12Other Assets, Other Liabilities, and Other Investments – Audit and Accounting Guide Depository and Lending Institutions, 2nd Edition

Chapter 12
Other Assets, Other Liabilities, and Other Investments

Introduction

12.01 The following assets are among those frequently grouped as other assets or other investments in institutions' balance sheets; however, any that are individually material should be presented in the balance sheet as a separate line item:

  • Accrued interest receivable (see chapter 7, “Investments in Debt and Equity Securities,” of this guide for a discussion on securities and chapter 8, “Loans,” of this guide for a discussion on loans)
  • Premises and equipment, net
  • Other real estate, such as foreclosed assets (see chapter 11, “Real Estate Investments, Real Estate Owned, and Other Foreclosed Assets,” of this guide for a discussion on real estate investments, real estate owned, and other foreclosed assets)
  • Servicing assets (SAs) (see chapter 10, “Transfers and Servicing and Variable Interest Entities,” of this guide for a discussion of SAs)
  • Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB), or other restricted stocks
  • National Credit Union Share Insurance Fund (NCUSIF) deposits or other share insurance deposits
  • Mortgage servicing advances
  • Identifiable intangible assets, such as core deposit intangibles, and purchased credit-card relationships
  • Indemnification assets arising from contractual indemnities provided in business combinations
  • Goodwill
  • Customers' liabilities on acceptances
  • Deferred tax assets (see chapter 16, “Income Taxes,” of this guide)
  • Investments in equity securities that are not readily marketable (which meet definition of a security in FASB ASC 320, Investments—Debt and Equity Securities, but are not subject to its provisions because they are not readily marketable), such as stock in the Federal Agricultural Mortgage Corporation or stock in banker’s banks.
  • Other equity investments, including investments in joint ventures or venture capital investments, and credit union investments in credit union service organizations (CUSOs) and corporate credit unions
  • Investments in nonnegotiable certificates of deposits (see chapter 6, “Cash and Cash Equivalents,” of this guide)
  • Bank, or credit union, owned life insurance
  • Loans to executives for collateralized split-dollar life insurance agreements
  • Prepaid pension assets

12.02 Other liabilities frequently include the following:

  • Accounts payable
  • Accrued interest payable (see chapter 13, “Deposits,” of this guide for discussion of deposits)
  • Accrued expenses
  • Borrower’s taxes and insurance escrows
  • Bankers’ acceptance liability
  • Guarantee liabilities pursuant to FASB ASC 460, Guarantees
  • Recourse liabilities
  • Allowance related to unfunded loan commitments
  • Servicing liabilities
  • Asset retirement obligations
  • Liabilities associated with exit or disposal activities
  • Estimated litigation and settlement loss allowance
  • Capital lease obligations
  • Compensation and benefit-related accruals, such as bonuses, pension liabilities, supplemental executive retirement plans, and postretirement health care benefits including split-dollar life insurance arrangements
  • Deferred tax liabilities
  • Allowance for unrecognized tax benefits

Premises and Equipment, Net

12.03 Premises and equipment consist primarily of land, buildings, furniture, fixtures, equipment, purchased software, and leasehold improvements used in institution operations. Such assets may be acquired directly or through a special-purpose subsidiary. Institutions may also lease property and equipment to other parties.

FHLB or FRB Stock

12.04 FHLB stock. Institutions that are members of the FHLB system are required to maintain a minimum investment in FHLB stock. The minimum is calculated as a percentage of aggregate outstanding mortgages. An additional investment calculated as a percentage of total FHLB advances, letters of credit, and the collateralized portion of interest-rate swaps outstanding may be necessary. FHLB stock is capital stock that is bought from and sold only to the FHLB at $100 par. Both stock and cash dividends may be received on FHLB stock.

