The Office of the Chief Accountant (OCA) has provided new insight into three of the biggest questions posed in recent months by banks and financial institutions.
Publishing in the 2021 edition of its annual Bank Accounting Advisory Series (BAAS) OCC Bulletin 2021-37, the OCA shared guidance covering:
- Loans held for sale (Subtopic 2E)
- Employee stock options (Subtopic 8C)
- Grants received by banks (Subtopic 11E)
The three are among the Accounting Standards Updates (ASU) issued by the Financial Accounting Standards Board (FASB) prior to March 31, 2021. The annual BAAS bulletin addresses the topics most relevant to national banks and federal savings associations, and it promotes consistent application of accounting standards and regulatory reporting among OCC-supervised banks.
Below is an overview of the three key items in the latest accounting bulletin update:
Loans held for sale (Subtopic 2E, Question 4)
If a bank has adopted Accounting Standards Codification (ASC) Topic 326 and decides to sell a loan that was originally marked as held for investment (HFI) whose fair value has declined because of negative trends in credit quality, the bank should apply a two-step process to account for the transaction. First, it should apply a regulatory charge-off, in accordance with the interagency guidance on held for sale. Second, after the write-down, the bank should apply the guidance for HFI to HFS transfers in ASC 310 or ASC 948.
Employee stock options (Subtopic 8C, Question 2)
A bank may participate in and sponsor an employee stock ownership plan (ESOP) solely for the benefit of bank employees. When the related ESOP trust borrows funds from the related holding company and is considered an internally leveraged ESOP, the loan is generally not required to be recorded at the subsidiary bank level under ASC 718-40. It is permitted if, based on the judgment of management or the external auditor, it is needed to accurately report the subsidiary bank’s financial condition in the call report or the subsidiary bank’s audited financial statements, both of which are presented on a bank-only level.
Grants received by banks (Subtopic 11E, Questions 1-2)
For regulatory reporting purposes, banks should account for any non-governmental grants received in accordance with ASC 958-605. While Topic 958 applies specifically to nonprofit entities, the guidance on accounting for contributions received (such as grants) applies to all entities. Banks that receive governmental grant proceeds, such as grants from the Community Development Financial Institution (CDFI) fund, should apply ASC 958-605 by analogy for call report purposes. The recipient bank should first determine if there are any donor-imposed conditions; revenue is recognized for grants without conditions when it is received.
When donor-imposed conditions exist, revenue is recognized when those conditions have been substantially met. In this situation, the grant should be recognized as deferred revenue with a related receivable, cash, or other contributed asset recognized. For call report purposes, grant revenue should be included in Schedule RI, “Other Non-Interest Income,” and, if thresholds are met, disclosed on Schedule RI-E, “Explanations.” Unearned grant revenue should be included in Schedule RC-G, “Other Liabilities.”
Additionally, the 2021 BAAS edition includes Appendix A, “Newly Issued Accounting Standards.” The appendix describes new accounting standards applicable to this edition of the BAAS and the first call report for which calendar year-end institutions must adopt the ASUs.
Reach out to our financial institutions team for help with your questions about the BAAS update and other issues in your industry.