Compared to recent years, accounting standards setters have allowed financial institutions to catch their collective breath during 2012 as it relates to financial statement presentation and disclosure changes. Perhaps they concluded the significant overhaul and expansion of the credit quality disclosures was enough change for a couple years! Maybe they decided a well-deserved break was necessary to assist in the timid recovery of the worldwide financial crisis. Whatever the reason, no one is complaining.
However, there are some modest changes for 2012 that you should be aware of. While they may not be as broad-sweeping as in recent years, there are indeed a few key changes that will impact nearly every financial institution’s financial statements and related disclosures for the year ended December 31, 2012.
Fair Value Measurement
Death, taxes, and fair value measurement and reporting changes — three things we can all expect in our lifetime, some with more frequency than others.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (the ASU). The amendments in this update are to be applied prospectively from its issuance. For public entities, the amendments are effective for interim and annual reporting periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual reporting periods beginning after December 15, 2011.
Some of the amendments in ASU 2011-04 apply only to public entities; however, this discussion will encompass only the changes impacting both public and nonpublic entities. The most significant changes required under the ASU affect disclosures and relate to level 3 fair value measurements in the fair value hierarchy (measurements based on significant, unobservable inputs). In brief, financial statement disclosures must now include (a) a qualitative description of the valuation process in place for both recurring and non-recurring level 3 fair value measurements, and (b) quantitative information about significant unobservable inputs used in the valuation process.
In addition to the above level three disclosure changes, the ASU also requires the disclosure of the reasons when the current use of a nonfinancial asset differs from its highest and best use.
Although the above changes surrounding fair value measurements and disclosure are not expected to significantly alter an institution’s current accounting or information-gathering practices, it is recommended you consult with your auditor to determine the specific impact to your institution and, perhaps, obtain some examples of how these new disclosure requirements might interplay with existing fair value disclosures.
Comprehensive Income Reporting
The changes to comprehensive income reporting are relatively easy to comprehend and, for most institutions, are little more than an additional reporting nuisance.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which has already been implemented by most public entities and is effective for nonpublic entities with fiscal year-ends after December 15, 2012. This update eliminates the option to report other comprehensive income (OCI) only within the statement of equity, which was the most common presentation. This elimination leaves two options remaining for reporting OCI: (1) within a combined statement of operations and comprehensive income, or (2) within a separate statement of comprehensive income.
It should be noted there are no changes to the items reported in OCI, nor when an item of OCI is reclassified into net income. There are also no changes to earnings-per-share calculations, which are based on net income. This update will simply result in a different form and presentation of the same information.
Your institution’s level of OCI activity during the year will most likely impact whether you include it within a single statement of operations and comprehensive income or break out into a separate statement.
Again, we recommend you consult your auditors for some example presentation templates to aid in minimizing the implementation effort for your institution.
Credit Quality Disclosures
By now, all financial institutions are more familiar with the expanded credit quality disclosures than they probably ever wanted to be. Although the bulk of these disclosures have already been implemented, there are two new items worth noting for your financial statements as of December 31, 2012.
Troubled Debt Restructurings (TDRs)
The expanded disclosures surrounding TDRs was deferred last year for nonpublic entities, but will be required as of December 31, 2012. These disclosures require class-level detail of TDRs as of the reporting date, including the number of contracts and pre- and post-modification outstanding recorded investment, by class. Also, information is required to reflect the number of TDRs, and corresponding recorded investment, that have defaulted subsequent to modification.
Since this is now year two of the expanded credit quality disclosures for nonpublic entities, there will be comparative presentation in the expanded format. Though this does not require any changes to be made by the institution, you should be aware that the loan and allowance footnote will nearly double in size, again.
As always, please consult your auditor with questions related specifically to the impact of these changes on your institution and your financial reporting process.