU apply.

Effective for public business entities for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The amendments in this ASU should be applied retrospectively to all periods presented.


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COSO Framework REVISED


COSO-UPDATED Internal Control-Integrated Framework What has changed: The updated framework builds upon the original version.


What has not changed… 1. Definition of internal control 2. Five components of internal

controls 3. The fundamental criteria used to

assess effectiveness of systems of internal control

4. Use of judgment in evaluating the effectiveness of systems of internal control

What has changed… 1. Update to reflect current

conditions in business and operating environments

2. Codify principles that support the five components of internal control

3. Expand financial reporting and non-financial reporting

4. Increase focus on operations, compliance and reporting objectives

Source: COSO’s May Update of the Internal Control-Integrated Framework


COSO-UPDATED Internal Control-Integrated Framework Summary of updates:


Control Environment

16. Conducts ongoing and/or separate evaluations 17. Evaluates and communicates deficiencies

13. Uses relevant information 14. Communicates internally 15. Communicates externally

10. Selects and develops control activities 11. Selects and develops general controls over technology 12. Deploys through policies and procedures

6. Specifies relevant objectives 7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change

1. Demonstrates commitment to integrity and ethical values 2. Exercises oversight responsibility 3. Establishes structure, authority and responsibility 4. Demonstrates commitment to competence 5. Enforces accountability

Risk Assessment

Control Activities

Information & Communication

Monitoring Activities

Source: COSO’s May Update of the Internal Control-Integrated Framework


COSO-UPDATED Internal Control-Integrated Framework • Updated framework supersedes the 1992 Internal Control-

Integrated Framework and 2006 Guidance on Internal Control Over Financial Reporting-Guidance for Smaller Reporting Companies

• Transition will occur between now and December 15, 2014



COSO-NEW AREAS OF FOCUS • Fraud Risk Assessments • Outsourced Service Providers (OSPs) • Information Technology • Comprehensive Risk Assessments



COSO-NEW AREAS OF FOCUS Fraud Risk Assessments • Financial institutions continue to be the most

frequent victims of fraudulent activities • Common fraud schemes and stats for banks • Sample approach:

- Identify fraud risk factors - Identify fraud risks and schemes - Assess and prioritize fraud risks and schemes - Determine controls that mitigate fraud risks and assess

anti-fraud controls 14 © 2014 Elliott Davis, PLLC © 2014 Elliott Davis, LLC


COSO-NEW AREAS OF FOCUS Outsourced Service Providers (OSPs) • Processes outsourced…not the risk • Greater emphasis on how OSPs are monitored • Vendor management focus by the regulators…not just COSO! • Common pitfalls:

- Management fails to evaluate exceptions noted in SOC reports - Lack of SOC reports obtained and no additional work performed

when a SOC report is not available - Risk assessments (including fraud risk assessments) that do not

consider risks associated with OSPs



COSO-NEW AREAS OF FOCUS Information Technology • Specific points of focus related IT (see Principle 11) • Focus on process for ensuring the quality of information • Common pitfalls:

- Lack of understanding regarding the source of data and/or validation of data included in reports

- Design gaps in controls addressing the accuracy, completeness and integrity of data included in reports (e.g., spreadsheets)



COSO-NEW AREAS OF FOCUS Comprehensive Risk Assessments • Risk analysis is a dynamic process that is updated as

new processes are introduced or new risks identified • Historically, there have been separate risk assessments

conducted by various functions within the bank • COSO-2013 suggests that your risk assessment consider

(“include”) the 17 principles



COSO-TRANSITION PLAN Transition Approach (5-Step Plan): 1. Develop awareness, expertise, and alignment 2. Conduct preliminary impact assessment 3. Perform detail review of the new areas of focus 4. Develop and execute COSO transition plan for SOX compliance,

including: - Remediation plans - Updated documentation and test plans

5. Communicate updates to external auditors



COSO-TRANSITION PLAN Transition Timeline: 1. Develop awareness, expertise, and alignment 2. Conduct preliminary impact assessment 3. Perform detail review of the new areas of

focus 4. Develop and execute COSO transition plan for

SOX compliance, including: - Remediation plans - Updated documentation and test plans



2014



COSO-TRANSITION PLAN Transition Timeline: 1. Develop awareness, expertise, and alignment 2. Conduct preliminary impact assessment 3. Perform detail review of the new areas of

focus 4. Develop and execute COSO transition plan for

SOX compliance, including: - Remediation plans - Updated documentation and test plans



Ongoing

2014

Complete by 6/30

Complete by 6/30

Complete by 9/30

Ongoing

Oops…we are behind schedule…what do we do at this point in the

year?


