Hot Topics: But Wait, There’s More

1. Hot Topics: But Wait, There’s More Paul Oseland, CPA Supervising Examiner – SRM Accounting Specialist

2. Disclaimer The opinions expressed in this presentation are intended for informational purposes and are not formal opinions of, nor binding on, the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Kansas City.

3. PCAOB Update • New auditing standards effective for fiscal years ending after December 15, 2020 • Auditing Accounting Estimates • Replaces three standards with a single, uniform standard that sets forth an updated approach to auditing accounting estimates • Emphasizes that auditors need to apply professional skepticism, including addressing potential management bias, when auditing accounting estimates • Provides more specific direction on auditing fair values financial instruments that are based on information from third-party pricing sources. • Auditor’s Use of the Work of Specialists • Strengthens requirements for evaluating the work of a company's specialist, whether employed or engaged by the company, and applies a supervisory approach to both auditor-employed and auditor-engaged specialists

4. Critical Audit Matters (CAMs) • A CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: • Relates to accounts or disclosures that are material to the financial statements; and • Involved especially challenging, subjective, or complex auditor judgment. • Effective dates: • Audits of large accelerated filers – FYE on or after June 30, 2019. • Audits of all other companies to which the requirements apply – FYE on or after December 15, 2020.

5. AICPA Auditing Standards • Statement on Auditing Standards No. 134 - Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements • Issued May 2019 • Effective for audits of financial statements ending on or after December 15, 2020 • Key Audit Matters - matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance • Not required under GAAS

6. Internal Audit Trends • Audit programs in the 10th District are generally in good shape • Talent acquisition and retention continue to be a challenge, especially for technical specialists • Emerging internal audit topics: • Auditing Culture Risk - occurs when there is a misalignment between an organization’s values and leader actions, employee behaviors, or organizational systems • Using data analytics, artificial intelligence, and robotic processes • Agile Auditing - based on flexible, iterative planning on an ongoing basis in “sprints” while focusing on continuous communication and collaboration among the audit team and with stakeholders

7. Regulatory Capital Simplifications • Final rule adopted in July 2019 and are effective April 1, 2020 • Increases common tier 1 (CET1) capital threshold deductions from 10% to 25% for: • Mortgage servicing assets (MSAs) • Deferred tax assets (DTAs) arising from temporary differences • Investments in the capital of unconsolidated financial institutions • Removes aggregate 15% CET1 capital threshold deduction for MSAs, DTAs, and significant investments in unconsolidated financial institutions • Simplifies the determination of the amount of minority interests includable in regulatory capital • Retains 250% risk weight for non-deducted DTAs and temporary difference DTAs

8. Interagency Tailoring Rules On October 10, the Federal Reserve Board finalized rules that tailor its regulations for domestic and foreign banks to more closely match their risk profiles. The rules reduce compliance requirements for firms with less risk while maintaining the most stringent requirements for the largest and most complex banks. The rules establish a framework that sorts banks with $100 billion or more in total assets into four different categories based on several factors.

11. Community Bank Leverage Ratio • Final rule would allow qualifying firms to opt out of calculating and reporting risk-based regulatory capital ratio. • Scoping criteria: • Firms with less than $10 billion in total assets, • Tier 1 leverage ratio of 9 percent or more, • Off-balance sheet exposures of 25 percent or less of total consolidated assets, and • Trading assets plus liabilities of 5 percent or less of total consolidated assets. • Requirements: • Firms have to maintain a 9 percent leverage ratio • Grace period – If firm using CBLR falls to an 8 percent ratio, it has two quarters to get back to a 9 percent ratio

12. Regulatory Reporting Burden Reduction • Eligibility to used the streamlined Call Report (FFIEC 051) have been raised from $1 billion to $5 billion • Effective as of September 30, 2019 filing • Reduction of approximately 43% of data items from prior FFIEC 041 • Reduction in reporting frequency of approximately 6% of data items • Proposal outstanding to provide streamlined FR Y-9C reporting for holding companies with assets under $5 billion • Current FR Y-9C reporting threshold is $3 billion

13. Reference Rates Reform • Alternative Reference Rates Committee • Private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from U.S. dollar LIBOR to a more robust reference rate, its recommended alternative, the Secured Overnight Financing Rate (SOFR). • Newsletter • Implementation checklist • Fallback language consultation • Proposed tax relief for LIBOR transition • www.newyorkfed.org/arrc • CBO/RBO LIBOR Transition Questionnaire

14. Questions?