[ Updated December 22, 2020 | 2:41pm ]
We are experiencing an unprecedented time: exponential growth of Covid-19 (Coronavirus) cases, social distancing, and growing unemployment. As the United States economy and daily life is being reshaped by COVID-19, maintaining “normal” business functions during these times is a challenge.
At YHB we work with Community Banks across the region of all shapes and sizes. Over the past few days we have been in touch with many of our clients as we work together to lead through this pandemic. Below we have included some ideas and updates to help your financial institutions during this time.
Efforts to contain the spread of the novel coronavirus (COVID-19) have led to suspension of many economic activities, putting unprecedented strain on businesses. The Securities and Exchange Commission (SEC) recently issued guidance to help public companies provide investors and other stakeholders with useful, accurate financial statement disclosures in today’s uncertain marketplace.
According to the FDIC, they are “…working with federal and state banking agencies, as well as, financial institutions to consider all reasonable and prudent steps to assist customers in communities affected by the Coronavirus (COVID-19).” The agency also stated it is communicating with regulatory agencies and encouraging financial institutions to work with customers impacted by the coronavirus.
In a press release issued by the FDIC on March 19, 2020, the agency revealed it has sent a formal letter to to the Financial Accounting Standards Board (FASB) “…urging a delay in transitions to and exclusions from certain accounting rules.” The letter focused on three primary areas of relief for banks:
In the letter the FDIC stated delaying some of these accounting rules would allow the banking industry to focus their efforts on caring for their employees, customers and, “allow banks to help their communities at this time of need.”
A joint effort by financial agencies released the Interagency Statement on Loan Modifications and Reporting by Financial Institutions Working with Customers Affected by the Coronavirus. The effort was led by The FDIC, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency, the National Credit Union Administration, the state banking regulators, and the Consumer Financial Protection Bureau.
On March 25, 2020 the FDIC along with several other federal banking agencies issued a press release stating they will not take action against any institution for submitting its March 31, 2020 Consolidated Reports of Condition and Income after the official filing deadline. The release did stipulate that the report must still be submitted within 30 days. The grace period allows banks experiencing adverse effects from COVID-19 some relief in filing regulatory reports. It’s important to note this is not an extension, rather a 30 day grace period only. If institutions have the ability to file on time, they should.
The SEC has also started providing guidance for banks as they adapt to this pandemic. The commission transitioned to telework on March 10, 2020 and has since remained operational. Beginning in March the SEC has released a flurry of statements and updated guidance which can be found at the link below.
In a Press Release issued by the SEC on March 25, 2020, “the Securities and Exchange Commission announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19.”
The release covered three primary areas:
On March 25, 2020 the Division of Corporation Finance Securities and Exchange Commission released CF Disclosure Guidance: Topic No. 9. The guidance provides some clarity on the Division’s views regarding disclosure and other securities law obligations that companies should consider in relation to COVID-19. Particular the following areas:
The American Institute of Certified Public Accountant’s Center for Plain English Accounting released a report addressing financial reporting matters that should be considered in light of the COVID-19 Pandemic. The report covers several specific areas, including:
The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27. Among other economic relief measures, the new law allows large public banks to temporarily postpone the controversial current expected credit loss (CECL) standard. Here are the details.
Updated accounting rules
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in response to the financial crisis of 2007–2008. The updated CECL standard relies on estimates of probable future losses. By contrast, existing guidance relies on an incurred-loss model to recognize losses.
In general, the updated standard will require entities to recognize losses on bad loans earlier than under current U.S. Generally Accepted Accounting Principles (GAAP). It’s scheduled to go into effect for most public companies in 2020. In October 2019, the deadline for smaller reporting companies was extended from 2021 to 2023, and, for private entities and nonprofits, it was extended from 2022 to 2023.
Option to delay
Under the CARES Act, large public insured depository institutions (including credit unions), bank holding companies, and their affiliates have the option of postponing implementation of the CECL standard until the earlier of:
Many public banks have made significant investments in systems and processes to comply with the CECL standard, and they’ve communicated with investors about the changes. So, some may decide to stay the course. But many large banks are expected to take advantage of the option to delay implementation.
Congress decided to provide a temporary reprieve from implementing the changes for a variety of reasons. Notably, the COVID-19 pandemic has created a volatile, uncertain lending environment that may result in significant credit losses for some banks.
To measure those losses, banks must forecast into the foreseeable future to predict losses over the life of a loan and immediately book those losses. But making estimates could prove challenging in today’s unprecedented market conditions. And, once a credit loss has been recognized, it generally can’t be recouped on the financial statements. Plus, there’s some concern that the CECL model would cause banks to needlessly hold more capital and curb lending when borrowers need it most.
Stay tuned
So far, the FASB hasn’t delayed the CECL standard. But the COVID-19 crisis has front-loaded concerns about the CECL standard, prompting critics in both the House and Senate to step up their efforts to block the standard. Contact us for the latest developments on this issue.
© 2020
We will continue to share helpful tips and resources on key issues as they develop to ensure you are prepared to navigate these unprecedented issue.
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