12.05 FRB stock. Members of the Federal Reserve System are required to maintain stock in the district FRB in a specified ratio to its capital. The stock does not provide the owner with control or financial interest in the FRB, is not transferable, and cannot be used as collateral. A member institution’s ownership of FRB stock may be canceled in the event of the institution’s insolvency or voluntary liquidation, conversion to nonmember status through merger or acquisition, or voluntary or involuntary termination of membership in the Federal Reserve System.

Identifiable Intangibles

12.06 Identifiable intangible assets may be acquired individually, as part of a group of assets, or in a business combination in accordance with FASB ASC 805, Business Combinations. According to the FASB ASC glossary, intangible assets are assets (not including financial assets) that lack physical substance. Although goodwill is an intangible asset, the term intangible assets is used to refer to intangible assets other than goodwill, which may include, among others, core deposit intangibles (the value of long term deposit relationships) and credit-card customer lists (the value of long term credit-card relationships).

12.07 Paragraphs 9–15A of FASB ASC 805-20-25 provide guidance on recognizing identifiable intangible assets, including operating leases and reacquired rights, acquired in a business combination. Paragraphs 11–45 of FASB ASC 805-20-55 present examples of identifiable intangible assets acquired in a business combination. See chapter 19, “Business Combinations,” of this guide for additional information regarding this topic.

Goodwill

12.08 Goodwill arises in a business combination. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized, as defined in the FASB ASC glossary.

Customers' Liabilities on Acceptances

12.09 Customer's liabilities on acceptances represent a customer's outstanding debt to the institution that resulted from a banker's acceptance transaction. A banker's acceptance is a short term negotiable time draft drawn on and accepted by an institution.

Other Miscellaneous Items

12.10 Other items that may be classified as other assets include accounts receivable, accruals for miscellaneous fees, other prepaid expenses, payroll deductions receivable, and suspense accounts. Suspense accounts usually contain amounts related to items recorded and held pending classification and transfer to the proper account and may originate from a variety of sources, such as loan remittances, branch clearing transactions, automated teller machine transactions, and payroll transactions. Suspense accounts are generally recorded within “other liabilities” in the balance sheet but may have debit balances.

Regulatory Matters

12.11 Section 107(4) of the Federal Credit Union Act permits federal credit unions to purchase, hold, and dispose of only that property which is necessary or incidental to their operations. Part 701.36 of the National Credit Union Administration (NCUA) regulations establishes occupancy and disposal requirements for acquired and abandoned premises, and prohibits certain transactions (such as, acquiring real property from certain related parties).1

12.12 As noted in chapter 17, “Equity and Disclosures Regarding Capital Matters," in 2013, the U.S. Banking regulators issued a final rule for U.S. adoption of the Basel III regulatory capital framework. Basel III includes a more stringent definition of capital and all intangible assets, other than mortgage servicing rights, are fully deducted from capital (net of associated deferred tax liabilities) after the current phase-in period which began on January 1, 2015 and will be fully phased-in January 1, 2018. Specific to mortgage servicing rights, under the revised capital rule any amount above 10 percent of a firm’s common equity tier 1 capital must be deducted from common equity tier 1 capital. Starting January 1, 2018, any amount of the threshold items that is not deducted from common equity tier 1 capital will be risk weighted at 250 percent (an increase from 100 percent). In addition, any amount of mortgage servicing assets, certain deferred tax assets arising from temporary differences, and significant investments in the capital of unconsolidated financial institutions in the form of common stock above 15 percent of a firm’s common equity tier 1 capital must also be deducted from common equity tier 1 capital.

12.13 Both national banks, federal savings associations, and state member banks are limited as to the amount of their investments in bank premises. National bank and federal savings association limitations are set forth in Title 12 U.S. Code of Federal Regulations (CFR) Part 5.37 Banks and Banking, U.S. Code 12, Section 371d. State member bank limitations are set forth in 12 CFR 208.21.

