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Newsletter – April 2020

April 8, 2020 By CFO Consulting Partners

Thinking Ahead – Accounting for Loan Losses During and After Covid-19

One of the many challenges posed by the current health crisis is the need for lenders to reassess their borrowers’ ability to repay their loans. While it may seem unfair, or even unseemly, to have to address this issue at this time, financial institutions will need to do exactly that in closing their books and reporting on the First Quarter of 2020 in their regulatory reports and (for SEC registrants) Forms 10-Q.

The accounting approach most community institutions are following, and on which we will focus here, is the traditional, probable incurred loss model. This model requires institutions to provide for losses that are probable to have been incurred under the GAAP literature in Accounting Standards Codification (ASC) 450, Contingencies, and 310, Receivables. In practice, this usually involves a modeled component, based on historical write-offs over a look-back period, and a qualitative component, based on the current state and trend of economic and other factors affecting the portfolio. A good summary of the factors to be considered in this qualitative analysis are the nine points summarized in an Interagency Policy Statement issued in 2006 by federal banking agencies, which can be found at this link: https://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-47a.pdf

Generally, increased loss provisions are expected but likely too few facts are available to make specific loss assumptions. Measuring specific incurred losses at the end of Q1 will be difficult and most likely will be addressed through additional qualitative factors. Reserve assumptions for those credits already under analysis should be reevaluated and likely dealt with across product and delinquency categories.

Following are the nine points from the Policy Statement, in italics, followed in each case by our comments:

1. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. This would include loan forbearance and other regulatory relief measures enacted to assist with resolution of the crisis: https://www.fdic.gov/news/news/press/2020/pr20038a.pdf

2. Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. The effects of the current health crisis will be pervasive, as covered in the other points.

3. Changes in the nature and volume of the portfolio and in the terms of loans. Institutions will need to address any shifts in new lending – in some portfolio segments, new production will have stopped, and thus not be available to offset increased non-performing loans and normal amortization within those segments. Thus, looking forward and doing the math, loss rates will increase within these portfolio segments.

4. Changes in the experience, ability, and depth of lending management and other relevant staff. Will there be sufficient staff available to effectively manage the portfolio? Will remote collection efforts be as effective as prior techniques?

5. Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans. A sharp increase in delinquencies can be expected, albeit delayed by the TDR forbearance mentioned above. The ultimate losses may be mitigated by any government guarantees that are available, as well as borrowers’ ability to access business interruption insurance.

6. Changes in the quality of the institution’s loan review system.
Improvements that strengthen the process of reviewing loans could be a mitigating factor. If however, the loan review process weakens, either because of staff illness or other limitations, this factor may be another reason to strengthen reserves.

7. Changes in the value of underlying collateral for collateral-dependent loans. Real estate loans will be a challenging area, as the impact of current developments on the commercial and residential real estate markets will take some time to shake out, however declines in market values seem likely.

8. The existence and effect of any concentrations of credit, and changes in the level of such concentrations. The effect of concentrations can become more severe as conditions in certain industry sectors worsen, and the relative size of concentrations can become larger as healthier loans run off in a low origination environment.

9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. These factors include forbearance that is enabled by legislation e.g., restrictions on foreclosure that lead to increased losses from deterioration in the physical condition of properties and/or in the property market.

Your portfolio consists of two types of borrowers: healthy and current borrowers who may be negatively affected by the duration and severity of the current crisis; and those already exhibiting financial stress (past due and delinquent accounts, businesses already under severe attack from a variety of sources including the lack of a viable internet strategy, lower cost of foreign competition, and many others) for which the current crisis may finalize their situation. Both may benefit from the governmental assistance and forbearance programs, however the exclusion from TDR accounting applies only to the former borrowers. You should track and maintain records of your borrowers’ status throughout the deferment and modification process in order to demonstrate those which are not TDRs.

We have discussed the challenge of first quarter reserving with senior representatives from several large accounting firms, and the following pieces of practical advice emerged:

* Now is not too soon to begin discussing reserving considerations with professional service providers, including auditors and consultants.

* Most institutions are targeting timely filings of their First Quarter reports, notwithstanding the grace periods being offered by regulators, including the FDIC and SEC. See the announcement of the grace periods at:
https://www.fdic.gov/news/news/financial/2020/fil20028.html
https://www.sec.gov/news/press-release/2020-53

* Auditors, regulators, analysts and other interested parties will be looking for a strengthening of the environmental/qualitative reserve, along with supporting evidence that identifies the impact of current events and links to any adjustments.

