On Oct. 2, 2014, the Federal Financial Institutions Examinations Council (FFIEC) released Financial Institution Letter 50-2014 (FIL-50-2014) — providing some good news for private banks. In part, this FIL documents the banking agencies’ approval of the use of the Private Company Council (PCC) accounting alternatives, issued by the Financial Accounting Standards Board (FASB), for the preparation of call reports for 2014. One of the alternatives allowed by the private company accounting alternatives permits a bank to elect to amortize goodwill on a straightline basis over a period of 10 years (or less than 10 years if more appropriate) and apply the simplified impairment model to goodwill.
In addition, if a private bank chooses to adopt the goodwill accounting alternative, the standard requires the private bank to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill must be tested for impairment when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount. In contrast, a public bank cannot amortize goodwill. The effective date of the alternative is annual periods beginning after Dec. 15, 2014, with early adoption permitted.
As defined by the FASB, a business entity is a public business entity if it meets any one of the following criteria, and would, therefore, not be permitted to use the PCC accounting alternatives:
- is required by the U.S. Securities and Exchange Commission (SEC) to file financial statements with the SEC
- is required to file under Securities Exchange Act of 1934 or furnish financial statements with a regulatory agency other than the SEC
- is required to file financial statements with a foreign and domestic regulatory agency in preparation for the sale of issuing securities that are not subject to contractual restrictions on transfer
- has issued securities that are listed on an exchange or over-the-counter (OTC) market or
- has securities that are not subject to contractual restrictions on transfer, and is required to prepare U.S. GAAP financial statements and make them publically available on a periodic basis
The last bullet point should be of particular concern to banks. Section 36 of the Federal Deposit Insurance Act and Part 363 of the FDIC regulations requires banks with $500 million or more in total assets to prepare and make publically available U.S. GAAP financial statements (with footnotes). In many circumstances, this requirement will prevent a bank with more than $500 million in assets from electing PCC accounting alternatives. Banks should consult with their accountants regarding specific applicability.