ICBA opposes any prohibitions on the ability of community banks to classify mortgage loans and investment securities at amortized cost when the bank’s intent is to collect contractual cash flows over the life of the investment.
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 regardless of their financial statement reporting requirements so that the cost of implementing standards does not outweigh their benefit to financial statement users.
As community banks become larger in size and more complex, FASB should not penalize their business models through more burdensome accounting policies and reporting requirements if their core business activities have not changed.
The asset threshold under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) for requiring an annual audit should be raised from $500 million to $1 billion, and the asset threshold for an internal control report, also required by FDICIA, should be raised from $1 billion to $5 billion.
Recognition and Measurement. ICBA opposes restrictions on the ability of community banks to classify mortgage loans and investment securities at amortized cost under any newly proposed recognition and measurement projects. 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 encouraged by the work of the Financial Accounting Foundation to promote a different approach to financial accounting and reporting for private companies, including non-public community banks, by creating the Private Company Council (PCC).
The PCC is tasked with identifying current and future accounting standards that should be modified for private companies. Such modifications will help address the current financial reporting burden facing community banks by simplifying reporting requirements and reducing the cost 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 appropriate accommodations are made for community banks when harmful accounting changes are being considered. ICBA also believes that the PCC should become central to the implementation of key accounting standard updates that impact community banks. In cases where further clarification is needed, the PCC should be the clearinghouse for managing private company implementation challenges.
The PCC should set a goal of generating a separate set of accounting standards specifically tailored to nonpublic entities so that small, non-complex entities like community banks can generate meaningful financial statements without the complexity that characterizes the current financial reporting framework for for-profit entities. Difficult and burdensome concepts like fair value and credit loss measurement should be simplified and streamlined for these nonpublic entities.
ICBA believes that the PCC should consider creating a subgroup that addresses and reports on smaller financial institution accounting concerns under a separate track. Such a subgroup would be permitted to make recommendations on key accounting standards developments as they impact smaller financial institutions such as privately held community banks. The subgroup would ensure that the concerns of the smallest private financial services companies have a dedicated voice and are not overshadowed by larger financial firms.
Federal Deposit Insurance Corporation Improvement Act. ICBA supports modernizing the asset thresholds for requiring both an independent annual audit of an insured depository institution and an internal control report under the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The FDICIA asset thresholds should be raised to reflect the overall increase in the size of community banks since these thresholds were last adjusted in 1993 and 2005. The asset threshold for requiring an annual audit should be raised from $500 million to $1 billion, and the asset threshold for an internal control report should be raised from $1 billion to $5 billion.
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 regardless of whether or not they file financial statements with the SEC. 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. As community banks become larger and more complex, FASB should continue to be sensitive to the burden of accounting standards by not imposing more strenuous reporting requirements simply because bank size has increased.
Staff Contact: James Kendrick
First Vice President, Accounting and Capital Policy