2021 Quarterly Financial Services Update – Second Quarter

We hope everyone is having a great summer and getting to enjoy some downtime. Our teams have been back out meeting with customers and friends, while also beginning to attend in-person conferences. It is even starting to feel like things are a bit back to normal, or at least the new normal. And we hope you and your teams are beginning to return to normal/new normal as well, if you have not already.

In this edition of our quarterly financial services update, we have provided some clarity around frequent topics of discussion we are hearing across the industry, as well as provided an update on recent releases by the FASB and banking regulators. We have also provided a summary of key projects in the works by the FASB that may impact your institution in the future. And as always, we have included a summary of recently issued accounting pronouncements and sample disclosures for your upcoming filings.

We will also be hosting a webinar on Thursday, July 8 to discuss some of the items discussed within this update, as well as others impacting the industry. You can register for the webinar at this link.

Lastly, if you have any questions regarding any of the items within, or if there are other areas where we might be of assistance, please reach out to our financial services team. We would be happy to help in any way we can.

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Considerations for Current Expected Credit Losses (CECL)

Mark Scriven, Principal, Mark.Scriven@elliottdavis.com

Brandon Paul, Manager, Brandon.Paul@elliottdavis.com

As previously discussed in prior quarterly communications, the new CECL standard brings significant change to the industry for estimating an institution’s credit losses. For institutions that have not yet implemented CECL, the methodology for loss estimation is shifting from the current “incurred loss model,” which seeks to recognize losses when it becomes probable the loss will be incurred, to a “current expected credit loss model,” which, at loan inception, seeks to recognize the total estimated losses expected over the life of the loan.

For those institutions that have not already adopted the CECL standard, provisions within the March 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) delayed the effective date of CECL until the termination of the national emergency related to COVID-19 or December 31, 2020. Then in December 2020, the Consolidated Appropriations Act (CAA) extended various elements of the CARES Act, which included a further delay of the required adoption of CECL by public business entities. Entities that were required to adopt CECL at January 1, 2020, but had yet to implement CECL due to the CARES Act and the CAA now have until the earlier of either the first day of the financial institution’s fiscal year that begins after the date on which the national COVID-19 emergency terminates, or January 1, 2022, to adopt ASC 326. All other entities are expected to adopt CECL as of January 1, 2023.

For those institutions that have already implemented the CECL standard, consider performing the following procedures in the coming quarters in order to re-evaluate your estimated credit losses, meet audit and regulatory expectations, and ensure that your model appropriately incorporates relevant and reasonable key model assumptions:

  • Identify and stress test key model assumptions. Understand how sensitive your model is to changes in these key assumptions.
  • Consider changes in the macroeconomic environment in recent months including, but not limited to, increased unemployment rates, businesses’ difficulties in finding employees, impact of increased COVID-19 vaccinations, tapering of government stimulus payments, etc. Consider whether you should revisit the macroeconomic variables used in forecasting calculations and determine whether new or alternative variables are more closely correlated to loss history than those utilized during initial model implementation.
  • Ensure that model validations are performed on a periodic basis. Generally model validations should be performed on an annual basis and potentially more frequently if significant changes have occurred within the model or the key assumptions utilized within the model.

If your institution has yet to adopt CECL, consider performing the following as soon as possible:

  • Compile historical loan information including, but not limited to, loss history, risk ratings, origination date, maturity date, interest rate, etc. Begin testing the data to ensure there are no data quality issues. We recommend capturing as much information as possible – both in terms of key loan fields and number of periods.
  • Assess your institution’s ability to develop a model in-house and/or whether additional resources are needed to assist in model development, implementation, and ongoing maintenance.
  • In the event that your team does not have the technical expertise to develop an in-house model, select a model provider and furnish them with historical loan data so they can assist you with additional data evaluation and model methodology selection.

 

  • Evaluate the type of model selected and document why it’s appropriate to estimate losses for your portfolio. For purposes of forecasting, evaluate key macroeconomic assumptions and document why those assumptions were chosen and why they are reasonable for your institution.
  • Begin running parallel models and understand the sensitivity of your key model assumptions and qualitative factors incorporated within the model. Not only should you identify macroeconomic variables that most closely correspond to loss history within your portfolio, you should also understand how sensitive your allowance for credit losses (ACL) results are to changes in the forecasted and qualitative variables.
  • Begin evaluating future disclosure requirements and build templates for purposes of financial reporting.
  • Consider engaging a third party to perform a full scope model validation of your CECL model prior to implementation. Regulators have indicated that if a management team does not have the technical expertise, an external model validation should be performed in accordance with Supervision and Regulation 11-7 and other applicable guidance.
  • Document every decision that is made by management, including model selection, why certain assumptions are utilized and appropriate, why a particular macroeconomic variable is utilized for forecasting, etc. All decisions should be documented and reviewed by your ACL Committee (or equivalent). Regulators and auditors will expect to see management’s documentation and evaluation prior to full implementation.

Also, July 1, 2021 the Federal Reserve announced that it will release a spreadsheet-based tool that will aid community banks with less than $1 billion in assets as they implement CECL. The tool will be called the Scaled CECL Allowance for Losses Estimator (SCALE) and utilize publicly available information. More information will be available during a planned “Ask the Fed” webinar scheduled for July 15. Registration for the webinar is now open at www.askthefed.org.

SEC Independence Guidance

Rob Stevens, Shareholder, Rob.Stevens@elliottdavis.com

Josh White, Shareholder, Josh.White@elliottdavis.com

The SEC recently amended independence rules related to the auditor/client relationship. The stated goal of the SEC’s amendments centered around focusing on relationships that are most likely to threaten an auditor’s ability to be objective and impartial. These amendments were adopted on October 16, 2020 and became effective in April 2021

There are several key takeaways from the revised auditor independence requirements:

  • The final rules reduce the length of time that first time SEC filers must adhere to SEC independence requirements to only the most recent year presented in the audited financial statements.
  • Certain loan and debtor-creditor provisions for consumer loans, home equity loans and student loans have been revised under the new rule.
  • Independence issues brought about by merger and acquisition transactions are now subject to a new transition framework to ease any required transition away from services not permissible under SEC independence rules.
  • The definition of “Affiliate of the Audit Client” has been amended, which should result in fewer sister entities being deemed affiliates of the company subject to audit.