12.14 See paragraph 10.10 of this guide for information on interagency guidelines on asset securitization.

12.15 The Office of the Comptroller of the Currency’s Bank Accounting Advisory Series (BAAS) is updated periodically to express the Office of the Chief Accountant’s current views on accounting topics of interest to national banks and federal savings associations. See further discussion of the BAAS in paragraph 7.82 of this guide. Topic 10B, “Intangible Assets,” includes interpretations related to intangible assets. Readers are encouraged to view this publication under the “Publications—Bank Management” page at www.occ.gov.

Accounting and Financial Reporting

Premises and Equipment, Net

12.16 Financial institutions account for premises and equipment in the same way that commercial entities account for property and equipment (fixed assets). Institutions carry premises and equipment at cost less accumulated depreciation, and adjust the carrying amount for permanent impairments of value. Capital additions and improvements to premises should be capitalized, including construction period interest in accordance with FASB ASC 835-20. A description of the institution's depreciation and capitalization policies should be included in the notes to the financial statements.

12.17 In accordance with paragraphs 1–2 of FASB ASC 942-360-45, premises and equipment are generally shown as a single caption on the balance sheet, net of accumulated depreciation and amortization, the amount of which should be disclosed either on the face of the balance sheet or in the notes to the financial statements. For premises and equipment, net gains or net losses on dispositions should be included in noninterest income or noninterest expense.

12.18 Long-lived assets or asset groups should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable as stated in FASB ASC 360-10-35-21. Capital leases should be accounted for in accordance with FASB ASC 840-30 and are subject to the requirements of the “Impairment or Disposal of Long-Lived Assets” subsections of FASB ASC 360-10, for purposes of recognizing and measuring impairment.

12.19 Premises and equipment held for use, including capital leases, need to be tested for recoverability whenever indicators of impairment are present. Paragraph 12.59 provides further guidance on impairment of long-lived assets.

12.20 Consolidation of subsidiaries that own premises and equipment should occur in accordance with FASB ASC 810, Consolidation.

12.21 In accordance with FASB ASC 810-10-15-3, all reporting entities should apply the guidance in FASB ASC 810 to determine whether and how to consolidate another entity and apply the applicable subsections of FASB ASC 810-10. The “Variable Interest Entities” subsections of FASB ASC 810-10 clarify the application of the “General” subsections to certain legal entities in which equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support, or according to “Pending Content” in FASB ASC 810-10-05-8,2 as a group, the holders of the equity investment at risk lack any of the following three characteristics:

  1. a. The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance
  2. b. The obligation to absorb the expected losses of the legal entity
  3. c. The right to receive the expected residual returns of the legal entity.

12.22 FASB ASC 840-40 provides guidance on how to account for sale-leaseback transactions and various sale-leaseback matters.

12.23 FASB ASC 350-40 provides guidance on accounting for the cost of computer software developed or obtained for internal use and for determining whether the software is for internal use. According to FASB ASC 350-40-05-2, internal use software is acquired, internally developed, or modified solely to meet the entity’s internal needs and during the software’s development or modification, no substantive plan exists or is being developed to market the software externally. Accounting for the cost of either internally developed and produced or purchased computer software to be sold, leased, or otherwise marketed is established in FASB ASC 985-20.3

12.24 If the individual categories of assets are material, they should be disclosed on the face of the balance sheet or in the notes to the financial statements. The gross amount of assets recorded under capital leases as of the date of each balance sheet presented by major classes according to nature or function should be disclosed, in accordance with FASB ASC 840-30-50-1.

12.25 Operating leases. An operating lease, from the perspective of a lessor, is a lease that meets the conditions in item (d) in FASB ASC 840-10-25-43 and, from the perspective of a lessee, is any lease other than a capital lease, as defined in the FASB ASC glossary. The capital lease criteria are specified in FASB ASC 840-10-25-1. From the lessor’s perspective, the leased assets are recorded on the balance sheet with or near property, plant, and equipment and lease payments are recognized as rental income in the income statement in accordance with FASB ASC 840-20-45-2 and 840-20-25-1, respectively. Long-lived assets of lessors subject to operating leases are also subject to the requirements of “Impairment or Disposal of Long-Lived Assets” subsections of FASB ASC 360-10 for purposes of recognizing and measuring impairment. From the lessee’s perspective, rent should be charged to expense by lessees over the lease term as it becomes payable, in accordance with FASB ASC 840-20-25-1. If rental payments are not made on a straight-line basis, rental expense nevertheless should be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis should be used.

