Bank Accounting Advisory Series October 2014 - Office of the

240 Pages·2016·1.14 MB·English

Bank Accounting
Advisory Series
Message From the Chief Accountant

I am pleased to present the Office of the Chief Accountant’s August 2017 edition of the Bank
Accounting Advisory Series (BAAS). The BAAS expresses the office’s views on accounting
topics relevant to national banks and federal savings associations (collectively, banks or
institutions, unless otherwise specified). We hope that you find this publication useful.

In the past, our office has updated the BAAS for newly issued accounting standards after they
became effective. We are changing our approach beginning with this edition of the BAAS,
because many Accounting Standards Updates (ASU) issued by the Financial Accounting
Standards Board (FASB) now have different effective dates for public business entities (PBE)
and private companies. This edition reflects ASUs issued by the FASB through March 31, 2017,
that, (1) while not yet effective for all institutions, must be adopted by PBEs beginning in 2018
and may be adopted early by other institutions or (2) are not yet effective for any institutions but
early adoption is allowed. To differentiate these two scenarios, we have added two color
schemes—lavender for content applicable to PBEs and early adopters and gold for content
applicable to early adopters only. The responses in lavender and gold text boxes replace the
initial staff responses for applicable entities and should not be read in conjunction with the
original staff responses.

The following questions have been added, updated, or deleted in the 2017 edition of the BAAS:

Topic 1A Investments in Debt and Equity Securities Questions 16, 17, and 18
Topic 3B Lessee Classification and Accounting Questions 1, 2, 3, 4, and 5
Topic 9A Transfers of Financial Assets and Servicing Questions 8, 9, and 10

Topic 1A Investments in Debt and Equity Securities Questions 6, 7, and 20
Topic 1B Other-Than-Temporary Impairment Questions 3, 7, and 20
Topic 3A Lessor Classification and Accounting Questions 1, 2, 3, 4, 5, and 11
Topic 3C Sale-Leaseback Transactions Questions 1, 3, 4, 5, and 6
Topic 3D Lease Exit Costs Questions 1, 2, and 3
Topic 5A Other Real Estate Owned Questions 13, 14, 15, 16, 17, 18, 21, 22, 23,
24, 25, 29, 30, 38, and 39
Topic 9A Transfers of Financial Assets and Servicing Question 7

Topic 1A Investments in Debt and Equity Securities Questions 16, 17, 18, 19, 20, and 21
Topic 1B Other-Than-Temporary Impairment Questions 17 and 18
Topic 2C Commitments Question 3

As part of our annual review process, we also made minor edits to some existing entries and
renumbered others.

Bank Accounting Advisory Series i August 2017
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Banks are reminded that the BAAS does not represent official rules or regulations of the Office
of the Comptroller of the Currency (OCC). Rather, the BAAS represents the OCC Office of the
Chief Accountant’s interpretations of generally accepted accounting principles and regulatory
guidance based on the facts and circumstances presented. Nevertheless, banks that deviate from
these stated interpretations may be required to justify those departures to the OCC.

Louis A. (Rusty) Thompson Jr.
Deputy Comptroller and Chief Accountant
Office of the Comptroller of the Currency

Bank Accounting Advisory Series ii August 2017
Contents

Message From the Chief Accountant ................................................................ i

Topic 1 Investment Securities ........................................................................................1
1A. Investments in Debt and Equity Securities ..................................................... 1
1B. Other-Than-Temporary Impairment ............................................................. 13
Topic 2 Loans ................................................................................................................ 23
2A. Troubled Debt Restructurings ...................................................................... 23
2B. Nonaccrual Loans ........................................................................................ 49
2C. Commitments .............................................................................................. 65
2D. Origination Fees and Costs ......................................................................... 74
2E. Loans Held for Sale ..................................................................................... 79
2F. Loan Recoveries .......................................................................................... 89
2G. Acquired Loans ........................................................................................... 92
Topic 3 Leases .............................................................................................................. 99
3A. Lessor Classification and Accounting .......................................................... 99
3B. Lessee Classification and Accounting ........................................................ 107
3C. Sale-Leaseback Transactions ................................................................... 111
3D. Lease Exit Costs ....................................................................................... 116
Topic 4 Allowance for Loan and Lease Losses ........................................................ 118