However, we have noticed that during 2021 the provisions contained in the final rule pertaining to SEC independence requirements applicable to first time SEC filers has been met with varying opinions. During March of this year, the SEC Office of the Chief Accountant commented during a speech that nothing in the amendments was intended to change the application of general Rule 2-01(b), and that all periods filed by the issuer were to be considered as part of auditor independence. The example given considered whether an accounting firm that performed the function of preparing the financial statements for an issuer for 2019 and 2020 would not be independent for either of those years, despite the one year lookback period, primarily due to the notion that auditors cannot re-audit their own work. While the example given is pertaining to auditor preparation of a future issuer’s financial statements, this concept would apply to many non-attest services an auditor is permitted to perform on a private company. As result, we believe that if your institution is considering going public, you should consult with your auditor regarding this rule and whether there are any conflicts of interest present regarding auditor independence.

HUD Regulatory Reporting

Marshall Trull, Senior Manager, Marshall.Trull@elliottdavis.com

The U.S. Department of Housing and Urban Development (HUD) offers several programs to approved lenders and issuers. In order to participate in HUD’s programs, including Federal Housing Administration (FHA) mortgage lending, lenders are required to obtain initial and ongoing approval for their applicable program. Institutions can apply to be a supervised lender if they want to originate, underwrite, purchase, hold, service, or sell FHA-insured mortgages. Lenders are further delineated by consolidated assets thresholds into small supervised lenders and large supervised lenders. The asset thresholds required by each respective agency are detailed at 12 CFR 363.1(a), 562.4(b) (2), and 715.4(c)). In all cases, the current threshold is $500 million or more. Lenders over that size are considered large supervised lenders based on their consolidated total assets are required to obtain an annual audit in accordance with the Consolidated Audit Guide for Audits of HUD Programs Handbook regardless of the number of loans originated or serviced. In general the audit reporting package will include an audit of the financial statements and supplementary information, an internal control report, a compliance report, a schedule of findings and questioned costs, and a corrective action plan prepared by the lender.

As a result of excess liquidity within many institutions due to stimulus programs originating from the COVID-19 pandemic and origination of Paycheck Protection Program (PPP) loans, many institutions have found themselves with inflated balance sheets. Due to this disruption caused by the pandemic, the Federal Deposit Insurance Corporation (FDIC) issued an interim final rule (codified at 12 CFR 363.1(a)). As this is the same reference utilized within Chapter 7 of the Consolidated Audit Guide for Audits of HUD Programs Handbook, it will be applicable to FDIC-regulated institutions to determine whether they are classified as a small or large supervised lender. Within this interim final rule, the date utilized to determine an institution’s consolidated total assets shall be determined based on the lesser of (a) an insured depository institution’s consolidated total assets as of December 31, 2019, or (b) an insured depository institution’s consolidated total assets as of the beginning of its fiscal year ending in 2021. Note, a financial institution may be required to comply with the requirements of a large supervised lender if their regulatory agency determines that their asset growth was related to a merger or acquisition.

Overall, institutions that participate in HUD programs should pay close attention to their consolidated total assets and the related threshold required by their respective regulatory agency to ensure they will not trigger a HUD audit requirement in 2021 and the coming years. If you have questions regarding your institution’s HUD audit requirements, we recommend you reach out to your audit service provider.

FASB Update

The following selected Accounting Standards Updates (ASUs) were issued by the Financial Accounting Standards Board (FASB) during the second quarter. A complete list of all ASUs issued or effective in 2021 is included in Appendix A.

FASB Provides Alternative to the Goodwill Triggering Event Assessment for Certain Private Companies and Organizations

In March, the FASB issued ASU 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, that provides an accounting alternative expected to reduce the complexity for private companies and not-for-profit organizations when performing the goodwill triggering event evaluation. Under current GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value. Companies and organizations are required to monitor for and evaluate goodwill triggering events when they occur throughout the year. Some stakeholders raised questions about the value of evaluating a triggering event at an interim date when certain private companies and not-for-profit organizations only issue GAAP-compliant financial statements on an annual basis. They noted the cost and complexity of preparing interim balance sheets and projecting cash flows that, according to those stakeholders, may not be relevant at the annual reporting date when financial statements are issued.

To address this, ASU 2021-03 provides an accounting alternative that allows private companies and not-for-profit organizations to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, as of the end of the reporting period, whether the reporting period is an interim or annual period. It eliminates the requirement for companies and organizations that elect this alternative to perform this assessment during the reporting period, limiting it to the reporting date only.

The amendments in the ASU also include an unconditional one-time option for entities to adopt the alternative prospectively after its effective date. No additional disclosures would be required.

Effective Dates

The amendments in ASU 2021-03 are effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. An entity should not retroactively adopt the amendments in this Update for interim financial statements already issued in the year of adoption.

FASB Issues Standard Clarifying the Issuer’s Accounting for Certain Modifications of Freestanding Equity-Classified Written Call Options

In May, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50),Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force), that requires issuers to account for modifications or exchanges of freestanding equity-classified written call options (e.g., warrants) that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. The guidance, which is based on a final consensus of the Emerging Issues Task Force, is intended to address stakeholder requests for accounting guidance on how issuers should account for modifications or exchanges of freestanding equity-classified written call options that are not in the scope of another Accounting Standards Codification (ASC) topic and remain classified in equity after a modification or an exchange. The lack of guidance has caused diversity in accounting for these types of modifications or exchanges. Entities modify or exchange written call options for different reasons. For example, they may modify warrants in connection with the issuance of new debt or equity instruments or in connection with a modification of an existing debt instrument or a line of credit or a revolving debt arrangement, which we refer to as debt instruments. They also may modify these instruments to compensate the counterparty for services or goods or for other reasons (e.g., to provide value to an instrument holder in lieu of a dividend).

The FASB narrowed the scope of the final guidance to modifications and exchanges of equity-classified freestanding written call options that remain equity classified after the modification or exchange rather than all equity-classified freestanding forwards and options, as it proposed. This means that the new guidance does not apply to modifications of equity-classified freestanding forward contracts or purchased options on an entity’s own shares, for example.

