FASB public interest entity definition and considerations

In December of 2013 the FASB issued Accounting Standards Update (“ASU”) 2013-12, Definition of a Public Business Entity. The FASB definition is much broader than the previous definitions included within generally accepted accounting principles (“GAAP”). Whether an institution meets the new definition of a public business entity (“PBE”) requires careful analysis and may result in an answer that initially comes as a surprise. The new definition is to be applied in practice to determine which institutions will be able to avail themselves to new accounting alternatives developed by the Private Company Council (“PCC”) and other private company relief that the FASB provides in new standards.

Institutions that meet the new definition of a PBE will not be able to avail themselves to any PCC accounting alternatives that are issued. In addition, PBE’s will be required to follow public company disclosures, adoption dates and transition differences as outlined in prospective ASU’s.

Public Business Entity Definition

An institution is a public business entity if it meets any of the following criteria (generally excludes a not-for-profit entity or an employee benefit plan):

  1. It is required by the U.S. Securities and Exchange Commission (“SEC”) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
  2. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
  3. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
  4. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over the counter market.
  5. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

Scope Clarification of the New Definition

What needs to be considered to determine whether an institution has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over the counter market?
If an institution has securities that are traded, listed or quoted on an exchange or an over the counter (OTC) market it is considered a PBE under criterion d. The Board stated that an OTC market includes an interdealer quotation or trading system for securities that are not listed on an exchange (e.g. OTC Markets Group, Inc., including the OTC Pink Sheets and the OTC Bulletin Board).

Does filing a call report with the federal financial institution regulators result in a bank being considered a public business entity?
No. The call report does not meet the definition of GAAP financial statements under criterion e.

Will the bank regulatory authorities accept PCC alternatives for call reporting purposes?
Generally yes. Call report instructions are expected to be amended beginning with the September 30, 2014 period to discuss reporting of PCC alternatives.  Nevertheless, banking regulators have indicated that PCC alternatives will be individually evaluated and may not be allowed if application could result in safety and soundness concerns.

How should an institution evaluate whether their financial statements are considered publicly available under criterion e?
Publicly available financial statements include those filed with the SEC and other regulatory agencies, but would also include financial statements that are made publicly available upon request or upon being posted to an institution’s website for public access.

In addition to financial statements being publicly available on a periodic basis, for this criterion to be met an institution must also be required by law, contract, or regulation to prepare and make those financial statements publicly available on a periodic basis AND must also have one or more securities not subject to contractual restrictions on transfer.

How should an institution assess whether their securities are subject to contractual restrictions?
A contractual restriction would exist if sales of securities are subject to management pre-approval, and as such, limits the ability of the holder to transfer the security. Regulators have expressed concerns with institutions specifically structuring contractual restrictions in an effort to circumvent criterion e.

Do banks with over $500 million in assets that are required to file annual audited financial statements with the FDIC meet the definition of a public business entity under criterion e?
Possibly.  Banks with over $500 million in assets are required to file annual audited U.S. GAAP financial statements with the FDIC and upon request make those financial statements available to the public.  Accordingly, if such a bank has one or more securities not subject to contractual restrictions on transfer, some believe that the bank would be considered a public business entity.  However, at the AICPA National Conference on Banks and Savings Institutions in September 2014, bank regulators indicated that this may not necessarily be the case and that it is facts and circumstances specific depending upon the level of financial statements provided to the banking regulators (holding company vs. insured depository institution). As this topic is very dynamic we would encourage any financial institutions subject to FDICIA to consult with their legal counsel and primary regulators in determining whether they meet the PBE definition and certainly before adopting any PCC alternatives.

Are Credit Union’s scoped out with the NFP exemption?
Yes. As Credit Unions are NFP entities they are scoped out of the public business entity definition.

Is a thrift organization a public business entity under criterion e?
Generally no. If a savings and loan association (or S&L), also known as a thrift, is mutually held (the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization like the members of a credit union or the policyholders of a mutual insurance company) there are generally no “securities” to be traded under criterion e. While it is possible for a thrift to be a joint-stock company, and even publicly traded, in such instances it would no longer truly be a mutual association, as depositors and borrowers no longer have membership rights. In these situations, further assessment of the legal structure of the institution would be required to determine whether its capital structure includes securities as contemplated in the ASU.

Does the requirement to file financial statements with the Department of Housing and Urban Development (“HUD”) meet the definition of a public business entity under criterion e?
Generally no. Financial statements filed with HUD are not publicly available and as such criterion e is not met. However, if the institution posts their financial statements to their website or otherwise allows for public distribution of their financial statements and does not have contractual restrictions on the transfer of their securities, they would be considered a PBE.

Considerations Prior to Adoption of PCC Alternatives

The FASB is using the term PBE prospectively, meaning it does not change whether an institution is considered public or nonpublic for purposes of applying other existing U.S. GAAP.

The FASB intends to determine whether to allow financial institutions to elect PCC alternatives on a standard by standard basis which would create exceptions to the PBE definition and thus add to further complexity in financial reporting. For example, the FASB decided that financial institutions cannot use the simplified hedge accounting approach the PCC developed for certain interest rate swaps regardless of whether they meet the criteria in the PBE definition.

Institutions should consider whether their exit or capital planning strategies include initial public offerings, sales to public companies or significant investments from public companies prior to adopting PCC alternatives. The SEC staff commented recently that if an entity elects a PCC alternative and then goes public, it will have to undo the elections for financial statements provided to the SEC.

In the absence of specific FASB transition guidance, institutions that become PBE’s after using private company relief would have to retrospectively apply the public entity accounting and reporting requirements to all prior periods presented. This could be challenging, could delay transactions or SEC filings, and could make private institutions that elect the alternatives less attractive business partners to PBE’s.

Assessing whether your financial institution is a public business entity requires careful analysis. In addition, institutions that qualify for adoption of PCC alternatives should thoroughly assess the pros and cons of adoption before implementation to ensure current and future consequences are evaluated fully.


Should you have questions as to whether your financial institution meets the definition of a public business entity or would like to discuss other aspects of the PCC alternatives please contact your Rehmann business advisor. The assessment is highly dependent upon individual facts and circumstances and over time it is expected that the scope of the definition will become further clarified.

 

 

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