Topic 5 OREO and Other Assets ................................................................................ 148
5A. Other Real Estate Owned .......................................................................... 148
5B. Life Insurance and Related Deferred Compensation.................................. 174
5C. Miscellaneous Other Assets ...................................................................... 178
Topic 6 Liabilities ........................................................................................................ 183
6A. Contingencies ............................................................................................ 183
6B. Other Borrowings ....................................................................................... 186
Topic 7 Income Taxes ................................................................................................. 188
7A. Deferred Taxes .......................................................................................... 188
7B. Tax Sharing Arrangements ........................................................................ 192
7C. Marginal Income Tax Rates ....................................................................... 195

Bank Accounting Advisory Series iii August 2017
Topic 8 Capital ............................................................................................................. 197
8A. Sales of Stock ............................................................................................ 197
8B. Quasi-Reorganizations .............................................................................. 199
8C. Employee Stock Options ........................................................................... 201
Topic 9 Income and Expense Recognition ................................................................ 202
9A. Transfers of Financial Assets and Servicing .............................................. 202
9B. Credit Card Affinity Agreements................................................................. 213
9C. Organization Costs .................................................................................... 214
Topic 10 Acquisitions, Corporate Reorganizations, and Consolidations ................ 217
10A. Acquisitions ............................................................................................. 217
10B. Intangible Assets .................................................................................... 226
10C. Pushdown Accounting ............................................................................ 233
10D. Corporate Reorganizations ...................................................................... 237
10E. Related Party Transactions (Other Than Reorganizations) ...................... 239
Topic 11 Miscellaneous Accounting ........................................................................... 244
11A. Asset Disposition Plans ........................................................................... 244
11B. Hedging Activities .................................................................................... 246
11C. Financial Statement Presentation ............................................................ 248
11D. Fair Value Accounting ............................................................................. 249
Appendixes ........................................................................................................................ 254
Appendix A. Commonly Used Abbreviations and Terms .................................. 254
Appendix B. Commonly Used Pre-Codification References ............................. 256
Appendix C. Commonly Used FASB Codification References.......................... 260

Bank Accounting Advisory Series iv August 2017
INVESTMENT SECURITIES 1A. Investments in Debt and Equity Securities

Topic 1 Investment Securities

PBEs and early adopters only
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Liabilities.” This guidance
creates Topic 321, “Investments – Equity Securities,” which addresses accounting and
reporting for investments in equity securities. ASU 2016-01 is effective for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years, for
banks that are PBEs. For banks that are not PBEs, the guidance is effective for fiscal years
beginning after December 15, 2018, and for interim periods within fiscal years beginning after
December 15, 2019. Early adoption of the provisions of the standard involving accounting for
equity investments is prohibited.

The following staff responses comply with existing GAAP guidance; to the extent that staff
interpretations differ under ASU 2016-01, these are provided in separate lavender text boxes.

1A. Investments in Debt and Equity Securities

Early adopters only
In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other
Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.”
ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years, for banks that are PBEs. For banks that are not PBEs,
the guidance is effective for fiscal years beginning after December 15, 2019, and for interim
periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for
all banks.

The following staff responses comply with existing GAAP guidance; to the extent that staff
interpretations differ under ASU 2017-08, these are provided in separate gold text boxes.

Facts Under ASC 320, banks classify their investments in debt securities in one of three
categories: HTM, AFS, or trading. HTM securities are carried at amortized cost, while AFS and
trading securities are carried at fair value. Banks include the net unrealized holding gains (losses)
on AFS securities in AOCI, net of applicable taxes, rather than as part of the bank’s net income
(loss). If HTM or AFS debt securities are other-than-temporarily impaired, banks must determine
the amount of impairment to be recognized in earnings. Net unrealized holding gains (losses) on
trading securities are reported in net income (loss).