ASU 2021-04 provides guidance on how an issuer would measure and recognize the effect of these transactions. Specifically, it provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense.

Effective Dates

ASU 2021-04 is applied prospectively to all modifications or exchanges that occur on or after the date of adoption. It is effective for all entities for fiscal years beginning after 15 December 2021, and interim periods within those fiscal years. Early adoption is permitted, but entities need to apply the guidance as of the beginning of the fiscal year that includes the interim period in which they choose to early adopt the guidance.

Regulatory Update

OCC Issues Allowances for Credit Losses Handbook

On April 15, 2021 the Office of the Comptroller of the Currency (OCC) issued a new booklet titled “Allowances for Credit Losses.” This booklet is prepared for use by OCC examiners in connection with the examination and supervision of its member banks, and applies to those banks that have adopted the current expected credit losses (CECL) methodology under ASC 326. The previously issued “Allowance for Loan and Lease Losses” booklet continues to apply to banks that have not adopted CECL.

While this booklet is primarily prepared for examiner use, it can be a valuable resource for institutions as they are implementing CECL. The booklet describes the scope of the methodology, risks associated with allowances for credit losses, and seven primary components used to estimate allowances for credit losses. The booklet further includes all examination procedures to be performed by OCC examiners, with the ultimate goal of concluding on whether or not the bank’s allowance for credit losses methodology and balances are appropriate.

Proposed Rule on Tax Allocation Agreements

A tax allocation agreement is a legally binding document between members of a consolidated tax group used to determine a methodology for computing each member’s tax liability, utilization of tax attributes (such as tax credits, excess capital losses and net operating losses), allocations of any tax refunds as well as the frequency of intercompany tax payments.

On May 10, 2021, a proposed ruling on tax allocation agreements was published in the Federal Register which allows for a 60 day comment period. Under the proposal, institutions regulated under the OCC, Federal Reserve Board or FDIC (“agencies”) which are part of a consolidated tax group would be required to enter into a tax allocation agreement with its holding company and/or other members with which it files a consolidated tax return. Currently, the agencies cannot legally enforce actions against non-compliant banks under the current guidance issued in 1998 and 2014, but this proposed rule would allow for enforcement actions.

The proposal also requires that a tax allocation agreement include the following items:

  • The timing and amounts of any payments for taxes due to taxing authorities;
  • The acknowledgment of an agency relationship between holding companies and their subsidiary institutions related to tax refunds;
  • Payment to a member for the tax benefit of its losses or tax credits if used to reduce the consolidated group’s overall tax liability;
  • Payment of refunds to a member if it would have received a refund as a separate entity; and
  • The requirement that documents, including tax returns, supporting schedules, workpapers or correspondence, relating to consolidated or combined federal, state, or local income tax filings be made available to an institution or any successor during regular business hours.

The 60 day comment period for this proposed rule ends on July 9, 2021. Instructions for submitting comments may be found here.

If the proposal were adopted as the final rule, the interagency policy statement on tax allocation agreements issued in 1998 and supplemented in 2014 would be rescinded. In addition, the proposal would become a new appendix to the safety and soundness regulations of each agency.

We will provide updates on the tax allocation agreement proposal as information becomes available.

Federal Reserve Publishes Semiannual Supervision and Regulation Report

The Federal Reserve Board published their semiannual Supervision and Regulation Report on April 30, 2021. The report focused on the challenges posed by COVID-19 and policy developments, supervisory programs, approaches, and actions taken by the Federal Reserve in response to the pandemic. The Federal Reserve continues to focus on the extent to which institutions understand their risks, estimate expected losses appropriately, and take action to conserve capital where prudent. In addition, resiliency to operational disruptions, changes in market conditions, and changes to accounting rules in a focus area.

The report also provided an overview of banking system conditions, which is summarized below:

  • Capital and liquidity remains robust, with capital ratios well exceeding regulatory minimums at nearly all institutions.
  • Return on equity (ROE) and return on average assets (ROAA) has returned to levels seen before the pandemic, bolstered by sources of non-interest income including mortgage banking revenues.
  • Liquidity has strengthened, primarily due to a large increase in deposits as a result of higher consumer savings, Paycheck Protection Program (PPP) loans, and stimulus payments.
  • Loan loss provisions have lowered sharply as the economic outlook has improved; however, loan growth has been relatively flat beyond the origination of PPP loans. In addition, loan modifications loan modifications have declined from their peak in the second quarter of 2020 for consumer loan modifications, and the third quarter of 2020 for commercial loan modifications.
  • Net interest margins have continued to decline due to a combination of a lower interest rate environment and increased liquidity concentrated in lower yielding assets.
  • Loan modification activity continues and a slight increase in loan delinquency rates has been seen.
PCAOB Releases 2020 Annual Report

The Public Company Accounting Oversight Board (PCAOB) released their 2020 annual report in May. In addition to a financial review, audited financial statements, and management’s report on internal control over financial reporting, the report included details of the execution of their strategic plan in 2020. Per the message from the chairman, the plan “emphasizes the need to transform our organization into a trusted leader that promotes high quality auditing through forward-looking, responsive, and innovative oversight.” In that regard significant steps taken to execute the plan in 2020 included:

1. “Becoming more proactive and innovative in our oversight”

2. “Expanding our stakeholder engagement activities and improving our communications”

3. “Maturing our internal operation by streamlining our business processes and improving our risk posture”

4. “Enhancing our organizational culture”

5. “Cultivating a high-performing workforce”

SEC Chair Gensler Initial Rulemaking Agenda Unveiled

Along with starting some predictable new rulemaking projects, such as disclosure of climate change, SEC Chair Gary Gensler is planning to revisit a few of the business-friendly rules adopted during Jay Clayton’ term as head of the agency, according to an updated semi-annual rulemaking agenda unveiled last week.

Gensler is also looking to implement some Dodd-Frank rules that were not previously adopted because of strong opposition by companies. The rules include clawback, pay versus performance, and incentive-based compensations for executives at large financial institutions. The last one must be adopted jointly with banking supervisors.

