Authored by Mark Boettcher, Matt Nitka and Christopher Tait
During the Financial Managers Society’s (FMS) Forum 2017, several key topics were thoroughly discussed and debated across numerous sessions. Requirements from the Financial Accounting Standards Board (FASB) and regulators, as well as the need to stay competitive and secure, will require organizations to make changes. Presenters shared many salient points for banks and other financial institutions to consider as they address these areas of concern:
- Current expected credit losses (CECL) (ASC 326-20)
- Revenue recognition (ASC 606)
- Leases (ASC 842)
- Cybersecurity and phishing
- Fintech disruption
Accounting Standards Codification (ASC) 326-20, current expected credit losses (CECL)
With significant impact to banking accounting processes and systems, CECL was a major focal point throughout the conference. Each CECL session provided further insights into different models institutions were considering, data points necessary for each model, usage of software vendors / third party consultants and regulatory insights. All topic presenters were in agreement that this change is substantially encompassing and that institutions should not delay examining the topic any longer. However, there was no consensus on what model to use or how to approach the implementation. CECL is a change that will require a large effort with significant internal and external resources to implement. Many attendees were looking for ways this change could help efficiencies in other areas of their institution rather than it just being an accounting exercise performed monthly, quarterly or annually.
Accounting Standards Codification (ASC) 606, revenue recognition
Many may be wondering why the new revenue recognition standard was a topic of discussion. As organizations and accountants get deeper into ASC 606, they have found that depository and lending institutions will be impacted in two ways: 1) significant changes to disclosures are needed, even with no change to the accounting, and 2) specific revenue streams including deposit fees, other real estate owned (REO) gains / losses and trust fees may have changes in the timing of when revenue can be recognized.
Most depository and lending institutions were under the impression that ASC 606 would not impact them, so many have not devoted serious attention to the revenue recognition standard. As the effective date is now closely approaching, institutions must evaluate the standard and assess what changes to their processes, policies, systems and controls need to be in place.
Accounting Standards Codification (ASC) 842, leases
Another accounting change that depository and lending institutions have been evaluating is the impact of ASC 842, leases, since it will not only affect financial institutions but their borrowers as well. The leases standard primarily impacts lessees as it will require the majority of operating leases to be reflected on the balance sheet. For construction companies that lease heavy equipment, the potential impact is easily seen prior to reviewing their current leases. For depository and lending institutions, the impact is much more opaque.
Many thought the impact would be insignificant because they have minimal leases. However, many organizations have found that the number of leases and impact to the company was much larger than originally thought, especially as many institutions lease their branch space. These leases need to be evaluated under the new standard and will most likely result in recording them on the balance sheet. This will in turn impact the institution’s capital ratios and various performance measures such as return on assets. Institutions need to inform their lenders and underwriters about the changes so they can structure the terms of agreements to avoid negatively impacting covenants when the new standard goes into effect. It is essential that institutions devote resources to identify changes needed to processes, policies, systems and controls as this will likely not be a trivial undertaking.
Cybersecurity and phishing
Cybersecurity and the various attack routes, especially phishing scams, that hackers can take were central risk topics throughout the conference. These attacks and scams are continuing to become more sophisticated, which requires financial institutions to continually improve training programs and testing. Because of this, cyber-attacks are only poised to be of increasing risk and importance to financial institutions. Changes will include expanded technology to support the organizations internal processes, third parties assisting with those processes and the increased use of technology to interact with the consumer.
Financial technology (fintech) companies are both competing with traditional financial institutions and also enhancing those organizations. The conference discussions focused on the need for organizations to find ways to leverage fintech to their advantage and maintain their competitive edge in the market. Financial institutions need to be aware of trends in technology that fintech organizations can provide, and assess whether their customers are looking for those solutions. If so, financial institutions need to improve technology and / or service offerings to compete with the fintech companies, or partner with a fintech company to provide those services.
For more information on these topics, or to learn how Baker Tilly banking specialists can help, contact our team.