12.26 State credit unions. Because the NCUA eliminated the 5 percent aggregate limit on investments in fixed assets for federal credit unions with $1 million or more in assets, state credit unions in some instances may still have limits on the amount they can invest in fixed assets.

FHLB or FRB Stock

12.27 On June 23, 2004, the Federal Housing Finance Board voted to require the 12 FHLBs to enhance their financial disclosures by registering with the SEC. Each bank is required to register a class of its equity securities under Section 12(g) of the Securities and Exchange Act of 1934. The banks file quarterly, annual, and supplemental disclosures.

12.28 Although FHLB (or FRB) stock is an equity interest in a FHLB (or FRB), it does not have a readily determinable fair value for purposes of FASB ASC 320 because its ownership is restricted and it lacks a market, as stated in FASB ASC 942-325-05-2. FHLB (or FRB) stock can be sold back only at its par value of $100 per share and only to the FHLBs (or FRBs) or to another member institution. In addition, the equity ownership rights represented by FHLB stock are more limited than would be the case for a public company, because of the oversight role exercised by regulators in the process of budgeting and approving dividends.

12.29 FHLB and FRB stock should be classified as a restricted investment security, carried at cost, and evaluated for impairment, as stated in FASB ASC 942-325-25-1 and 942-325-35-1. FASB ASC 942-325-35-2 states that both cash and stock dividends received on FHLB stock should be reported as income. See FASB ASC 505, Equity, and FASB ASC 852, Reorganizations, for guidance concerning stock splits.

12.30 FASB ASC 942-325-35-3 states that FHLB stock is generally viewed as a long term investment. Accordingly, when evaluating FHLB stock for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The determination of whether the decline affects the ultimate recoverability is influenced by criteria such as the following:

  • The significance of the decline in net assets of the FHLBs as compared to the capital stock amount for the FHLBs and the length of time this situation has persisted.
  • Commitments by the FHLBs to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBs.
  • The impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLBs.
  • The liquidity position of the FHLBs.

12.31 The evaluation of whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock is ultimately made by the member institution based on the facts at the time. This consideration is influenced by (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution's operational needs for the foreseeable future would indicate management intends to dispose of the stock and cause management to dispose of the stock at an amount other than par value.

12.32 When addressing other than temporary impairment, readers may also refer to FASB ASC 320-10-35.

12.33 Classification of FHLB or FRB stock in the balance sheet varies among financial institutions. Some institutions, with more significant investments in FHLB or FRB stock, present their investment as a separate line item in the balance sheet. Others may combine the investment in FHLB or FRB stock with other investments or other assets. Either manner of presentation is acceptable.

12.34 However, investments in FHLB or FRB stock should not be shown with securities accounted for under FASB ASC 320, according to FASB ASC 942-325-45-1.

Goodwill and Other Intangible Assets

12.35 Goodwill. FASB ASC 350-20 addresses financial accounting and reporting for goodwill subsequent to its acquisition and for the cost of internally developing goodwill. In accordance with FASB ASC 350-20-35-1, goodwill should not be amortized. Instead, goodwill should be tested for impairment at a level of reporting referred to as a reporting unit. (Paragraphs 33–46 of FASB ASC 350-20-35 provide guidance on determining reporting units.) FASB ASC 350-20-35-2 states that impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The first step of the goodwill impairment test compares the estimated fair value of the identified reporting units with their carrying amount, including goodwill. If the estimated fair value of the reporting unit is less than the carrying value, the second step must be performed to determine the implied fair value of the reporting unit’s goodwill and the amount of goodwill impairment, if any. The implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. FASB ASC 350-20-35-3 states that an entity may first assess qualitative factors,4 as described in paragraphs 3A–3G of FASB ASC 350-20-35 (see paragraphs 12.36–.38), to determine whether it is necessary to perform the two-step goodwill impairment test discussed in paragraphs 4–19 of FASB ASC 350-20-35. The entity should consider its specific facts and circumstances when determining whether to utilize the qualitative assessment. If determined to be necessary, the two-step impairment test should be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).