The chair of the commission sets the rulemaking agenda, and investor protection advocates were deeply concerned as Clayton, from 2017 to 2020, moved to check off regulatory items on the wish list of business groups who argued that burdensome regulations ultimately hurt economic growth. Investor advocates said that such rules put shareholders at a greater risk of losing money but at the same time make company management less accountable. Gensler, in his public remarks, has signaled that he will put a heightened regulatory focus on meeting the needs of investors without neglecting capital formation.

The agenda reflects items that Gensler wants to issue as preliminary, proposed, or final rulemaking documents over the next 10 months, with some planned for October and November this year, and others planned for April 2022. There are 49 rulemaking items in total: four are pre-rules, 36 are proposals, and the remaining nine are finals.

The agenda does not give detailed information, but it offers clues with a broad summary of what Gensler intends to do for each rulemaking item; chief among them are rules pushed by progressives and Democrats, such as enhanced disclosure of climate change risk, human capital management, corporate board diversity, and cybersecurity risk governance. The staff is drafting a proposal for each of the four projects for the commission’s consideration this fall. The unprecedented increase in the number of special purpose acquisition companies (SPACs) has led the commission to try to address any emerging investor protection issues. The staff is working on a rule proposal for April 2022.

Rules intended to address problems with meme stock trading and other trading issues are on the agenda, including a proposal to shorten the stock trade settlement cycle, short sale disclosure under Dodd-Frank, executive stock trade plans, and stock buybacks. Former SEC commissioner Robert Jackson, who was considered for the commission chair position under the Biden administration, had pushed for rule changes on corporate stock repurchases, which have increased in recent years. Among other things, Jackson said the current rule inappropriately gives executives incentives by taking advantage of less informed shareholders while cashing out their shares at a higher price.

Other notable rulemaking topics include universal proxy, which the commission wants to finalize next spring, and stock trading prohibitions under the Holding Foreign Companies Accountable Act. This is intended to address the PCAOB’s inability to inspect auditors for Chinese companies who list their shares on U.S. exchanges with a proposal slated for April 2022.

House Passes Legislative Package on Climate, Pay, Political Spending Disclosures

House Democrats are pushing forward on a legislative package that would establish a sweeping set of mandates for the SEC on climate risk, sustainability, outsourcing, corporate political spending, and executive pay raises. H.R. 1187, the Corporate Governance Improvement and Investor Protection Act, is made up of bills that advanced out of the House Financial Services Committee in April and May. The package represents the most aggressive push this year by Democratic lawmakers looking to vastly expand the SEC’s environmental, social, and governance (ESG) disclosure regime, running parallel to ESG rulemaking efforts by new SEC Chair Gary Gensler. House Republicans remain strongly opposed to the package.

The package contains the text of the following bills:

  • Climate Risk Disclosure Act, sponsored by Rep. Sean Casten of Illinois, mandating new corporate disclosures on the threat to public companies posed by climate change. Casten’s bill would amend the Securities Exchange Act of 1934 to require covered issuers to make annual disclosures on the identification of, the evaluation of potential financial impacts of, and any risk management strategies relating to the physical and transition risks posed by climate change. Public companies would also need to describe any established corporate governance processes and structures to address climate risks, and describe specific actions taken to mitigate those risks; among other disclosures. Also under the bill, the SEC would have two years to set out rules that establish, in consultation with the appropriate climate principals, climate-related disclosure requirements. Those rules would be specialized for industries that include finance, insurance, transportation, electric power, mining, non-renewable energy, and any other sector deemed appropriate by the SEC. The commission would also need to issue reporting standards for “estimating and disclosing direct and indirect greenhouse gas emissions” by an issuer and its affiliates, among other provisions. The SEC last issued climate guidance in 2010 in Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change. In the guidance, the commission said companies should inform investors about the risks they face from climate change, including lawsuits, business problems, regulatory supervision, or international treaties. The significant effects of climate change, such as severe weather, rising sea levels, loss of farmland, and the declining availability and quality of water, have the potential to affect a public company’s operations and financial results and should be disclosed.
  • ESG Disclosure Simplification Act, introduced by Rep. Juan Vargas, of California. The bill sets out that ESG metrics are material and requires their disclosure, with the SEC in charge of establishing those metrics using recommendations from a newly created advisory panel. Public companies would also need to disclose their views on the link between ESG metrics and long-term business strategy, among other disclosures. The measure would establish an SEC Sustainable Finance Advisory Committee made up of no more than 20 members, with representation from experts on sustainable finance; operators of financial infrastructure; entities that provide analysis, data, or methodologies that facilitate sustainable finance; insurance companies, banks, pension funds, asset managers or credit unions; and other intermediaries in sustainable finance. Each SEC commissioner would select an equal number of committee members from the pool of applicants.
  • Shareholder Political Transparency Act, sponsored by Rep. Bill Foster of Illinois, which would amend the Securities Exchange Act of 1934 to direct the SEC to issue rules requiring disclosure of expenditures for political activities in the preceding quarter, including a description of that expenditure, the date, the amount, and the name and party affiliation of the recipient. The reports must be made available over the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Also under the bill, SEC would issue rules requiring public companies to include in annual reports a summary and description of each political expenditure in the preceding year above $10,000, and a forecast of the political expenditures for the coming year. The bill comes as Democratic lawmakers are looking to scrub a longstanding budget rider preventing the SEC from implementing a corporate political spending disclosure rule under its own authority. Congress has for years slipped riders into Financial Services and General Government (FSGG) appropriations bills, which fund the SEC, prohibiting the agency from launching the rulemaking, to the protest of political spending transparency activists. They say the rule is sorely needed following the Supreme Court’s 5-4 decision in Citizens United v. Federal Election Commission in 2010, which lifted restrictions on independent political expenditures by corporations and unions.
  • Disclosure of Tax Havens and Offshoring Act, sponsored by Rep. Cindy Axne of Iowa, directing the SEC to make rules requiring large, multinational public companies to provide country-by-country disclosures of financial performance, an effort to bring transparency to offshoring practices and the use of tax havens. The bill, according to Axne, would provide investors with consistent, comparable information needed to understand the risks of investing in those companies. She has argued that, because the bill would only be making public information that is already provided to the IRS, the burden to companies would be minimal. The measure would apply to an issuer that is a member of a multinational enterprise group meeting a certain minimum revenue threshold set by the SEC to conform to United States or international standards for country-by-country reporting. The disclosures required under the bill include revenues, profit or loss, total income tax paid, total accumulated earnings, and total number of employees, all broken out on a jurisdiction-by-jurisdiction basis.
  • Greater Accountability in Pay Act, sponsored by Rep. Nydia Velazquez of New York. The bill would set out new pay raise disclosures in public company annual reports for executives and for the company’s broader workforce, and require an issue to present a ratio comparing the former to the latter. The legislation comes less than six years after the SEC finalized its Dodd-Frank Act pay ratio disclosure rules in Release No. 33-9877, Pay Ratio Disclosure, which require companies to disclose a ratio comparing the chief executive’s pay to that of the median employee.

