As the Financial Accounting Standards Board (FASB) seeks to establish new standards or make improvements in financial accounting and reporting, businesses sometimes feel as if newly announced changes fall into the dubious category of “gotcha!” MB asked some of our accountant associate members for a “heads up” for the coming year. Specifically, we asked:
What do you see as the major accounting issues facing banks in the coming year?
Thomas J. O’Connor, CPA, vice president, G.T. Reilly & Co., Milton
Financial institutions have been on the receiving end of new accounting standards and technical advice; 2005 does not appear to be any different. The Financial Accounting Standards Board (FASB) plans on issuing new guidance on measuring fair value. In recent years numerous new standards have pushed for more and more accounting and disclosure of fair value. This proposed standard should help clarify proper recognition of fair value, but in its early stages will require financial executives within banks to incorporate the contents of this new standard into fair value practices. It is expected that this standard will be effective for financial statements issued for fiscal years beginning after June 15, 2005.
Paul G. Pustorino, partner, Grant Thornton LLP, Boston
There are several accounting issues of note that will be facing bankers in 2005. Bankers should be aware of SOP 03-3 regarding purchased loans. There are new rules when the buyer does not expect to collect all contractual cash flows. These rules will be effective in years beginning after Dec. 15, 2004. EITF No. 03-16, “Accounting for Investments in LLCs,” discusses how to account for certain investments using the cost or equity method. Any updates on EITF No. 03-01 discussing “Other-Than-Temporary Impairment and its Application to Certain Investments” always bears watching out for. The proposed FASB statement on share-based-payments should be finalized in late 2004 or early 2005, and look for FASB to issue an exposure draft in the first quarter of 2005 regarding “Purchase Method Procedures and Combinations of Mutual Organizations,” to consider aspects of purchase accounting not considered in SFAS No.141.
Thomas W. Grottke, principal, Carlin, Charron & Rosen LLP, Westborough
2005 will be the year risk management truly gets tested. Auditors of public companies have only just begun to feel the impact of the PCAOB. Certainly, publicly held banks will have in-depth examinations of their internal controls over financial reporting (some already in 2004), but non-public banks are being put on notice by regulatory agencies and their auditors that attention to their internal control environment will be heightened. In addition, further attention will be given to IT security controls and other IT areas closely associated with financial reporting as well as your fraud risk management program. From an accounting perspective, investment securities valuation and disclosures, stock option accounting, mortgage servicing rights and fair market value disclosures need particular attention in 2005.
Joel F. Shamon, vice president, Vitale, Caturano & Co., Boston
One issue affecting the banking industry is Statement of Position 03-3 regarding the acquisition of certain loans which will be effective in 2005. This ruling will change one of the fundamental industry benchmarks, reserve-to-loan ratios, because it changes how banks record loan acquisitions. Currently, when a bank purchases a loan portfolio, the bank records both the value of the loans and the reserves associated with the loans. However, according to SOP 03-3 banks acquiring loans at any point after the origination date cannot carry over reserves for loan losses. Another significant issue is the finalization (again) of the new impairment rules for debt securities. The EITF tried to address this issue in 2004 and had to rescind their guidance. Look for them to release new rules in 2005, and let’s hope they get it right this time.
Dennis F. Walsh, partner, KPMG LLP, Boston
Certainly, FASB Statement 123R, which requires that stock options and other equity-based employee compensation be recognized in the income statement at grant-date fair value, is top-of-mind for public banks. Although the Statement does not mandate a particular valuation model, most banks will likely be re-examining their award methodology and assumptions as well as examining their share-based-payment programs in light of these new requirements.
For mutuals, a key issue will be the resolution of EITF 03-1, which addresses the recording of other-than-temporary impairment losses on securities. It appears likely that some workable guidance for the industry will be forthcoming in this area and that most of the industry concerns will be addressed by the FASB.
Harrison E. Holbrook III, partner, Ernst & Young, Boston
On Dec. 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for public entities (excluding small business issuers) in the first interim or annual reporting period beginning after June 15, 2005. Small business issuers will be required to adopt the provisions of Statement 123(R) in the first interim or annual reporting period beginning after Dec. 15, 2005. Nonpublic entities will be required to adopt the provisions of the new standard in fiscal years beginning after Dec. 15, 2005.