Considerations for Private Companies That Elect to Use Standards as Issued by the Private Company Council

FASB ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council), permits a private company to subsequently amortize goodwill on a straight-line basis over a period of 10 years, or less if the company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill.

12.36 In performing the qualitative assessment to evaluate whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, an entity should assess relevant events and circumstances. Examples of such events and circumstances include the following:5

  1. a. Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in exchange rates, or other developments in equity and credit markets
  2. b. Industry and market considerations such as deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development
  3. c. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
  4. d. Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
  5. e. Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
  6. f. Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-than-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
  7. g. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers)

12.37 An entity should consider the extent to which each of the adverse events and circumstances identified could affect the comparison of a reporting unit’s fair value with its carrying amount. An entity should place more weight on the events and circumstances that most affect a reporting unit’s fair value or the carrying amount of its net assets. An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity has a recent fair value calculation for a reporting unit, it also should include as a factor in its consideration the difference between the fair value and the carrying amount in reaching its conclusion about whether to perform the first step of the goodwill impairment test. An entity should evaluate, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the existence of positive and mitigating events and circumstances is not intended to represent a rebuttable presumption that an entity should not perform the first step of the goodwill impairment test.

12.38 If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. Conversely, if an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity should perform the first step of the two-step goodwill impairment test.

12.39 Identified intangibles other than goodwill. In accordance with FASB ASC 350-30-25-1, an intangible asset that is acquired either individually or with a group of other assets should be recognized. FASB ASC 350-30-25-2 states that the cost of a group of assets acquired in a transaction other than a business combination or an acquisition by a not-for-profit entity should be allocated to the individual assets acquired based on their relative fair values and should not give rise to goodwill. Paragraphs 12.06–.07 and chapter 19 of this guide discuss intangible assets acquired in connection with a business combination.

12.40 Costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business or nonprofit activity and related to an entity as a whole, should be recognized as an expense when incurred in accordance with FASB ASC 350-30-25-3.

12.41 In accordance with paragraphs 1–4 of FASB 350-30-35, the accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life should be amortized; an intangible asset with an indefinite useful life should not be amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. The useful life is not the period of time that it would take that entity to internally develop an intangible asset that would provide similar benefits. However, a reacquired right recognized as an intangible asset is amortized over the remaining contractual period of the contract in which the right was granted. If an entity subsequently reissues (sells) a reacquired right to a third party, the entity includes the related unamortized asset, if any, in determining the gain or loss on the reissuance. The estimate of the useful life of an intangible asset to an entity should be based on an analysis of all pertinent factors, including those described in FASB ASC 350-30-35-3. If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset should be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon—that is, there is no foreseeable limit on the period of time over which it is extended to contribute to the cash flows of the reporting entity.

12.42 As required by FASB ASC 350-30-35-6, if an intangible asset has a finite useful life, but the precise length of that life is not known, that intangible asset should be amortized over the best estimate of its useful life. The method of amortization should reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method should be used. Accordingly, FASB ASC 350-30-35-7 states that an intangible asset should not be written down or off in the period of acquisition unless it becomes impaired during that period.

