As we begin the second quarter of 2020, SEC financial institution reporting companies will need to assess the impact of COVID-19 on their organization for their first quarter Form 10-Q. Financial institutions should follow SEC disclosure guidance related to COVID-19, which was issued on March 25, 2020.
As financial institutions, there is much to consider, including impairment of goodwill and long-lived assets, troubled debt restructuring (TDR), current expected credit losses (CECL) and filing deadlines.
Potential Impairment of Goodwill and Long-Lived Assets
Effective January 1, 2020, public business entities that are SEC filers will be adopting Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 of the goodwill impairment test and companies will have to compare the fair value of the reporting unit with the carrying amount of goodwill.
Companies will have an impairment charge when the carrying amount of goodwill exceeds the reporting unit’s fair value. The frequency of the impairment test is annually, and more frequently if events or if circumstances indicate that it is more likely than not that the intangible asset or the reporting unit is impaired.
Due to the potential economic fallout from the COVID-19 pandemic, financial institutions will need to assess events and circumstances that may require an interim impairment test for goodwill and a test for recoverability for long-lived assets. These considerations are noted in Accounting Standards Codification ASC 350-20-35-3C for goodwill and ASC 360-10-35-21 for long-lived assets.
For goodwill, an indicator could be a sustained decrease in the company’s share price. The COVID-19 pandemic has caused many financial institutions’ stock prices to decline, some well below tangible book value. Just one indicator may not be a triggering event to cause an interim impairment assessment. All circumstances will need to be evaluated in order to determine if an interim impairment assessment is necessary for goodwill or a test for recoverability for long-lived assets.
Troubled Debt Restructurings
Accounting Standards Codification (ASC) 310-40-20, defines a TDR as a restructuring of a debt if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.
The Financial Accounting Standards Board (FASB) has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. Banks will need to make a policy election to apply Section 4013. Section 4013 applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. If a loan modification is not eligible under section 4013, the Bank can apply recent regulatory guidance on loan modifications that are short-term modifications, generally meaning six months or less, which could include payment deferrals, fee waivers, extension of payment terms, or other delays in payment that are insignificant. Non-Section 4013 loan customers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Duration of non-TDR designation is for the remaining life of the loan for both Section 4013 modifications and non-section 4013 modifications. Subsequent modifications must be re-evaluated for potential TDR designation.
For modification programs designed to provide temporary relief for borrowers affected by COVID-19, financial institutions may presume that loan customers that are current on payments are not experiencing financial difficulties at the time of the modification for the purposes of determining TDR status, and no further TDR analysis is required for each loan modification qualifying for the program. It should be noted that modification or deferral programs mandated by federal or state government related to COVID-19 would not be in the scope of ASC 310-40.
Financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due as a result of the deferral if these loans are not otherwise reportable as past due. If the financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans would not be considered past due during the period of deferral. Additionally, during the short-term arrangement period, loans should generally not be reported as nonaccrual.
There is much to consider as part of COVID-19. We’ve developed resources to help you understand its impact.
Current Expected Credit Losses (CECL)
The CARES Act signed into law on March 27, 2020, has specific wording that financial institutions are not required to comply with ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and related amendments, also known as CECL, ending with the earlier of the termination of the national emergency related to COVID-19 or December 31, 2020. Large accelerated filers will have to weigh their options on whether they delay CECL for the short term under the CARES Act or continue with their plans to report and disclose under the CECL model effective as of January 1, 2020. If a decision to delay implementation of CECL is made, the financial institution would still be required to disclose the potential impact of CECL similar to the disclosure as of December 31, 2019. As of the date of this insight, the FASB has not weighed in on this delay or provided any guidance.
We broke down the components of the CARES Act and what you should know.
The SEC has provided temporary relief for issuers on their filing requirements. Filers will have an option to request a 45-day extension to file that would have otherwise been due between March 1 and July 1, 2020. Filers will have to file a Form 8-K noting that they are relying on the SEC order, a description of the reasons why they cannot file in a timely manner, estimate the date they expect to file, provide risk factors that impact the issuer related to COVID-19, and reasons if the report cannot be filed timely due to persons, other than the issuer, that may have to provide an opinion related to the filer. The SEC may provide extensions and may add conditions that it deems appropriate for each filer. Filers are encouraged to reach out to the SEC staff with concerns or questions.
Keep Up to Date On COVID-19 and Its Impact on Financial Institutions
There are a number of items that SEC-reporting financial institutions need to consider in the first quarter of 2020 related to financial reporting because of COVID-19. As the pandemic continues to impact the way we do business, there is still much to come. Financial institutions should stay up to date on guidance concerning these changes.
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