New Guidance on Definition of a Public Company Impacts Community Banks
On December 23, 2013, the Financial Accounting Standards Board (FASB) released guidance to help determine if a company is considered a public business entity for financial reporting purposes. Banks with total assets in excess of $500 million may be considered a public entity under the new definition.
The guidance (ASU 2013-12) states that a business is considered a public entity if it meets one of five criteria. One of those criteria is it “has securities that are not subject to contractual restrictions on transfer and that is by law, contract, or regulation required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis.”
"Larger banks need to carefully review the new guidance and assess if they meet the definition of a public entity. Not meeting this definition may restrict the type of accounting alternatives available to them" Todd Sprang
financial institutions principal
Public entity criteria
Banks that have total assets in excess of $500 million and are therefore subject to the Federal Deposit Insurance Corporation Improvement Act (FDICIA) partially meet two of the three components of the aforementioned criteria for a public entity, since the regulations require them to:
- have an annual audit, which means they prepare GAAP financials with footnotes; and
- make their audited financial statements available to the public upon request.
Thus, a FDICIA bank needs to conclude whether its stock is subject to contractual restrictions. The guidance doesn’t provide much discussion on this issue, but according to Sprang, sufficient contractual restrictions may include:
- Buy/sell agreements
- Restrictions on transfers by S corporations to non-eligible shareholders
- Restrictions on transfer timing (e.g., end of month or end of quarter) or requiring approval of all transfers
Also note that all outstanding shares need to be contractually restricted to avoid being defined as a public business entity.
The disadvantages of being considered a public entity are that the bank:
- cannot elect to adopt alternative accounting treatments from the recently formed Private Company Council (PCC). An example of a PCC alternative that may be attractive to banks is the FASB Accounting Standards Update: Accounting for Goodwill issued on January 16, 2014. It permits a private company to subsequently amortize goodwill on a straight-line basis over a period of 10 years (or less if such a shorter life is more appropriate). It also permits the application of a simplified goodwill impairment analysis. These application alternatives can produce significant cost savings for banks with goodwill on their balance sheets and is available for financial statements that have not yet been made available. It is unclear at this point whether PCC alternatives will be accepted for regulatory reporting purposes. Sprang suggests that banks closely monitor regulatory announcements if they are considering PCC alternative elections for their 2013 audited financial statements.
- doesn’t receive the benefit of longer implementation periods granted to private companies when new pronouncements are issued, such as the FASB project, Accounting for Financial Instruments – Credit Impairment, which could be released in 2014.
- is subject to public company disclosure provisions of future accounting pronouncements.
How we can help
Your accounting advisor can discuss the PCC alternatives available to your institution in greater detail and assist you in quantifying the potential cost and time savings of electing those alternatives. Your advisor can also answer your questions about how the guidance affects your bank.