Community Banking Advisor: FASB Updates Guidance on Classifying and Measuring Financial Instruments

Abstract: This issue’s “BANK Wire” reports on updated FASB guidance on classifying and measuring financial instruments, reasons why a bank needs a “bring your own device” (BYOD) policy for personal mobile devices and what such a policy should include, and the Federal Reserve’s recent comments on the low interest rate trend. It also announces a new and useful fact sheet on construction loan disclosures from the Consumer Financial Protection Bureau.

Banks will be required to measure certain equity investments at fair value and recognize fair value changes in net income, due to an update from the Financial Accounting Standards Board. Accounting Standards Update (ASU) 2016-01, Financial Instruments–Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, also eliminates the “available for sale” classification, under which changes in fair value are reported in “other comprehensive income.”

Additionally, the ASU provides some financial reporting relief for many community banks — it ends the requirement for nonpublic business entities to disclose the fair value of financial instruments measured at amortized cost, such as loans and deposits. Although the guidance doesn’t take effect until fiscal years beginning after December 15, 2018 (2017 for public business entities), this provision may be adopted early.

Why You Need a BYOD Policy

Given the usefulness and pervasiveness of smartphones and other mobile devices, it’s wise for banks to establish a “bring your own device” (BYOD) policy. Some banks — concerned about security risks — simply prohibit employees from using their own devices for bank business. Such a ban can be unpopular as well as difficult to enforce, however. A less stringent approach would be to have a policy that permits the use of mobile devices, but also takes steps to manage the risks.

A BYOD policy should:

  • Provide for management approval of devices,
  • Require employees to use strong passwords and other security controls,
  • Enable the bank to wipe a device remotely at its discretion,
  • Specify the types of information that can be stored on — or transmitted using — the device, and
  • Establish encryption standards.

Certain vendors offer mobile device management solutions that banks can use to manage employees’ devices and implement controls to protect bank information.

Low Net Interest — “Not the New Normal”

The Federal Reserve has attributed recent low net interest income to low interest rates, fewer lending opportunities and relatively flat yield curves in the years following the financial crisis and recession. But low net interest income “isn’t the ‘new normal,’” the Fed stated in its Community Banking Connections. The agency predicted that, “although net interest income may be unlikely to return to the high levels of the early 1990s, as the economy improves net interest income is likely to rebound significantly.”

CFPB Offers Some Guidance on Construction Loan Disclosures

The Consumer Financial Protection Bureau recently published a fact sheet (“Know Before You Owe Mortgage Disclosures and Construction Loans”) explaining construction loan disclosures under the TILA/RESPA Integrated Disclosure rule. Click here to read more.