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FDIC Chicago Region Regulatory Teleconference October 21, 2010 PowerPoint Presentation
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FDIC Chicago Region Regulatory Teleconference October 21, 2010

FDIC Chicago Region Regulatory Teleconference October 21, 2010

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FDIC Chicago Region Regulatory Teleconference October 21, 2010

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  1. FDIC Chicago Region Regulatory TeleconferenceOctober 21, 2010 Accounting – Current Issues Pamela J. Rich FDIC Chicago Regional Accountant prich@fdic.gov

  2. Topics • Troubled Debt Restructuring • Deferred Tax Assets and Regulatory Capital Limit • Loan Participations

  3. Troubled Debt Restructuring • Applicable Accounting Standards • ASC 310-40, Troubled Debt Restructurings by Creditors (formerly FAS 15) • ASC 310-10-35, Receivables, Subsequent Measurement (formerly FAS 114) • Center for Audit Quality White Paper, Application of Statement 114 to Modifications of Residential Mortgage Loans that Qualify as Troubled Debt Restructurings • Issued December 2008

  4. Troubled Debt Restructuring • A and B Note Structure • A formal restructuring may involve a multiple note structure in which a troubled loan is restructured into two notes • “A” note represents portion of original loan principal expected to be fully collected • “B” note represents portion of original loan that has been charged off

  5. Troubled Debt Restructuring • Can Note A be returned to accrual status? • Yes, if all of the following conditions are met: • Charge-off of Note “B” is recorded at time of restructuring • Ultimate collectibility of all amounts contractually due on Note A is not in doubt • There is a period of satisfactory payment performance before Note A is returned to accrual status (generally six months)

  6. Troubled Debt Restructuring • Disclosures • ASC 310-40-50-2 provides conditions relating to when a loan need not be included in TDR disclosures in years after the restructuring • Loan has been reset to a market rate determined at modification • Loan is not impaired based on terms specified by restructuring agreement

  7. Troubled Debt Restructuring • Call Report Instructions • A restructured loan need not continue to be reported as a TDR in calendar years after the year in which the restructuring took place if: • In compliance with its modified terms, and • Yields a market rate

  8. Troubled Debt Restructuring • Call Report Instructions • Market yield is an effective rate that at the time of the restructuring is greater than or equal to the rate bank is willing to accept for a new extension of credit with comparable risk • TDR may result in recorded amount of loan bearing a market yield. This may arise as a result of a charge-off prior to the restructure.

  9. Troubled Debt Restructuring • Recent FASB Board Decisions • At its August 25, 2010, Board Meeting the FASB decided to issue potential clarifications to the guidance in Subtopic 310-40. FASB tentatively decided: • Creditors should be explicitly precluded from using borrower’s effective rate test in ASC 470-60, Troubled Debt Restructurings by Debtors (formerly EITF 02-4) in its evaluation of whether a modification was executed at a market rate

  10. Troubled Debt Restructuring • A situation in which a market rate is not readily available is a strong indication that the modification was executed at a rate that is below market • A modification that results in a temporary or permanent increase to the contractual interest rate cannot be presumed to be at a rate that is at or above market

  11. Troubled Debt Restructuring • A borrower not currently in default may still be considered to be experiencing financial difficulty • A creditor should not conclude that a modification is not a TDR simply because a delay in payment resulting from that modification is insignificant

  12. Deferred Tax Assets • Reporting of Income Taxes and Deferred Taxes for Call Report • Each depository institution that is a subsidiary of a holding company must report its income taxes as a separate legal and accounting entity • Amount and timing of payments to, and refunds from, holding company must be no less favorable to subsidiary than if the subsidiary were a separate taxpayer • Interagency Policy Statement on Income Tax Allocation In A Holding Company Structure • http://www.fdic.gov/regulations/laws/rules/5000-5000.html#fdic5000interagencypolicystate

  13. Deferred Tax Assets • Principal GAAP guidance is FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes • Formerly FASB Statement No. 109, Accounting for Income Taxes • Call Report Glossary – Income Taxes

  14. Deferred Tax Assets • The realizability of all deferred tax assets must be evaluated each period • Per ASC Topic 740, a valuation allowance must be recorded, if needed, to reduce deferred tax assets to an amount that is more likely than not (greater than 50% likelihood) to be realized. • Consider all available evidence, both positive and negative, in assessing the need for a valuation allowance

  15. Deferred Tax Assets • Realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period • On the balance sheet, report net amount of deferred tax assets (less any valuation allowance) and deferred tax liabilities separately for each tax jurisdiction (e.g., federal, state, and local)