On the Horizon

AICPA FinREC Weighs in on Credit Loss Standard

The Financial Reporting Executive Committee (FinREC) of the AICPA has issued proposed guidance that will be added to the AICPA Accounting Guide, Brokers and Dealers in Securities. An exposure draft has been released for review, and comments are requested by July 17, 2021.

If adopted, the update would include sample financial statement language for SEC-registered broker-dealers. The sample language would be included in the accounting policy footnote, after cash and cash equivalents, and would state the broker-dealer’s policy for estimating losses on financial assets upon adoption of ASC 326-20. The guide would also include sample language for off-balance sheet credit exposures, receivables from customers, and securities borrowed. The purpose of this addition to the guide is to give broker-dealers some clarity on what their accounting policy footnote should include upon adoption of ASC 326 – Financial Instruments – Credit Losses.

This proposed update also includes updated financial statement language related to the Receivables From and Payables to Customers section.

Statement of Cash Flow Needs to Be Revised for Financial Institutions According to Analysts

The FASB should consider revising the statement of cash flows to better reflect what financial institutions do, according to a May meeting of the Investor Advisory Committee (IAC) of the FASB. Analysts have a host of problems with what’s given to investors in the current statement of cash flow format and it comes down to a fundamental view as to what is an operating activity at a financial institution. As it now stands, many financial institutions ‘ free cash flow and free cash flow yields cannot be reliably compared across the sector as is done for other sectors. Among potential solutions the FASB could take is to either change the definition of operating activities for financial institutions such that more applies to what the financial institutions do or try to get to what net cash income really is for banks.

FASB May Tweak CECL Standard

The FASB could decide at a future meeting on whether to tweak credit loss accounting rules in areas such as purchased financial assets credit deterioration (PCD) and measurement of troubled debt restructurings (TDR), according to a FASB roundtable discussion in May. Some panelists said the FASB should eliminate the need to recognize a provision expense when acquired financial assets do not qualify for PCD accounting, referred to as the double count. Others cautioned there could be potential consequences of making a change to the current PCD guidance including operational and transparency issues.

A second project the board could add might surround the relevance of TDRs as a measure of troubled loans, the discussions revealed. Some panelists said TDR measurements are less relevant for financial institutions given the forward-looking nature of the CECL model. Relevant information would be better conveyed through disclosures, they said.

The roundtable was part of efforts to obtain feedback on whether ASC 326, Credit Losses, worked as intended. The standard replaced an incurred loss model with the CECL standard, which provides a more timely report of losses from bad loans.

ABA Calls for Changes in Accounting Rules for Tax Credit Investments

The banking sector has asked the FASB to expand the accounting rules for qualified affordable housing project investments to other tax credit investments, stating the guidance should apply to more programs. Specifically, the American Bankers Association (ABA) says the FASB should amend rules under ASC 323-740, Investments—Equity Method and Joint Ventures, to include all investments that are made for the primary purpose of receiving tax credits and other tax benefits based on satisfying the conditions of tax rules in ASC-740-25-1. Other investment programs such as the New Markets Tax Credit Program (NMTC) have similar structure and tax advantages to low income housing tax credits (LIHTC) but are subject to different accounting standards.

The NMTC program attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialized financial intermediaries called Community Development Entities (CDEs), according to the U.S. Department of Treasury’s Community Development Financial Institutions Fund. Banks have asserted that since there is no guidance specific to NMTC investments today, they have to present the depletion of these tax credit investments as an expense in their pre-tax income line while recognizing the economic benefit of the investment below the pre-tax income line as a reduction to income tax expense. The timing of the recognition of this expense and the associated tax credit benefit are often misaligned.

Lack of consistency in the application of the accounting for tax credit investments negatively impacts users of financial statements, preparers, and ultimately those who are served by the underlying projects, according to the ABA.

Improvements to Discount Rate Guidance for Lessees That Are Not Public Business Entities

In June, the FASB issued a proposal that would improve discount rate guidance for lessees that are not public business entities—including private companies, not-for-profit organizations, and employee benefit plans. It is intended to reduce the expected cost of implementing the lease accounting standard (ASC 842, Leases) for those entities while retaining the expected benefits for users of financial statements.

ASC 842 currently provides lessees that are not public business entities with a practical expedient that allows them to make an accounting policy election to use a risk-free rate as the discount rate for all leases. The FASB originally provided this practical expedient to relieve those lessees from having to calculate an incremental borrowing rate, which could create unnecessary cost and complexity.

Some private company stakeholders expressed reluctance to use the risk-free rate election for all leases. Those stakeholders noted that in the current economic environment, a risk-free rate (e.g., a U.S. Treasury rate) is low compared with their expected average incremental borrowing rates, and that using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets.

To address these concerns, the amendments in the proposed ASU would allow lessees that are not public business entities to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. It also would require that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee would use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.

FASB Proposal to Improve and Expand Hedge Accounting

In May, the FASB issued a proposal intended to better align hedge accounting with an organization’s risk management strategies. In 2017, the FASB issued a new hedging standard to better align the economic results of risk management activities with hedge accounting. The new standard increased transparency around how the results of hedging activities are presented, both on the face of the financial statements and in the footnotes, for investors and analysts when hedge accounting is applied.

One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate pre-payable financial assets or one or more beneficial interests secured by a portfolio of pre-payable financial instruments, such as mortgages or mortgaged-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows.

