With 2022 well under way, resolutions set in the New Year are rapidly falling to the wayside for many. In the current environment, financial institution leaders can’t ignore the need for change in order to try again next year. Updates to accounting standards and regulations necessitate careful planning, and, in some cases, tweaks of systems and processes to maintain compliance.
Fulfill your fiduciary obligations and minimize disruption to your financial institution by keeping these three topics in mind to gradually implement changes within your institution throughout the year.
New lease accounting standard
The long-awaited update to lease accounting is finally here for everyone. After years of discussion and delay, ASC Topic 842, Leases, took effect for non-public entities for fiscal years beginning on or after December 15, 2021 and is applicable for 2022. Complying with this standard can have a meaningful impact on the institution’s balance sheet, income statement, and capital ratios.
The most significant change in ASC 842 requires lessees to record right-of-use assets (ROU) and lease liabilities on the balance sheet for almost every lease. This significantly differs from the previous accounting for operating leases under which the leases were not recognized for accounting purposes. Accordingly, these operating leases were only disclosed in the notes to the financial statements, instead of recorded on the balance sheet.
ROU assets must be included among total risk-weighted assets as well as total assets when calculating leverage capital. The expense recognition for an operating lease would be recorded on a straight-line basis over the lease term, reducing the recorded lease liability.
The new standard also contains a variety of practical expedients and policy elections. For example, a lessee may elect, as a policy election, not to record leases with terms of 12 months or less on the balance sheet.
FDICIA annual audit and reporting requirements
Like the lease accounting rules, implementation of Part 363 of Federal Deposit Insurance Corporation regulations was delayed in 2021. However, the temporary relief for Part 363 Audit and Reporting Requirements has ended now.
The regulation’s annual audit and reporting requirements are in effect for all individual insured depository institutions (IDIs) with consolidated total assets of $500 million or more at the beginning of the fiscal year. IDIs with $1 billion or more must undergo an internal control audit in addition to the financial statement audits required for all IDIs meeting the asset threshold.
Public companies and certain subsidiaries of a public company must file Part 363 annual reporting no later than 90 days after their fiscal year ends. For non-public financial institutions, the filing deadline is 120 days past the fiscal year-end.
Part 363 contains additional reporting requirements as well. Bank leaders and board members should gain a thorough understanding of all audit and reporting obligations described under the regulation and ensure their institution takes the steps necessary for full compliance.
CECL
The Current Expected Credit Losses (CECL) accounting standard, ASU 2016-13, will be effective as of January 1, 2023, for insured depository institutions, bank holding companies and affiliates not already subject to the new rule. This update, entitled Financial Instruments—Credit Losses (Topic 326), replaces ASC 450 (FAS-5) and ASC 310 (FAS-114) with a new accounting standard that significantly alters the way financial institutions must treat expected credit losses.
The standard has been in place for SEC filers since the end of 2019. Now all remaining financial institutions must adopt the new rules governing how lenders account for credit losses. In a major shift from older regulations, CECL requires lenders to measure expected losses over the remaining life of the loan rather than recognizing only incurred losses at the balance sheet date.
Evaluating changes in existing guidance and implementing new processes in response can add stress to internal resources at financial institutions. When compliance is critical, timely professional guidance can be a wise investment to respond to complex rules. We will help you adopt and implement these complex rules with straightforward advice and processes to meet all your financial institution’s regulatory requirements.
Contact your Mauldin & Jenkins advisor today for knowledgeable advice and support.
