ACCOUNTING / AUDITING
- ICBA opposes the development of any impairment model for loans and investment securities that places undue cost burdens on community banks.
- ICBA opposes any prohibitions on the ability of community banks to classify mortgage loans and investment securities at amortized cost when the intent for the bank is to collect contractual cash flows.
- ICBA supports the work of the Financial Accounting Foundation’s Private Company Council to seek recognition, measurement, and disclosure alternatives for smaller private companies including non-public community banks.
- When accounting standards are developed, provisions should be made for smaller financial institutions and businesses so that the cost of implementing the standards does not outweigh their benefit to financial statement users.
- ICBA opposes the Financial Accounting Standard Board’s (FASB) operating lease proposal that would require recognition of long-term operating leases on the balance sheet for both lessors and lessees.
- ICBA opposes the FASB’s proposed disclosures about liquidity and interest rate risk for community banks.
Loan Impairment Model. ICBA opposes any impairment model for portfolio loans and investment securities that increases costs for community banks. In the FASB’s proposed expected loss model, community banks would be required to introduce complex cash flow modeling processes that require the inclusion of non-loan-specific factors to generate expected losses over the life of the loan or security. The proposed impairment model also generates a frontloading effect to loss recognition that harms both earnings and regulatory capital. Many community banks do not have the ability to absorb the costs associated with implementing and maintaining dynamic cash flow models that capture all relevant economic factors that may impact the performance of a particular financial instrument. These costs will further strain the ability of these institutions to properly manage the allowance for loan and lease losses. The FASB should adopt the ICBA alternative proposal, which relies exclusively on historical losses to generate the allowance for loan and lease losses (ALLL) and recognizes those losses in a ratable, common sense fashion. This model properly recognizes the straightforward lending that sets community banks apart from larger banks.
Recognition and Measurement. ICBA opposes restrictions on the ability of community banks to classify mortgage loans and investment securities at amortized cost under the FASB’s proposal on the recognition and measurement provisions of the financial instruments project. The alternative to amortized cost, fair value, is based on the exit price of a loan or security, which current fair value guidance defines as the price at which a willing buyer and seller would transact for that asset in a non-distressed market. Carrying financial instruments such as loans and securities at fair value creates a tremendous burden for community banks while providing little or no incremental benefit to investors or other financial statement users. Community banks would need to implement robust pricing engines and complex valuation methodologies for their mortgage loan portfolios in order to satisfy the valuation standards required in current fair value guidance.
Private Company Council. ICBA is very encouraged by the work of the Financial Accounting Foundation to recognize the need for differences in financial accounting and reporting for private companies, including non-public community banks, by creating the Private Company Council (PCC). The task of the PCC, which is to identify current and future accounting standards that should be modified for private companies, will help address the current financial reporting burden facing community banks by simplifying reporting requirements and reducing the costs of compliance. ICBA believes that the PCC should become a proactive member of the accounting standard setting process by participating directly with the FASB when a proposed accounting change is considered. A proactive stance by the PCC will help ensure that the appropriate accommodations are made for community banks when harmful accounting changes are being considered.
Burdens of Accounting Standards. As accounting standards become more complex, there is great merit in looking at whether all aspects of accounting and disclosure standards are necessary for all companies. Accounting standards setters should take greater account of the potential impact of changes to accounting standards on community banks and other small businesses, be they private or public companies, which have fewer resources to cope with them. The costs of accounting changes must not outweigh their benefits. The PCC should become a more proactive partner in the accounting standard setting process to ensure that the burdens on small community banks are adequately addressed and reconciled.
Leases. ICBA opposes the recognition of operating leases on the balance sheet as proposed under the FASB’s re-exposure of the project on leases. Community banks would be required to gross up the balance sheet to record operating lease assets and liabilities. For lessees, the offsetting assets and liabilities would need to be amortized, which would require the implementation of complex methodologies and could result in the need to invest in expensive solutions for those banks with extensive leasing transactions.
Liquidity Risk and Interest Rate Risk Disclosures. ICBA strongly opposes the FASB’s proposal on requiring extensive liquidity risk and interest rate risk disclosures in financial statement footnotes that would be required to be audited. The proposed liquidity gap maturity analysis, repricing gap analysis, and interest rate sensitivity tables would provide very little or no new information that could assist stakeholders in making informed decisions about the health of a community bank. Additionally, the proposed disclosures undermine the work of the prudential regulator, whose job entails assessing the safety and soundness of the bank including the assessment of liquidity and interest rate risk.
Staff Contact: James Kendrick