* Whatever process is followed, it will be necessary to step back and consider whether the result makes sense.

* Whatever answer is arrived at for First Quarter reporting, further adjustments will undoubtedly be required in the Second and Third Quarters as more information becomes available.

We are familiar with these issues and accustomed to working remotely. Please let us know if we can help in any way.

Note on CECL: Institutions that have adopted the new Current Expected Credit Loss Model in the First Quarter will have similar considerations, but with the additional challenge of adopting the new model. They should also consider the possible impact of the CARES Act on timing of adoption, and related regulatory actions, including the Federal Institutions Letter on the interaction between timing of adoption and capital relief:
https://www.fdic.gov/news/news/financial/2020/fil20032.pdf

Larry Davis – ldavis@cfoconsultingpartners.com
Paul Karr – pkarr@cfoconsultingpartners.com
Eric Segal – esegal@cfoconsultingpartners.com

Filed Under: Eric Segal, Featured, Larry Davis, Newsletters, Paul Karr, Uncategorized

Business in the Time of Coronavirus

April 7, 2020 By CFO Consulting Partners

How can your business adapt to the new normal and plan for an uncertain future? How can the provisions of the CARES Act and other related stimulus help your business now? More importantly, how do they actually work in practice?

Our panel of experts will answer your questions across a range of disciplines.

You also have the opportunity to put forward 3 questions in advance and we will ensure they’re answered on the day. You will be asked to submit questions when registering.

Moderator:

Mark Taylor, Vistage: Leadership

Our Panel of Experts:

Craig Teahen, Freeman Clarke: Tech & Digital

David DeMuth – CFO Consulting Partners: Finance

Allan Tepper, CFO Consulting Partners: Finance

Jason Rimland – Tannenbaum Helpern Syracuse & Hirschtritt LLP: Legal & Benefits

Who should attend?

This event is for CEOs and Leaders of mid-market businesses in the NYC metro area.

Maximum 2 attendees per company.

For further details read the event flyer.

Filed Under: Uncategorized

Cash Flow – We Want to Help

March 31, 2020 By CFO Consulting Partners

We hope you and your family are well during this Covid-19 event.

From a business perspective, it is likely that almost all companies will suffer reduced sales and cash flow. Cash is often said to be king, and this crisis is reinforcing that idea.

At CFO Consulting Partners, a senior-level financial management firm comprised mostly of former CFOs and Controllers, we are here to help. We often work with companies on cash flow issues. Our cash flow work includes working with the various cash flow technical tools that assist companies with forecasting, payments management and collection techniques.

We would be pleased to assist your company with questions on new emergency government regulations, on cash flow or other business issues resulting from this crisis on a no obligation, complimentary call. To take advantage of this offer, please complete the questionnaire which can be found here.

Sincerely,

Partners:
Allan Tepper
David DeMuth
Eric Segal

Filed Under: Featured, Resources, Uncategorized

March 5, 2020 By CFO Consulting Partners

FC Yale 4Levers dig flyer April 1 2020 with Schedule ATEPPER

https://cfoconsultingpartners.com/1895-2/

Filed Under: Uncategorized

CFO Consulting Partners was a Proud Sponsor the 2020 Tri-State XPX Summit

February 2, 2020 By CFO Consulting Partners

1st Annual

Tri-State XPX Summit:

 

Business Value Growth

Business Value Transfer

Owner Life and Legacy

Filed Under: Featured, News & Events, Uncategorized

Newsletter – March 2019

March 19, 2019 By CFO Consulting Partners

New Revenue Recognition Standard (ASC 606) – Practical applications within the software industry

Chip Steppacher, Director, CFO Consulting Partners

Overview 

Revenue recognition within the software industry has generally been a complex topic with many industry-specific standards and interpretations. With this new single revenue recognition standard (ASC 606) replacing the industry-specific standards, the software industry has been one of the most impacted. The effective date for ASC 606 for private companies is the annual reporting periods beginning after December 15, 2018 and interim periods thereafter. For most public business entities, the effective date was their annual reporting period beginning after December 15, 2017.

This article summarizes some of the most common implementation challenges faced by CFO’s in the software industry across the five core principles in ASC 606:

  1. Identify the contract with the customer
  2. Identify the performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to distinct performance obligations
  5. Recognize revenue

Identify the contract with the customer

In addition to requiring that the contract has been approved by both parties, one of the challenges in determining whether the software contract meets all of the criteria of ASC 606 is the assessment of collectability provisions of the standard. The concept of considering the credit risk of the customer within the collectability provisions of the standard is important in determining whether collection is probable. If the software company concludes that it is not probable that it will collect a portion of the expected consideration in the contract, then the amount of revenue recognized will be reduced from the contracted amount until the collectability criteria is met.