12.43 The amount of an intangible asset to be amortized should be the amount initially assigned to that asset less any residual value, according to FASB ASC 350-30-35-8. The residual value of an intangible asset should be assumed to be zero unless at the end of its useful life to the entity the asset is expected to continue to have a useful life to another entity and either of the following conditions is met:

  1. a. The reporting entity has a commitment from a third party to purchase the asset at the end of its useful life.
  2. b. The residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset’s useful life.

12.44 Paragraphs 9–10 and 12 of FASB ASC 350-30-35 state that an entity should evaluate the remaining useful life of an intangible asset that is being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset should be amortized prospectively over that revised remaining useful life. If an intangible asset that is being amortized is subsequently determined to have an indefinite useful life, the asset should be tested for impairment in accordance with paragraphs 18–20 of FASB ASC 350-30-35. (FASB ASC 360-10-35-21 includes examples of impairment indicators.) That intangible asset should no longer be amortized and should be accounted for in the same manner as other intangible assets that are not subject to amortization.

12.45 FASB ASC 350-30-35-14 states that an intangible asset that is subject to amortization should be reviewed for impairment in accordance with the “Impairment or Disposal of Long-Lived Assets” subsections of FASB ASC 360-10 by applying the recognition and measurement provisions in paragraphs 17–35 of FASB ASC 360-10-35. In accordance with the “Impairment or Disposal of Long-Lived Assets” subsections of FASB ASC 360-10, an impairment loss should be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset should be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited.

12.46 If an intangible asset is determined to have an indefinite useful life, it should not be amortized until its useful life is determined to be no longer indefinite, as required by paragraphs 15–16 of FASB ASC 350-30-35. An entity should evaluate the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, FASB ASC 350-30-35-17 states that the asset should be tested for impairment in accordance with paragraphs 18–19 of FASB ASC 350-30-35. That intangible asset should then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization.

12.47 Paragraphs 18–19 of FASB ASC 350-30-35 state that an intangible asset that is not subject to amortization should be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. An entity may first perform a qualitative assessment, as described in paragraphs 18A–18F of FASB ASC 350-30-35, to determine whether it is necessary to perform the quantitative impairment test. An entity has an unconditional option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The quantitative impairment test for an indefinite-lived intangible asset should consist of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an entity should recognize an impairment loss in an amount equal to the excess. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset should be its new accounting basis. In accordance with FASB ASC 350-30-35-20, subsequent reversal of a previously recognized impairment loss is prohibited.

12.48 Indemnification assets. Indemnification assets arise from contractual indemnities provided for in a business combination. According to paragraphs 27–28 of FASB ASC 805-20-25, the acquirer should recognize an indemnification asset at the same time that it recognizes the indemnified item, measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. However, the indemnity may relate to an asset or liability that is an exception to the recognition or measurement principal, such as a contingency that is not recognized at the acquisition date because it does not meet the criteria for recognition in paragraphs 18A–19 of FASB ASC 805-20-25 at that date. In such a circumstance, the indemnification asset should be recognized and measured using assumptions consistent with those used to measure the indemnified item, subject to management’s assessment of the collectability of the indemnification asset and any contractual limitations on the indemnified amount. At each subsequent reporting date, FASB ASC 805-20-35-4 requires the acquirer to measure an indemnification asset that was recognized in accordance with paragraphs 27–28 of FASB ASC 805-20-25 at the acquisition date on the same basis as the indemnified liability or asset. Further, the measure is subject to any contractual limitations on its amount, except as noted in FASB ASC 805-20-35-4B, and, for an indemnification asset that is not subsequently measured at its fair value, management’s assessment of the collectability of the indemnification asset.

12.49 Financial statement presentation. Paragraphs 1–2 of FASB ASC 350-30-45 state that at a minimum, all intangible assets should be aggregated and presented as a separate line item in the statement of financial position. However, that requirement does not preclude presentation of individual intangible assets or classes of intangible assets as separate line items. The amortization expense and impairment losses for intangible assets should be presented in income statement line items within continuing operations as deemed appropriate for each entity.

