Accounting and Reporting Updates for Financial Institutions

What Your CFO Needs to Know

By Jamie Keiser, CPA, Principal

November 2010 FINANCIAL INSTITUTION CFO TO DO LIST

What your financial institution needs TO DO with the calendar year end quickly approaching.

1. Get ready to disclose, disclose, disclose.

Public entities must apply the “new credit quality disclosures” (ASU 2010-20) to disclosure period-end balances beginning with the first interim or annual period ending on or after December 15, 2010, and disclosures about activity in the allowance for loan and lease losses (ALLL) beginning with the first interim or annual reporting period beginning on or after December 15, 2010.  Non-public entities must apply all disclosure requirements in the ASU beginning with the first annual reporting period ending on or after December 15, 2011.

Note: the definition of a PUBLIC ENTITY per the FASB includes not only entities that file with the SEC but also entities that issue debt or equity securities that are traded in a public market (inclusive of OTC markets that are local or regional).

Therefore, this NEW robust and disaggregated disclosure requirement is widely applicable to financial institutions that are non-filers and therefore preparation should be made in anticipation of the requirement.

A brief summary of the increased disclosure requirements as a result of this update include:

• Disclosures for nonaccrual and past due loans receivables (by loan class, which demonstrates inherent risk)
• Disclosures for the ALLL (by portfolio segment, which demonstrates composition)
• Disclosures for impaired loans, individually evaluated for impairment (by loan class)
• Disclosure of credit quality information (by loan class)
• Disclosure for modifications (by portfolio segment)
• Disclosure for modifications (by loan class)

The update inclusive of example disclosures can be found on the FASB’s website. 

October 2010 “Dear CFO” Letter

Although this letter primarily targets financial institutions that sell or securitize mortgages or mortgage backed securities (MBS), public entities that file with the SEC and engage in mortgage servicing, title insurance, mortgage insurance, and other activities relating to residential mortgages should also consider the impact of these noted issues on their disclosures.

• The impact of various representations and warranties regarding mortgages made to purchasers of the mortgages (including MBS) including government-sponsored entities (GSEs), private-label investors, financial guarantors and other whole loan purchasers.

o For any reserve established relating to representations and warranties attributable to loans sold, registrants should consider providing a roll forward presenting the changes attributable to change in reserve estimate, new loan sales and utilization/realization of losses.

• Any implications of foreclosure review.

Although this is not a disclosure requirement for non-filers, enhanced disclosure of areas of significant risk and investor concern such as this would be prudent in this economic environment.

2. Prepare your tax provision in anticipation of heightened scrutiny by your external auditor …

Deferred Taxes – Regulatory Limitations and Adequate Documentation

For regulatory capital purposes, deferred tax assets are limited to the lesser of the amount that is expected to be realized within one year or 10% of the Bank’s Tier 1 capital.  Applicable loss carry back provisions do apply.  With the continued focus on capital ratios, there will continue to be increased scrutiny of these calculations.

Adequate documentation to support the realization of your deferred tax assets should include an evaluation of both positive and negative evidence as well as the sources and sufficiency of taxable income.  Again, depressed earnings raise concern over realization.
Other Items for Consideration in the Preparation of Your December 31, 2010 Tax Provision:

 Depreciation

• 50% bonus depreciation continues through 2010.
• Section 179 increased to $500,000 for 2010-2011 (scheduled to drop to $25,000 in 2012).
• Qualified leasehold improvements qualify under Section 179 - $250,000 for 2010-2011.

Energy Efficient Improvements of Commercial Real Estate 

• Section 179 deduction is available for energy-efficient equipment installed (before 2014) as part of an interior lighting system, heating, cooling, ventilation, hot water system or building envelope.  These must meet specific standards (reduces energy costs by 50%) and requires certification by a qualified engineer.

Also impacting taxes paid by the Bank in 2010 is the:

New Hire Act

• New hire payroll tax rebate – employer’s 6.2% FICA tax is “forgiven” on wages paid March 18, 2010 to December 31, 2010 to a previously unemployed person.

3. …and provide yet another roadmap for the IRS.

The IRS is requiring the disclosure of uncertain tax position on Schedule UTP beginning with 2010.

4. Make sure your ducks are in order in relation to Regulatory “Hot” Buttons, such as…

Liquidity Risk Management

The interagency policy statement on funding and liquidity management was released on March 22, 2010.  Liquidity risk management should be an area of focus for both the Bank’s Board and Management.  This policy statement provided Banks with more clear expectations including key items of importance such as cash flow projections, diversified funding sources, stress testing, cushion of liquid assets, and a formal well-developed contingency funding plan.

Banks should anticipate this to be an area of focus during any upcoming examinations.

If you have any questions regarding the matters discussed above or want to discuss any other issues concerning your Bank as you enter the calendar year end, please feel free to call us at 1.800.487.7624 and ask to speak with our Banking Specialist.

Next month, look for more financial institutions insights relating to planning for the next calendar year (including but not limited to tax planning and accounting updates).