  16. Deferred Tax Assets • Part 325 regulatory capital standards limit amount of deferred tax assets that can be included in Tier 1 capital • Limit applies to deferred tax assets that are dependent on future taxable income: • Deferred tax assets arising from deductible temporary differences that exceed taxes previously paid that could be recovered through loss carrybacks if all temporary differences (both deductible and taxable) fully reverse at the report date • Deferred tax assets arising from operating loss and tax credit carryforwards

  17. Deferred Tax Assets • Determination of deferred tax assets “dependent on future taxable income” • Per Section 325.5(g)(4), banks may exclude deferred tax effects of unrealized holding gains (losses) on available-for-sale debt securities reported in accumulated other comprehensive income (AOCI) • Banks may also exclude • Deferred tax assets arising from other-than-temporary impairment losses on debt securities reported, net of tax, in AOCI • Deferred tax effects associated with amounts recorded in AOCI resulting from application of ASC Topic 715, Compensation-Retirement Benefits (FAS 158) that are excluded from regulatory capital • In each case, if excluded, follow this treatment consistently

  18. Deferred Tax Assets • Determination of deferred tax assets “dependent on future taxable income” • For a bank subsidiary of a holding company, if parent lacks financial capability to reimburse bank for the tax benefit of bank’s carryback of its net operating losses or tax credits, bank should limit carryback potential available for realization of its deferred tax assets to amount it could reasonably expect to have refunded by its parent

  19. Deferred Tax Assets • Regulatory capital limit (Section 325.5(g)(2)) • Deduct from Tier 1 capital amount by which deferred tax assets dependent on future taxable income exceed lesser of • Amount of deferred tax assets the bank expects to realize within one year based on projected future taxable income or • 10% of the bank's Tier 1 capital before deducting certain disallowed assets

  20. Deferred Tax Assets • Calculation of regulatory capital limit should be made on a separate entity basis • Treat bank (plus its consolidated subsidiaries) that is a subsidiary of a holding company as a separate taxpayer rather than as part of a consolidated group • Bank should calculate one overall regulatory capital limit on deferred tax assets that covers all tax jurisdictions rather than a separate limit for each tax jurisdiction

  21. Deferred Tax Assets • For certain assets deducted from Tier 1 capital, deduction may be made net of associated deferred tax liability • Disallowed mortgage and nonmortgage servicing assets • Intangible assets acquired in nontaxable business combinations • Goodwill acquired in taxable business combinations • Disallowed credit-enhancing interest-only strips • Deducted nonfinancial equity investments

  22. Deferred Tax Assets • Any deferred tax liability netted in this manner cannot also be netted against deferred tax assets when determining the amount of deferred tax assets dependent upon future taxable income and the disallowed amount of deferred tax assets, if any, for regulatory capital purposes

  23. Deferred Tax Assets • Projected future taxable income • Regulatory capital limit on deferred tax assets is based in part on projected future taxable income for one year from the calendar quarter-end report date • Per Section 325.5(g)(3), projected future taxable income does not include • Net operating loss carryforwards to be used within one year of calendar quarter-end report date • Amount of existing temporary differences expected to reverse within that year • These reversals are excluded because all existing temporary differences are assumed to fully reverse at quarter-end report date when determining amount of deferred tax assets dependent on future taxable income

  24. Deferred Tax Assets • Projected future taxable income • May include estimated effect of tax planning strategies that are expected to be implemented to realize tax carryforwards that will otherwise expire during that year • Differs from tax planning strategies used under GAAP for purposes of determining need for and amount of any valuation allowance against deferred tax assets, i.e., prudent and feasible actions that management ordinarily might not take to realize deferred tax assets, but would do so to prevent an operating loss carryforward from expiring unused

  25. Deferred Tax Assets • Calculation of Disallowed Deferred Tax Assets (Schedule RC-R, item 9.b) • (a) Enter the amount from Schedule RC-R, item 8 ________ (b) Enter 10% of the amount in (a) above ________ (c) Enter the amount of deferred tax assets reported in Schedule RC-F, • item 2 _______ • (d) Enter the amount of taxes previously paid that the bank could • recover through loss carrybacks if the bank's temporary differences • (both deductible and taxable) fully reverse at the report date ________ • (e) Amount of deferred tax assets that is dependent upon future taxable • income: subtract (d) from (c); enter 0 if the result is a negative • amount ________ • (f) Enter the portion of (e) that the bank could realize within the next • 12 months based on its projected future taxable income. (Future taxable • income should not include net operating loss carryforwards to be used during the next • 12 months or existing temporary differences that are expected to reverse over the • next 12 months.) ________ • (g) Enter the lesser of (b) and (f) ________ • (h) Disallowed net deferred tax assets - subtract (g) from (e); enter 0 • if the result is a negative amount ________

