Is Your Nonpublic Bank (or Credit Union) Considered a Public Entity?
Many nonpublic companies have looked to the Financial Accounting Standards Board – through the creation of the Private Company Council – to examine the existing accounting standards and make recommendations for alternative approaches to financial reporting.
Based on the PCC recommendations, the FASB has now issued two Accounting Standards Updates, one standard provides simplified accounting alternatives for accounting for goodwill, the other for applying hedge accounting to certain plain vanilla interest rate swaps (which is explicitly not available to financial institutions) and have others in the pipeline for release. Financial institutions may want to proceed cautiously before moving forward with adoption of any of the PCC alternatives.
Will the Agencies Allow Adoption?
The first issue is whether the regulatory agencies will allow any financial institution to adopt any of the simplified accounting PCC alternatives. While FASB’s simplified accounting alternatives are still considered GAAP, the use of these accounting alternatives could potentially create financial reporting inconsistencies between institutions. Comparability and consistency in regulatory reporting is one of the congressional mandates that the agencies must take into consideration when determining the acceptability of the FASB’s simplified accounting alternatives.
Currently, the agencies have not determined whether such changes will pose a conflict with their mandate to ensure comparability of regulatory reporting across entities. However, until a decision is reached, financial institutions that choose to adopt any of these accounting electives risk the chance of having to restate their regulatory reports if these accounting alternatives are not deemed acceptable.
Revised Definition of Public Entity
Secondly, some banks may be unaware that they could be considered public business entities for accounting purposes and, thus, unable to take advantage of the PCC simplified accounting electives.
Recently, the FASB issued a standard (ASU 2013-12, “Definition of a Public Business Entity—An Addition to the Master Glossary”) to define a public business entity, with one purpose being to determine the scope for the PCC alternatives. One of FASB’s criteria to meet the definition of a public business entity is whether it has one or more securities that are not subject to contractual restrictions on transfer. Another aspect of the criteria is if the entity is required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods), pursuant to a legal, contractual or regulatory requirement. An entity must meet all those conditions, plus others as outlined in the ASU. Not-for-profit organizations and employee benefit plans are excluded from the definition.
Given that all banks subject to the Federal Deposit Insurance Corporation Improvement Act are required to prepare U.S. GAAP financial statements, and their financial statements are publicly available, this could suggest that banks with more than $500 million in assets are public business entities, unless there are restrictions on securities. Therefore, banks that are legally considered nonpublic entities should not assume that the public entity definition does not apply to them for accounting purposes.
What Do the PCC Alternatives Mean for Credit Unions?
While the FASB has clarified that credit unions are exempt from the definition of a public business entity for accounting purposes, like banks, credit unions should also proceed cautiously. The National Credit Union Administration has not yet determined if it will accept the PCC alternatives for regulatory reporting for credit unions.
The bottom line is before a bank or a credit union considers adopting any of FASB’s simplified PCC accounting alternatives, management should carefully review FASB’s definition of a public business entity to determine whether the PCC’s alternatives are even an option for consideration.
Salome J. Tinker, CPA, Senior Technical Project Manager, Accounting Standards, American Institute of CPAs. Salome’s focus is accounting standards affecting depository and lending institutions and oversees the Depository Institutions Expert Panel. Prior to joining the AICPA, Salome worked for Fannie Mae, the Board of Governors of the Federal Reserve and the U.S. Army. She has a BBA in Accounting from Howard University.
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