In December 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-12, Definition of a Public Business Entity. This standard created a single definition for a “public entity” to be used for future standard setting. Prior to this standard, public entities were defined differently for different accounting standards.
This new definition of a public business entity carried forward four criteria that were similar to those used in previous definitions of public entities. It also added a new fifth criterion that impacted banks falling under Part 363 of the FDIC regulations, often referred to as FDICIA. Entities that meet any one of these criteria are considered public business entities, and public business entities:
- Generally must adopt new accounting standards sooner than other entities.
- May have additional disclosure requirements in new accounting standards.
- May not be able to adopt certain future accounting standards or elections only available to other entities.
In the September 2015 supplemental instructions to the call report (the “supplemental instructions”), the Federal Financial Institutions Examination Council (FFIEC) issued new guidance impacting FDICIA banks and whether they meet the criteria of a public business entity.
Implicit Contractual Restriction
An institution is considered a public business entity under the new criterion if:
- 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.
Since FDICIA banks are required by regulation to prepare U.S. GAAP financial statements and those financial statements are made publicly available, FDICIA banks meet the second condition. Mutual banks generally do not have securities, and banks that have made S-corporation elections often have contractual restrictions on transfer of their securities, so these entities usually will not meet the first condition and would not be considered public business entities unless they meet one of the standard’s first four criteria.
The supplemental instructions state that if an institution is a wholly owned subsidiary of a holding company, an implicit contractual restriction on transfer is presumed to exist on the institution’s common stock; therefore, if no other debt or equity securities have been issued without contractual restrictions, such an institution would not meet the first condition. Based on this guidance, it appears wholly owned bank subsidiaries subject to FDICIA would not meet the first condition of the new criterion and therefore would not be considered public business entities unless they meet one of the first four criteria in the standard.
It appears this new guidance will provide accounting relief to many wholly owned FDICIA bank subsidiaries, although such institutions will still need to consider whether they meet any of the other four criteria of a public business entity. Unfortunately, this will not provide relief to FDICIA banks that are not wholly owned. Since this is a new interpretation of the original accounting standard, Wipfli will continue to follow and communicate any new developments. For more information on this new guidance, please refer to the FFIEC’s supplemental instructions or contact your Wipfli relationship executive or Brett Schwantes