Identify the performance obligations 

Identifying separate performance obligations under ASC 606 is a significant change for the software industry. Software arrangements are generally comprised of:

  • SaaS – cloud computing or hosted software
  • On-premises software – licenses run on customer premises
  • Post-contract support – updates and maintenance
  • Professional services – such as installation services, consulting or technical services

Under the new standard, the software company must determine whether these promised goods and services are distinct. If the goods and services are determined to be distinct, then each distinct performance obligation will be allocated a portion of the transaction price and revenue recognition assessed separately. However, in many software contracts this determination requires a series of management judgments on which products and services are combined for purposes of this principle. These combined performance obligations will ultimately determine whether the obligation is satisfied at a point in time or satisfied over time.

Determine the transaction price

The transaction price includes only those amounts where the software company has enforceable rights under the contract. If the contract price is fixed, then its application is straightforward. If the contract price is variable or there are service level agreements in place, there are additional considerations. The most significant challenge is estimating the variable consideration over the contract period based on expected value, including a determination that it is probable that there will not be a significant downward adjustment of the revenue recognized over time. Compared to the previous software standards, this estimate of variable consideration may result in earlier revenue recognition under ASC 606.

Allocate the transaction price to distinct performance obligations 

After the software company identifies the distinct performance obligations and determines the transaction price of each contract under the standard, the next challenge is allocating the transaction price to these obligations. The standard introduces the concept of relative standalone selling price or SSP.   If the products or services are sold separately in similar circumstances, then the determination of the SSP and allocation is straightforward. If the SSP is not directly observable, then the SSP will need to be estimated. Since software vendors tend to bundle their software licenses with other products and services, this determination of the SSP for each performance obligation will require management to exercise expert judgment, appropriate internal governance and detailed documentation of their conclusions. These determinations could materially impact the revenue recognized.

Recognize revenue

The timing of revenue recognition for software products and services is based on when control is transferred to the customer. Management should evaluate transfer of control primarily from the customer’s perspective and assess whether control transfers at a point in time or over time. The complexities of implementation manifest when performance obligations are combined or the software license fees are based on sales or usage royalties. This may require further estimates and management judgment to determine revenue recognition under the new standard.  

Conclusion

CFO Consulting Partners has worked with its clients to interpret and implement ASC 606 and ensure that the client is ready for full implementation and audit preparedness of the standard. As part of our work, we can assist in working through the implementation challenges, choosing the transition method, as well as determining the required disclosures. We have experience in establishing appropriate corporate governance to support management judgments and ensuring consistency in the estimation methods employed. It is also important that policies and procedures for ASC 606 and revenue recognition are documented around the end-to-end accounting and reporting process.

Filed Under: Uncategorized

CFO Consulting Partners is a Proud Sponsor of ACG Philadelphia’s Breakfast Meeting

March 12, 2019 By CFO Consulting Partners

CFO Consulting Partners is a proud sponsor of ACG Philadelphia’s Breakfast Meeting. The subject for the Breakfast Meeting will be Economic Outlook: Managing & Deploying Capital in Volatile Markets. 

James Carville uttered the famous warning to Bill Clinton: “It’s the economy, stupid!” But is it the economy or political machinations that are driving capital flows, Fed policy (including rate hikes and balance sheet reductions), equity market volatility and confidence, both consumer and business? 

It’s important, as investors and acquirers, to separate the temporary impacts of political gamesmanship from the underlying real economic trends, as those will largely determine the future direction of the economy. And when it comes to successful investment opportunities, its the future economy that matters.

So, are we headed into a recession or will growth stay solid and interest rates rise?

Join us as we welcome one of our most engaging and highly-rated economists, Joel Naroff, to discuss these issues and others that will impact the flow of capital and investment in the coming year.

When: March 227:15 AM Registration: 8-9 AM Program: 9-10 AM Space Available for Continued Networking

Location: Union League
Meade & Grant Rooms
140 South Broad | Philadelphia, PA

Pricing: $45.00 ACG Members
$125.00 Non-Members

To register please click here.

For questions, please contact mdagit@acg.org or David DeMuth of CFO Consulting Partners at ddemuth@cfoconsultingpartners.com. 

Filed Under: Featured, News & Events, Uncategorized

Allan Tepper interviewed by CFO Studio

August 5, 2011 By CFO Consulting Partners

Filed Under: Uncategorized

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