Question 1

Should the net unrealized holding gains (losses) on AFS debt securities be included in the
calculation of a bank’s lending limit?
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INVESTMENT SECURITIES 1A. Investments in Debt and Equity Securities

Staff Response

It depends on the regulatory capital treatment of net unrealized holding gains (losses) on AFS
debt securities for the bank.

A bank’s legal lending limit is the amount that the bank may legally lend to one customer. It
should be calculated, in accordance with 12 CFR 32, based on the bank’s tier 1 and tier 2 capital
calculated under the applicable risk-based capital standards (set forth at 12 CFR 3 and presented
in call report instructions), adjusted to include the portion of the ALLL excluded for tier 2 capital
calculation purposes.

Under the 2013 revised regulatory capital rule, banks may be required to incorporate net
unrealized holding gains (losses) on AFS debt securities into common equity tier 1 (CET1)
capital, which is a component of tier 1 capital, as described below.

For non-advanced approaches banks
Under the 2013 revised regulatory capital rule, non-advanced approaches banks had a one-
time irrevocable option to exclude (“filter”) certain AOCI components, comparable to the
regulatory capital treatment before the 2013 revised regulatory capital rule. The AOCI opt-out
election had to be made on the bank’s first call report filed after January 1, 2015. For any bank
that did not exercise this option, its AOCI will be incorporated into CET1 capital, including
unrealized gains and losses on all AFS securities, subject to a transition period through
December 31, 2017.

For advanced approaches banks
Net unrealized gains or losses on AFS debt securities are reflected in CET1 capital, subject to
a transition through December 31, 2017.

Advanced approaches banks generally include those with $250 billion or more in total
consolidated assets or $10 billion or more in on-balance-sheet foreign exposure, other banks
that opt in to the advanced approaches, and depository institution subsidiaries of banking
organizations that meet one of the aforementioned thresholds.

Question 2

How should a bank account for the unrealized gains or losses on investments denominated in a
foreign currency?

Staff Response

The net unrealized holding gains and losses on AFS investments denominated in a foreign
currency should be excluded from net income and reported in AOCI. The entire unrealized gain
or loss, including both of the portions related to interest rate and foreign currency rate changes, is
accounted for as an unrealized holding gain or loss and reported in the separate component of
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INVESTMENT SECURITIES 1A. Investments in Debt and Equity Securities

stockholders’ equity. Therefore, the income statement effect of foreign currency gains and losses
is deferred until the security is sold.

The gain or loss attributable to changes in foreign currency exchange rates, however, would be
recognized in income, if the investment is categorized as HTM. Banks should follow the
accounting guidance provided in ASC 830 for such investments.

Question 3

What is the appropriate accounting for transfers between investment categories?

Staff Response

In accordance with ASC 320-10-35, transfers between investment categories are accounted for as
follows:

• HTM to AFS: The unrealized holding gain or loss at the date of the transfer shall be
recognized in AOCI, net of applicable taxes.
• AFS to HTM: The unrealized holding gain or loss at the date of transfer shall continue to be
reported in AOCI but shall be amortized over the remaining life of the security as a yield
adjustment. This amortization of the unrealized holding gain or loss will offset the effect on
income of amortization of the related premium or discount (see question 4).
• All transfers to the trading category: The unrealized gain or loss at the date of transfer, net
of applicable taxes, shall be recognized in earnings immediately.
• All transfers from the trading category: The unrealized gain or loss at the date of transfer
will have already been recognized in earnings and shall not be reversed.

Transfers in and out of the trading category and from HTM to AFS should be rare.

Facts A bank purchased a $100 million bond on December 31, 20X1, at par. The bond matures
on December 31, 20X6. Initially, the bond was classified as AFS. On December 31, 20X2, the
bank decides it intends to hold the bond until maturity and transfers the security to the HTM
portfolio. The fair value of the security on the date of transfer is $92 million. The bank has
appropriately determined that the decline in the security’s fair value is not OTTI.

Question 4

How should the bank account for the transfer?

