United States

Proposed deferred CECL effective date and the definition of an SRC

FINANCIAL REPORTING INSIGHTS  | 

At its meeting on July 17, 2019, the Financial Accounting Standards Board (FASB) decided to propose deferring the effective dates for certain guidance in its Accounting Standards Codification (ASC) for certain entities. Among other provisions, with respect to the guidance in ASC 326, Financial Instruments – Credit Losses (CECL), the FASB has proposed a three-year deferral for smaller reporting companies (SRCs). Therefore, if the proposed deferral is finalized, the CECL effective date for an SRC with a calendar year end will change from its quarter beginning January 1, 2020 to its quarter beginning January 1, 2023. The determination of whether an entity is an SRC should be based on the entity’s most recent assessment in accordance with SEC regulations. As proposed, the SRC will be able to take advantage of the deferral even if its filing status changes during the deferral period. Put another way, the entity’s CECL adoption date is the adoption date as determined on the effective date of the final standard that allows deferral, unless the entity elects at a later time to adopt early.

An SRC is defined by the SEC as a company with (a) less than $250 million in common equity public float as of the last business day of the company’s most recently completed second fiscal quarter, or (b) annual revenues of less than $100 million in the most recently completed fiscal year and either no public float or a public float of less than $700 million. A company that most recently determined that it did not qualify as an SRC under the initial qualification thresholds will remain unqualified until it determines that it falls below a specified lower threshold for the criteria on which it previously failed to qualify and continues to meet any other threshold it previously satisfied. The subsequent qualification thresholds are set at 80% of the initial qualification thresholds.

A reporting company should determine whether it qualifies as an SRC annually as of the last business day of its second fiscal quarter. Therefore, a reporting company with a calendar year end will determine whether it qualifies as an SRC as of June 30, 2019 using its common equity public float as of June 30, 2019, or if it has no public float or a public float of less than $700 million, it will use its annual revenues for the fiscal year ended December 31, 2018.

A company calculates its public float by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity. A company may have no public float because it has no public common equity outstanding or no market price for its common equity exists.

For purposes of the revenue test, a bank must include all gross revenues from traditional banking activities. Banking activity revenues include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. Revenues do not include gains and losses on dispositions of investment portfolio securities (although it may include gains on trading account activity if that is a regular part of the institution's activities).

The CECL effective date for an SEC filer with a calendar year end that does not qualify as an SRC as of June 30, 2019 continues to be its quarter beginning January 1, 2020