Since issuing the hedging standard, stakeholders have told the FASB that the ability to elect hedge accounting for a single layer is useful, but hedge accounting could better reflect risk management activities if expanded to allow multiple layers of a single closed portfolio to be hedged under the method.

The proposed ASU would expand the current single-layer model to allow multiple-layer hedges of a single closed portfolio of pre-payable financial assets or one or more beneficial interests secured by a portfolio of pre-payable financial instruments under the method. To reflect that expansion, the last-of-layer method would be renamed as the portfolio layer method.

Additionally, the proposed ASU would:

  • Clarify eligible hedging instruments in a single-layer strategy.
  • Provide additional guidance on the accounting for and disclosure of fair value hedge basis adjustments that would be applicable to both the current single-layer model and the proposed multiple-layer model.
  • Indicate how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.
FASB Proposal Issued to Address Business Combination Accounting for an Assumed Liability in a Revenue Contract

When accounting for a business combination, in applying the acquisition method, the acquirer recognizes identifiable assets acquired and liabilities assumed in the business combination and measures those assets and liabilities at fair value. For business combinations that occur before the adoption of the new revenue recognition standard, entities often use a legal obligation definition for recognition of a liability under Topic 805 for deferred revenue. However, Topic 606 has introduced the performance obligation definition for revenue contracts with customers which has created diversity of opinion regarding which definition should be used for recognition for business combinations after Topic 606 has been adopted.

On February 14, 2019, the FASB issued proposed ASU, Business Combinations (Topic 805): Revenue from Contracts with Customers—Recognizing an Assumed Liability (a consensus of the FASB Emerging Issues Task Force). The EITF reaffirms that the performance obligation definition in Topic 606, Revenue from Contracts with Customers, would be used to determine whether a liability assumed for a contract liability from a revenue contract with a customer is recognized by the acquirer in a business combination.

Disclosure Framework

The disclosure framework project consists of two phases: (1) the FASB’s decision process and (2) the entity’s decision process. The overall objective of the project is to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements. Although reducing the volume of the notes to financial statements is not the primary focus, the FASB hopes that a sharper focus on important information will result in reduced volume in most cases.

Consolidation Reorganization

On November 2, 2016, the Board added this project to its technical agenda. Further, it tentatively decided to (1) clarify the consolidation guidance in ASC 810, Consolidation, by dividing it into separate Codification subtopics for voting interest entities and variable interest entities (VIEs); (2) develop a new Codification topic that would include those reorganized subtopics and would completely supersede ASC 810; (3) rescind the subsections on consolidation of entities controlled by contract in ASC 810-10-15 and in ASC 810-30 on research and development arrangements; (4) further clarify that power over a VIE is obtained through a variable interest; and (5) provide further clarification of the application of the concept of “expected,” which is used throughout the VIE consolidation guidance.

At its March 8, 2017, meeting, the FASB discussed the feedback received at its December 16, 2016, public roundtable and voted to move forward with a proposed ASU that reorganizes the consolidation guidance. On September 20, 2017, the FASB issued Proposed ASU, Consolidation (Topic 812): Reorganization, and the comment period has closed. The proposed ASU is now in the redeliberation phase related to comment responses received.

On June 27, 2018, the FASB decided to continue its existing project to reorganize ASC 810 and instructed the staff to develop nonauthoritative educational material to address the more difficult parts of consolidation guidance with the goal of supporting and supplementing the reorganized authoritative consolidation guidance.

Determining Current Price of an Underlying Share for Equity-Classified Share-Option Awards

In 2020, the FASB issued a proposed ASU intended to reduce cost and complexity for private companies when determining the fair value of the shares underlying a share-option award on its grant date or modification date. Members of the Private Company Council (PCC) conveyed concerns that current guidance on determining fair value for these shares creates unnecessary cost and complexity for some stakeholders. This is primarily because the private company equity shares underlying the share option often are not actively traded and, thus, observable market prices for those shares or similar shares do not exist.

The proposed ASU would allow a nonpublic entity to determine the current price of a share underlying an equity-classified share-option award using a valuation method performed in accordance with specific regulations of the U.S. Department of the Treasury that provide acceptable methodologies to comply with the “presumption of reasonableness” requirements of Section 409A of the U.S. Internal Revenue Code.

EITF Agenda Items

The Emerging Issues Task Force did not meet during the second quarter.

PCC Activities

The Private Company Council (PCC) met on April 20, 2021. Below is a brief summary of issues addressed by the PCC at the meeting:

  • Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards”: The PCC redeliberated issues for the proposed ASU, Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards. The PCC discussed how the practical expedient should reference the Treasury Regulations of Section 409A of the U.S. Internal Revenue Code—by direct reference to specific paragraphs, by a summarization of those paragraphs, or by a combination of those two approaches. The PCC also redeliberated the scope, application, transition method, and effective date of the practical expedient. After redeliberating those issues, the PCC unanimously determined that the practical expedient would achieve the project’s intended objectives. At its June 2021 meeting, the PCC will discuss a draft of the final Update and consider whether to recommend that it be subject to the FASB endorsement process (see below).
  • Agenda Consultation: A PCC member provided a summary of the financial reporting issues that the Board should consider adding to its technical agenda and the priority of those issues, which were discussed during the closed PCC meeting that took place on April 19, 2021. Those issues included debt modifications, troubled debt restructurings, disclosure materiality, liabilities and equity, variable interest entities, and financial performance reporting. PCC members discussed their views with FASB Board members and staff on those potential areas for the Board to prioritize. PCC members also expressed support for the FASB’s goodwill and segment reporting projects.
  • Goodwill—Triggering Event Assessment Alternative for Private Companies and Not-for-Profit Entities: FASB staff highlighted ASU 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, which provides an accounting alternative that allows private companies and not-for-profit organizations to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, as of the end of the reporting period, whether the reporting period is an interim or annual period. This accounting alternative is expected to reduce the complexity for private companies and not-for-profit organizations when performing the goodwill triggering event assessment. The Board thanked the PCC and private company stakeholders for their involvement in developing this standard.
  • Profits Interests and Their Interrelationship with Partnership Accounting: FASB staff summarized outreach with taxation and valuation specialists that has been conducted since the December 3, 2020 PCC meeting. Key discussion areas with specialists included (1) typical circumstances surrounding the grant of a profits interest award, (2) common terms of profits interests, (3) how the language in Revenue Procedure 93-27 (which defines a profits interest for tax purposes) influences the terms of profits interests, and (4) how valuation techniques used to measure profits interests compare to valuation techniques used to measure other types of equity interests issued as compensation. FASB staff noted that next steps involve performing additional outreach and research focused on some of the key accounting issues on profits interests and analyzing the FASB’s agenda criteria as it relates to identified issues. PCC members briefly provided feedback on the research performed so far and next steps.
  • Current Issues in Financial Reporting: PCC and FASB members discussed practice issues arising from the current business environment under the COVID-19 pandemic. Topics discussed included disclosures related to COVID-19 and Paycheck Protection Program loan classification. The PCC also thanked the FASB for issuing certain educational documents in response to the current environment. Those documents include the FASB Staff Educational Paper, “Topic 470 (Debt): Borrower’s Accounting for Debt Modifications,” and the FASB Staff Q&A, “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.”
  • Revenue—Post-Implementation Review: FASB staff solicited feedback from PCC members on their implementation experience with ASC 606, Revenue from Contracts with Customers, and on the post-implementation review plan for private companies. PCC members commented about their usage of the implementation resources provided by the FASB and discussed challenges and issues related to the adoption of ASC 606.
  • Leases (ASC 842)—Discount Rate for Lessees That Are Not Public Business Entities: FASB staff provided the PCC with an overview on this FASB project, which was added to the FASB agenda on April 14, 2021. This project seeks to amend the accounting policy election for lessees that are not public business entities to elect to use the risk-free rate as the discount rate by asset class. A PCC member offered preliminary feedback and volunteered to discuss further with the FASB staff at a later date.
  • Simplifying the Balance Sheet Classification of Debt: FASB staff provided the PCC with an update on this FASB project. At its April 14, 2021 meeting, the Board discussed comments received on and redeliberated the proposed amendments in its January 2017 proposed ASU and its September 2019 proposed ASU (Revised), Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). At that meeting, the Board removed this project from the FASB technical agenda.

At its meeting on June 22, 2021, the PCC approved Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards,” which will be issued as an ASU later this year subject to FASB endorsement. The new guidance will allow private companies to determine the current price input in accordance with certain valuation procedures described in the U.S. Internal Revenue Code Section 409A and the associated Treasury Regulations (Section 409A). Section 409A would be referenced as an example, but the guidance will also include facts and circumstances (as stated in Section 409A) to consider for reasonable valuations. The guidance will be effective prospectively for fiscal years beginning on or after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Earlier application will be allowed.

APPENDIX A – Important Implementation Dates

The following table contains significant implementation dates and deadlines for standards issued by the FASB and others.

Click here to view dates

APPENDIX B – Illustrative Disclosures for Recently Issued Accounting Pronouncements

For the Quarter Ended June 30, 2021

{Please give careful consideration to the appropriateness of italized text.}

The illustrative disclosures below are presented in plain English. Please review each disclosure for its applicability to your organization and the need for disclosure in your organization’s financial statements.

ASU 2016-02 ― Applicable to lessee and lessor entities:

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for [fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.- all non-public business entities]. Early adoption is permitted.

We expect to adopt the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts and activities. We have also started developing our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2020 future minimum lease payments were $____ million). We do not expect a material change to the timing of expense recognition, but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures and may need to provide additional information as a result of adoption of the ASU.

ASU 2016-13 ― Applicable to entities that hold financial assets and net investment in leases that are not accounted for at fair value through net income:

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The guidance requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. The amendments will be effective for the Company for [fiscal years beginning after December 15, 2022 including interim periods within those fiscal years.- all non-public business entities and non-SRC SEC filers] Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this guidance on the financial statements.

ASU 2017-04 ― Applicable to all entities:

In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The effective date and transition requirements for the technical corrections will be effective for the Company [reporting periods beginning after December 15, 2020.-public business entities that are not SEC filers] [reporting periods beginning after December 15, 2021.-all other entities] Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2017-12 ― Applicable to entities that elect to apply hedge accounting:

In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for [fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021.-entities other than public business entities] Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2018-01 ― Applicable to entities with land easements:

In January 2018, the FASB amended the requirements of the Leases Topic of the Accounting Standards Codification. The amendments permit an entity to elect an optional transition practical expedient to not evaluate under the new lease accounting guidance land easements that exist or expired before the entity’s adoption of the new lease accounting guidance and that were not previously accounted for as leases under previous lease accounting guidance. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2018-11 ― Applicable to lessee and lessor entities:

In July 2018, the FASB amended the Leases Topic of the Accounting Standards Codification to give entities another option for transition and to provide lessors with a practical expedient. The amendments will be effective for the Company for [annual periods beginning after December 15, 2019, and interim periods within annual reporting periods beginning after December 15, 2020- non-public business entities]. The Company does not expect these amendments to have a material effect on its financial statements.

 

ASU 2018-12 ― Applicable to insurance entities that issue long-duration contracts:

In August 2018, the FASB amended the Financial Services—Insurance Topic of the Accounting Standards Codification to make targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The amendments will be effective for the Company for [fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.-public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC] [for fiscal years beginning after December 15, 2023, and interim periods within fiscal year beginning after December 15, 2024.-all other entities] The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2018-14 ― Applicable to employers that sponsor defined benefit pension or other postretirement plans:

In August 2018, the FASB amended the Compensation—Retirement Benefits—Defined Benefit Plans Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain disclosure requirements for employers that sponsor defined benefit pension plans or other postretirement plans. The amendments are effective [fiscal years ending after December 15, 2020.-public business entities] [fiscal years ending after December 15, 2021-all other entities]. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2018-15 ― Applicable to all entities:

In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for [fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021-all non-public business entities]. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2018-17 ― Applicable to all entities:

In October 2018, the FASB amended the Consolidation topic of the Accounting Standards Codification for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. [The amendments provide a nonpublic entity with the option to exempt itself from applying the variable interest entity consolidation model to qualifying common control arrangements. The amendments will be effective for the Company for annual periods beginning after December 15, 2020, and interim periods within annual reporting periods beginning after December 15, 2021.-all non-public business entities] Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. [The Company does not expect these amendments to have a material effect on its financial statements.] [The Company is currently evaluating the effect that implementation of the new standard will have on its financial statements.]