  26. Loan Participations • FASB Statement No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (FAS 166) • Now codified in FASB ASC Topic 860, Transfers and Servicing • Effective as of beginning of an entity’s first annual reporting period that begins after 11/15/09 • 1/1/10 for calendar year banks • Recognition and measurement provisions must be applied to transfers on or after the effective date

  27. Loan Participations • FAS 166 modifies the financial components approach in FAS 140 • Limits the circumstances in which a portion of a financial asset is eligible for derecognition • Transfers of portions of financial assets are eligible for derecognition only if the transferred portions mirror the characteristics of the original financial asset • Introduces concept of a “participating interest” for transfers of portions of an entire financial asset

  28. Loan Participations • A participating interest has all of the following characteristics • Represents a proportionate (pro rata) ownership interest in an entire financial asset • All cash flows received from entire asset (except any allocated as compensation for services performed provided certain conditions are met) must be divided among participating interest holders in proportion to their shares of ownership • No interest is subordinated to another interest and no participating interest holder has recourse to another • No party has right to pledge or exchange entire asset unless all participating interest holders agree

  29. Loan Participations • Compensation for services performed • Must not be subordinated • Must not significantly exceed amount that would fairly compensate a substitute service provider should one be required • If transfer of a portion of an entire financial asset does not meet definition of a participating interest • Both lead lender transferring the participation and the party acquiring the participation must account for the transaction as a secured borrowing with a pledge of collateral

  30. Loan Participations • If transfer of a portion of an entire financial asset meets the definition of a participating interest • Transferor (normally lead lender) must evaluate whether the transfer meets all of the conditions for derecognition in FAS 166 • Isolation of transferred assets from the transferor • Transferee has right to pledge or exchange the assets received • Transferor does not maintain effective control over the transferred assets • If all conditions are met, account for transfer as a sale

  31. Loan Participations • Participations in lines of credit and loans with multiple advances (e.g., construction loans) • Accounting under FAS 166 is based on the date that a participation is transferred, not the date of loan agreement or participation agreement • For a calendar year bank, even if loan agreement or participation agreement was entered into before 2010, when all or a portion of an advance that has lost its identity is transferred in 2010, portion of entire loan transferred and other portion of entire loan must meet definition of a participating interest in order to evaluate whether transfer qualifies for sale accounting

  32. Loan Participations • “Last-in, first out“ (LIFO) and “first-in, first out” (FIFO) participations • Do not meet definition of participating interest because all principal cash flows collected on the loan are paid first to one of the parties, not proportionately • Transfers on or after effective date of FAS 166 (1/1/10 for calendar year banks) do not qualify as sales, must be reported as secured borrowings • Transfers before effective date of FAS 166 not affected • If transfer qualified as a sale, it continues to be reported as a sale

  33. Loan Participations • “Last-in, proportionate-out“ (LIPO) revolving participations • Lead bank arranges a credit facility under which it advances to its maximum exposure • Advances that exceed Lead bank’s maximum exposure are transferred to a Participant bank

  34. Loan Participations • “Last-in, proportionate-out“ (LIPO) revolving participations • Percentage ownership will vary over the life of the credit facility as partial draws and pay downs occur • Borrower payments (cash flows received) are allocated proportionately, although at varying percentages, depending on the relative ownership shares of the Lead and Participant

  35. Loan Participations • Reporting in Call Report by lead lender for participations that are secured borrowings • Report transferred participation, as well as retained portion, i.e., entire loan, as a loan asset • Normally in Schedule RC, item 4.b, “Loans and leases, net of unearned income,” and in appropriate loan category in Schedule RC-C, part I, Loans and Leases • Include interest income on both portions in Schedule RI, item 1.a • Include in risk-weighted assets in Schedule RC-R • Include in loan and lease portfolio for purposes of determining allowance for loan and lease losses

  36. Loan Participations • Reporting in Call Report by lead lender for participations that are secured borrowings • Report transferred participation as a secured borrowing (liability) • Schedule RC, item 16, “Other borrowed money” • Appropriate subitem(s) of Schedule RC‑M, item 5.b, “Other borrowings” • Schedule RC-M, item 10.b, “Amount of ‘Other borrowings’ that are secured” • Schedule RC-C, part I, Memorandum item 14, “Pledged loans and leases” • Include interest expense in Schedule RI, item 2.c

  37. Loan Participations • Reporting in Call Report by participating bank for participations that are secured borrowings • Normally report acquired participation in Schedule RC, item 4.b, “Loans and leases, net of unearned income” • Report in Schedule RC-C, part I, Loans and Leases, in the loan category appropriate to the underlying loan, not as a loan to the lead lender • Include in loan and lease portfolio for purposes of determining allowance for loan and lease losses • In Schedule RC-R, assign acquired participation to risk-weight category appropriate to underlying borrower or, if relevant, guarantor or nature of collateral

  38. Questions ???