Is a Community Bank Owned by a Bank Holding Company a Public Business Entity?
Just as it has been over the years with the incurred loss model of accounting for loan and lease losses, there are certain to be ongoing releases from the FASB clarifying or interpreting various provisions of the CECL accounting standard. One issue currently needing clarification is the definition of a public business entity (PBE). The issue is of great concern to community banks for several reasons, including that PBEs must adhere to a different set of disclosures under CECL, and perhaps even more alarming, that under current guidelines PBEs have the effective date of December 15, 2019 meaning the first quarter of regulatory reporting will be March 31, 2020, earlier than nonpublic entities.
Currently under GAAP, your institution is considered a PBE if, “It has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market.” Another relevant passage indicates your institution is a PBE 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 notes) and make them publicly available on a periodic basis (for example, interim or annual periods).” An entity must meet both of these conditions to meet this criterion.
If you, your accountants, and auditors are confused by these distinctions, you’re not alone. There are gray areas relative to each passage. One example is how traded securities and filing requirements are to be interpreted by institutions that are owned by bank holding companies.
“Call Reports are not GAAP financial statements,” argues Michael Gullette, VP accounting and financial management for the American Bankers Association (ABA), in the ABA white paper, Definitions of Private Company and Public Business Entity. “They do not include all the GAAP-required footnote disclosures,” thus eliminating one condition for classification as a PBE. As well, since the banks are wholly-owned subsidiaries of BHCs, “an implied restriction on the transfer of the bank shares exists. Therefore, the bank itself is not a PBE and the BHC is not a PBE.”
However, Gullette noted, “A community bank that is owned by a BHC can be a PBE if it has no publicly-traded debt and does not offer deposit products with variable values, such as negotiable CDs,” as that would signal internal control issues on financial reporting.
More clarification is due either through the FASB or a white paper promised by the AICPA, which the organization says is “in the works”.
For the discussion of PBEs and criteria between Rahul Gupta and Graham Dyer, both of Grant Thornton, at the MST 2017 National ALLL Conference, click here.
Read the blog Are You a PBE? Lenders Need to Know.