COSO-TRANSITION PLAN CAVEAT: While this approach is not recommended, if you have determined that at this point your company has no other option… 1) Keep using COSO 1992 for the current year

- Clearly state that you are using COSO’s 1992 framework 2) Go ahead and identify gaps 3) Make a transition plan for 2015 that starts early (see

transition approach on the previous slides) …however, you should be prepared to answer the questions as to why the company did not implement COSO 2013 by the deadline and what the company’s plan is to implement



Documenting Your Reading of Outsourced

Service Organization Control (SOC) Reports


• Determine which SOC report covers a key financial process or system, • For SOC reports identified as “key,” document:

• Name of service organization • Services covered by the service organization • Period covered by the SOC report

• SOC report type (Type 1 or Type 2) • If a Type 1, document why not testing the operating effectiveness of the

controls in the report is appropriate • Name and qualifications of service auditor • Opinion type

- If a qualified opinion, document the nature of the qualification(s) and any implications resulting from the qualification.

• Locations covered (if applicable)



• Are there any subservice organizations carved out of the report? • If so, document:

• The name of subservice organization • Any relevant functions performed by the carved-out subservice organization • The procedures applied to address relevant functions performed by the carved-out

subservice organization

• Are there any deviations noted in the report? • Document the deviations/exceptions noted and the procedures applied to

address the relevant functions impacted by the deviations/exceptions • Determine whether complementary user entity controls (UCCs)

identified by the service organization are relevant in addressing the risks of material misstatement relating to the relevant assertions in the financial statements




2014 Frequently Asked Questions


• OREO Sales Accounting • TDRs • ALLL Issues • DTAs – Reversal of Valuation Allowances • Internal Audit Outsourcing • BSA Examinations • BASEL III




Revenue From Contracts With Customers

ASU 2014-09


Revenue Recognition • Applies to revenue arising from contracts with customers. • Excludes lease contracts, insurance contracts, contractual rights and

obligations within the scope of other guidance (banking financial instruments) and non-monetary exchanges (to facilitate sales to customers) between entities in the same line of business.

• Requires the recognition of revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration a company receives or expects to receive.



5-Step Model 1. Identify the contract with a customer. 2. Identify the separate performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the separate performance obligations. 5. Recognize revenue as each performance obligation is satisfied.



Possible Impact on Community Banks • Upfront fees

- Loan application and origination fees • Variable pricing arrangements

- Late payment penalties and fees • OREO sales • Credit card loyalty programs • Underwriting fees • Treasury management fees




Proposed CECL Model


Credit Losses – CECL Model • CECL would apply to the following financial assets (measured at AC):

- Debt instruments (e.g., all loans and HTM debt securities) - Trade Receivables - Reinsurance receivables - Lease receivables recognized by a lessor - Loan commitments

• Simplifies the accounting for purchased credit impaired financial assets • CECL would not apply to equity instruments • CECL would not apply to available-for-sale debt securities • Retains concept of a troubled debt restructuring “TDR”



Credit Losses – CECL Model • Expected credit losses over entire life of the instrument (“life of loan”)

- Consider expected prepayments during “life” - Consider collateral pledged - Do not consider expected extensions, renewals and modifications - Requires long range forecasting techniques

• Estimate of expected credit losses based on all relevant internal and external information including:

- Past events - Current conditions - Reasonable and supportable forecasts



Credit Losses – CECL Model • Information to consider includes the following:

- Quantitative and qualitative factors specific to the borrower - Current economic environment of the entity - Internal and external information - Current point and forecasted direction of the economic cycle

• No recognition threshold (e.g., probability of losses having occurred) - Must consider the expected risk of credit loss, even if remote

• The estimate of expected credit losses may reflect the time value of money - No specific methods to estimate expected credit losses prescribed - Approaches that can be used

• Discounted Cash Flows • Loss-Rate Approach • Probability of Default/Loss Given Default • Aging schedule

- No reconciliation of chosen method to a DCF methodology



Credit Losses – CECL Model Implementation considerations Entities need to consider key transitional aspects under the CECL model: • Assessing the data collection and aggregation process • Determining reasonable and supportable forecasts • Compliance with the additional reporting and disclosure requirements • Technology needs and solutions to support the selected method of

measurement of expected losses Current Proposed



Portfolio Level data

Loan level data

Historical approach

Forward thinking

Spreadsheet technology

IT Strategy



Credit Losses – CECL Model Reasonable and supportable forecasts

Expected implementation challenges

• Document decisions and changes to support accounting policy elections

• Address the potential knowledge gap related to the economic data used over the life of the loan

• Ensure transparency and traceability for policy elections and factors used in the estimation process

• Establish adequate reconciliation of asset balances used in the calculation of expected losses

• Provide clear explanations for changes in the allowance from period to period


Professional Overview Garry focuses on corporate auditing and accounting as well as consultation regarding governance, financial systems and internal controls. With more than 33 years of experience, his industry concentrations include financial services, manufacturing and Securities and Exchange Commission (SEC) reporting. Additional professional experience includes the management of complex engagements, mergers and acquisitions, projects involving subsidiary companies and the application of accounting and reporting standards.

Garry Rank Shareholder

Greenville, SC [email protected]



Lee Haynes Shareholder

Charlotte, NC [email protected]

Professional Overview Lee has over 20 years of combined experience in public accounting and accounting/management positions in publicly held companies including approximately 5 years with a Big Four accounting firm. He has participated in the audits of larger entities, including multinational and multistate operations. Lee concentrates his time in the financial services industry serving both publicly traded as well as privately held community banks located in North Carolina, South Carolina and Virginia.

In addition to financial services expertise, Lee has extensive experience with preparation of consolidated financial statements, Securities and Exchange Commission (SEC) filings as well as Sarbanes-Oxley compliance. Since enactment of Sarbanes-Oxley, Lee has overseen audits of internal control over financial reporting as required by Sarbanes-Oxley for audit clients as well as assisted in the design, documentation and implementation of internal control programs for non-audit SEC registrant clients.



Professional Overview With more than 20 years of experience in finance and accounting, Jay focuses on providing assurance and consulting services to financial institutions including external and internal audits, risk management, information technology and Sarbanes-Oxley compliance. Jay also leads the firm’s SSAE 16 – Service Organization Controls Reporting practice.

Jay is both a certified public accountant and a certified internal auditor. His experience includes serving as senior compliance manager for a global banking institution, a business advisory senior manager for an international CPA firm, a managing consultant for a large technology and process consulting firm and a financial statement auditor for a Big Four accounting firm.

Jay has written numerous articles on dealing with Sarbanes-Oxley, corporate governance and internal controls. He also was a principal contributor in COSO’s Guidance on Monitoring Internal Control Systems.

Jay Brietz

Senior Manager Charlotte, NC

[email protected]


Elliott Davis, LLC/PLLC is one of the largest accounting, tax and consulting services firms in the Southeast and ranks among the top 50 CPA firms in the U.S. With offices in SC, NC, GA and VA, the firm provides clients across a wide range of industries with smart, customized solutions and its people with rewarding opportunities. Founded in 1925, Elliott Davis is a member of The Leading Edge Alliance, an international professional association of independently owned accounting firms based in the U.S. and is strategically aligned with LEA Europe and LEA Asia Pacific, a worldwide network of more than 450 offices in 100 countries around the globe. For more information about Elliott Davis and its services, visit http://www.elliottdavis.com.


http://www.elliottdavis.com/

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