Staff Response

In accordance with ASC 320-10-35-10, at the date of transfer, the bank should transfer the
security at its fair value, $92 million, which becomes the security’s amortized cost. The
$8 million unrealized holding loss on the date of transfer is not recognized in net income but
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remains in AOCI. In addition, an unaccreted discount of $8 million offsets the security’s face
amount of $100 million, so the security is reported at its fair value ($92 million) when
transferred.

Under ASC 320-10-35-16, the $8 million discount is accreted to interest income over the
remaining life of the security. In accordance with ASC 320-10-35-10d, the unrealized loss
amount in AOCI is amortized simultaneously against interest income. Those entries offset or
mitigate each other.

For regulatory capital purposes, the unamortized AOCI related to the security is treated in the
same manner as a net unrealized gain or loss on an AFS debt security. See question 1 for further
information on the regulatory capital treatment of net unrealized gains (losses) on the AFS debt
securities.

Question 5

Do any restrictions exist on the types of debt securities that may be placed in the HTM category?

Staff Response

Generally, there are few restrictions on how bank management chooses to allocate the securities
in its portfolio among the investment categories. ASC 320 requires that a security, such as an IO
strip, not be accounted for as HTM, if it can be contractually prepaid or otherwise settled, so that
its holder would not recover substantially all of its recorded investment.

Additionally, an institution may not include a convertible debt security as HTM. Convertible
debt bears a lower interest rate than an equivalent security without such a feature, because it
provides the owner with potential benefits from stock price appreciation. Use of this feature,
however, requires the owner to dispose of the debt security before maturity. Accordingly, the
acquisition of such a security implies that the owner does not intend to hold it to maturity.

No restrictions prevent a bank from pledging HTM securities as collateral for a loan. A bank
may also pledge HTM securities in a repurchase agreement if the agreement is not effectively a
sale in accordance with ASC 860.

Question 6

How should banks account for investments in mutual funds under ASC 320?

Staff Response

Investments in mutual funds cannot be classified as HTM because mutual funds are an equity
investment, for which there is no maturity. Therefore, at acquisition, the bank must evaluate
whether the investment should be classified as trading or AFS. A mutual fund bought principally
for sale in the near term should be classified as a trading investment. For a mutual fund that is
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INVESTMENT SECURITIES 1A. Investments in Debt and Equity Securities

not bought principally for sale in the near term, a bank may elect to classify the fund as trading
or AFS at the time of purchase. Net unrealized holding gains and losses on trading investments
are included in income, while net unrealized holding gains and losses on AFS investments are
included in AOCI until they are realized.

PBEs and early adopters only
Under ASU 2016-01, mutual funds will no longer be classified as either trading or available-
for-sale; instead, they will generally be measured at fair value with changes in fair value
recognized through net income.

Question 7

How should gains and losses be reported when mutual fund investments are sold?

Staff Response

Realized gains and losses should be included in determining net income for the period in which
they occur. Realized gains and losses should be recorded in the call report as “Realized gains
(losses) on available-for-sale securities” if the mutual fund investments were classified as AFS,
or as “Trading revenue” if the mutual fund investments were classified as trading. If mutual fund
investments classified as AFS are sold, the component in AOCI should be adjusted to remove
any previously included amounts applicable to them.

PBEs and early adopters only
Under ASU 2016-01, mutual funds will generally be measured at fair value, with changes in
fair value recognized through net income. All changes in a mutual fund’s fair value should be
reported in earnings at each reporting date. Therefore, the sale of a mutual fund would
generally not give rise to a gain or loss except to the extent a bank has not yet recorded the
mutual fund’s change in fair value to the point of sale.

Question 8

When may a bank sell HTM securities and not “taint” the portfolio?

Staff Response

ASC 320 establishes the following “safe harbors” under which HTM securities may be sold
without tainting the entire portfolio:

• Evidence of a significant deterioration in the issuer’s creditworthiness.
• A change in the tax law that eliminates or reduces the tax-exempt status of interest on the
debt security (but not a change in tax rates).
• A major business combination or disposition that necessitates the sale of the securities to
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