Note 10 - Adoption of New Accounting Standards

 

Update Number 2014-09 – Revenue from Contracts with Customers (Topic 606). This accounting standard update adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update does not apply to financial instruments. The Financial Accounting Standards Board (FASB) also issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), to defer the effective date of ASU 2014-09. The ASU is now effective for public business entities for annual reporting periods beginning after December 15, 2017 (therefore, for the year ending December 31, 2018 for the Bancorp). Early adoption is permitted for public business entities with certain caveats. Management does not believe the adoption of this update will have a material effect on the Bancorp’s consolidated financial statements.

Update Number 2016-01 – Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this accounting standard update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments in this accounting standard update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this accounting standard update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. This accounting standard update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is in the process of evaluating the impact of this update on the Bancorp’s consolidated financial statements.

 

Update Number 2016-02 – Leases (Topic 842) Lessees As a result of a joint effort by the FASB and the IASB to improve financial reporting, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which finalizes (1) Discussion Paper No. 1680-100, Leases—Preliminary Views, (2) Proposed ASU No. 1850-100, Leases (Topic 840), and (3) Proposed ASU No. 2013-270, Leases (Topic 842)—a revision of the 2010 proposed FASB Accounting Standards Update, Leases (Topic 840). Moreover, ASU No. 2016-02 seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements.

 

To satisfy the foregoing objective, the FASB has created Topic 842, Leases, which supersedes Topic 840. In fact, current GAAP requires lessees and lessors to classify their leases as either capital leases or operating leases and to account for those leases differently, but those accounting models have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions. Thus, under the new guidance, Topic 842, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or an operating lease (i.e., the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases under the previous guidance).

 

However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU No. 2016-02 will require both operating and finance leases to be recognized on the balance sheet. Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.

 

Notably, lessor accounting will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.This ASU is effective for Public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management does not believe the adoption of this update will have a material effect on the Bancorp’s consolidated financial statements.

 

Update Number 2016-09 – Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU provides for the simplification of several aspects of the accounting for share based payment transactions, including the income tax consequences, classification of the awards as either equity or liabilities, and classification on the statement of cash flows. Some of these simplifications only apply to nonpublic entities. Public business entities must apply the amendments in this Update for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Management does not believe the adoption of this update will have a material effect on the Bancorp’s consolidated financial statements.

 

Update Number 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU finalizes Proposed ASU No. 2012-260, Financial Instruments—Credit Losses (Subtopic 825-15), and adds Topic 326, Financial Instruments—Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

 

Prior GAAP included multiple credit impairment objectives that generally delayed recognition of the full amount of credit losses until it was probable that the loss would occur. The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. The accounting for purchased credit impaired financial assets under the amendments will make the allowance for credit losses more comparable between originated assets and purchased financial assets, as well as reduce complexity with the accounting for interest income.

 

Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. This approach is an improvement to current GAAP, because unlike current GAAP, which prohibits reflecting reversals of credit losses, an entity will be able to record reversals of credit losses in current-period net income in situations in which the estimate of credit losses declines, thereby aligning the income statement recognition of credit losses with the reporting period in which the changes occur.

This ASU is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Management is in the process of evaluating the impact adoption of this update will have on the Bancorp’s consolidated financial statements.