ASU 2018-18 ― Applicable to all entities:

In November 2018, the FASB amended the Collaborative Arrangements Topic of the Accounting Standards Codification to clarify the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. The amendments will be effective for the Company for [fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.-all non-public business entities] Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2018-19 ― Applicable to entities that hold financial assets and net investment in leases that are not accounted for at fair value through net income:

In November 2018, the FASB issued guidance to amend the Financial Instruments—Credit Losses topic of the Accounting Standards Codification. The guidance aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic. The amendments will be effective for the Company for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. [All non-public business entities and non-SRC SEC filers] Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this guidance on the financial statements.

ASU 2019-04 ― Applicable to entities that hold financial instruments:

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for [reporting periods beginning after December 15, 2020.-public business entities that are not SEC filers] [fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.-all other entities]. The amendments related to hedging have previously been adopted by for the Company. The amendments related to recognition and measurement of financial instruments have previously been adopted by the Company. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-05 ― Applicable to entities that hold financial instruments:

In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. [All non-public business entities and non-SRC SEC filers] Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this guidance on the financial statements.

ASU 2019-09 ― Applicable to insurance entities that issue long-duration contracts:

In November 2019, the FASB issued guidance to defer the effective date of ASU 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The new effective date will be [for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.-public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC] [for fiscal years beginning after December 15, 2023, and interim periods within fiscal year beginning after December 15, 2024.-all other entities] The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-10 ― Applicable to all entities:

In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. The new effective dates will be CECL: [fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.-public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC] [fiscal years beginning after December 15, 2022 including interim periods within those fiscal years.-all other entities]; Hedging: [fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021.-entities other than public business entities]; Leases: [fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.-all entities other than public business entities; not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and employee benefit plans that file or furnish financial statements with or to the SEC] The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-11 ― Applicable to all entities:

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. [For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years-public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC] [fiscal years beginning after December 15, 2022 including interim periods within those fiscal years-all other entities]. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-12 ― Applicable to entities within the scope of Topic 740, Income Taxes:

In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. [The amendments are effective for [fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.-public business entities] [fiscal years beginning after December 15, 2021, and interim periods within annual reporting periods beginning after December 15, 2022-all other entities]. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-01 ― Applicable to all entities:

In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments are effective for [fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.-public business entities] [for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years-all other entities]. Early adoption is permitted, including early adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-03 ― Applicable to all entities:

In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the current expected credit losses (CECL) guidance issued in 2016. The amendments related to conforming amendments: For public business entities, the amendments are effective upon issuance of this final ASU. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early application is permitted. The effective date of the amendments to ASU 2016-01 is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the amendments related to ASU 2016-13, public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies (SRCs) as defined by the SEC, should adopt the amendments in ASU 2016-13 during 2020. All other entities should adopt the amendments in ASU 2016-13 during 2023. Early adoption will continue to be permitted. For entities that have not yet adopted the guidance in ASU 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU 2016-13. For entities that have adopted the guidance in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For those entities, the amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13.The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-04 ― Applicable to all entities:

In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-05 ― Applicable to all entities:

In June 2020, the FASB issued guidance to defer the effective dates for certain companies and organizations which have not yet applied the revenue recognition and leases guidance by one year. The new effective dates will be: Revenue Recognition: annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020; Leases: fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-06 ― Applicable to all entities:

In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments are effective for [fiscal years beginning after December 15, 2021, including interim periods within those fiscal years – public business entities that meet the definition of a SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC] [fiscal years beginning after December 15, 2023, including interim periods within those fiscal years – all other entities]. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-08 ― Applicable to all entities:

In October 2020, the FASB issued guidance to clarify the FASB’s intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of FASB Accounting Standards Codification (FASB ASC) 310-20-35-33 for each reporting period. The amendments will be effective for [fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 – public business entities] [fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted for all other entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 – all other entities]. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-10 ― Applicable to all entities:

In October 2020, the FASB issued amendments to clarify the Accounting Standards Codification and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are effective for [annual periods beginning after December 15, 2020. Early application is permitted for any annual or interim period for which financial statements have not been issued – public business entities] [annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early application is permitted for any annual or interim period for which financial statements are available to be issued – all other entities]. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2020-11 ― Applicable to insurance entities that issue long-duration contracts:

In November 2020, the FASB issued guidance to defer the effective dates for insurance entities which have not yet applied the long duration contracts guidance by one year. The new effective dates will be [fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.-public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC] [for fiscal years beginning after December 15, 2024, and interim periods within fiscal year beginning after December 15, 2025.-all other entities] The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2021-01 ― Applicable to entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform:

In January 2021, the FASB issued amendments to clarify that certain optional expedients and exceptions in the reference rate reform topic for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The amendments were effective immediately upon issuance. The Company elected to apply the amendments [retrospectively to eligible modifications as of any date from the beginning of the interim period that includes March 12, 2020] or [prospectively to new modifications made on or after any date within the interim period that includes January 7, 2021]. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2021-03― Applicable to entities that are not public business entities:

In March 2021, the FASB amended the Intangibles—Goodwill and Other topic of the Accounting Standards Codification to provide an accounting alternative for private companies and not-for-profit organizations when performing the goodwill triggering event evaluation. Under the amended guidance, a private company or not-for-profit organization may elect to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, as of the end of the reporting period, whether the reporting period is an interim or annual period.   The amendments are effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. The Company does not expect these amendments to have a material effect on its financial statements.

Applicable to all:

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE: The disclosures in the previous appendix are not intended to be all inclusive. All pronouncements issued during the period should be evaluated to determine whether they are applicable to your Company. Through June 30, 2021, the FASB had issued the following Accounting Standard Updates during the year.

· ASU 2021-04—Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)

· ASU 2021-03 Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events

· ASU 2021-02—Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient

· ASU 2021-01—Reference Rate Reform (Topic 848): Scope