12.50 The aggregate amount of goodwill should be presented as a separate line item in the statement of financial position, as provided in paragraphs 1–3 of FASB ASC 350-20-45. The aggregate amount of goodwill impairment losses should be presented as a separate line item in the income statement before the subtotal income from continuing operations (or similar caption) unless a goodwill impairment loss is associated with a discontinued operation. A goodwill impairment loss associated with a discontinued operation should be included (on a net-of-tax basis) within the results of discontinued operations. For guidance on reporting discontinued operations, see FASB ASC 205-20. FASB ASC 350-30-50 and 350-20-50 provide additional disclosure requirements for intangible assets and goodwill, respectively.

Exit or Disposal Activities

12.51 Exit activities include, but are not limited to, the closure of activities in a particular location, the relocation of activities from one location to another, changes in management structure, sale or termination of a line of business, or a fundamental reorganization that affects the nature and focus of operations.

12.52 FASB ASC 420, Exit or Disposal Cost Obligations, discusses recognition of liabilities for the costs associated with exit or disposal activities, including, but not limited to, involuntarily employee termination benefits pursuant to a one-time termination benefit arrangement, costs to terminate a contract that is not a capital lease, and other associated costs, including costs to consolidate or close facilities and relocate employees, according to paragraphs 2–3 of FASB ASC 420-10-05.

Asset Retirement Obligations

12.53 FASB ASC 410-20 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement costs, as stated in FASB ASC 410-20-05-1.

12.54 An example of an asset retirement obligation might include an obligation to restore space leased for bank operations to its original condition, including the cost of removing vaults, teller lines and drive-through facilities.

12.55 The guidance in FASB ASC 410-20 applies to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, including any legal obligations that require disposal of a replaced part that is a component of a tangible long-lived asset, according to item (a) in FASB ASC 410-20-15-2. FASB ASC 410-20-25-4 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.

12.56 The FASB ASC glossary clarifies the term conditional asset retirement obligation, as used in FASB ASC 410-20, as a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. In addition, as defined in the FASB ASC glossary, the asset retirement cost is the amount capitalized that increases the carrying amount of the long-lived asset when a liability for an asset retirement obligation is recognized.

Customers' Liabilities on Acceptances

12.57 FASB ASC 942-310-35-8 establishes that provisions for uncollectible amounts for customers' acceptance liabilities should be made, if necessary. Customers' liabilities on acceptances should be reported gross, rather than net of the related bankers' acceptance liability in accordance with FASB ASC 942-310-45-1.

Mortgage Servicing Advances

12.58 Mortgage servicers may make payments on a borrower’s behalf when escrow amounts, or other similar deposits, are not sufficient. For example, a servicer may pay a borrower’s property tax to avoid a tax lien. Such amounts may need to be evaluated as to their significance and collectability by management.

Impairment of Long-Lived Assets

12.59 The “Impairment or Disposal of Long-Lived Assets” subsections of FASB ASC 360-10 establish the financial accounting and reporting for the impairment of long-lived assets to be held and used or to be disposed of, including (a) capital leases of lessees, and (b) long-lived assets of lessors subject to operating leases, according to item (a) in FASB ASC 360-10-15-4. See chapter 11 of this guide for the requirements of FASB ASC 360-10.

NCUSIF Deposit

12.60 Federally insured credit unions are required, under 12 CFR 741.4c, to maintain on deposit with the NCUSIF during each reporting period an amount equal to 1 percent of the credit union’s total insured shares at the close of the preceding reporting period. The amount on deposit is adjusted periodically for changes in the amount of a credit union's insured shares. For example, if the insured shares decline, a pro rata portion of the amount on deposit with the NCUSIF is refunded to the credit union. A credit union, according to 12 CFR 741.4d, is also required to pay to the NCUSIF, on dates the NCUA board determines, but not more than twice in any calendar year, an insurance premium in an amount stated as a percentage of insured shares, which will be the same for all insured credit unions. The NCUA board may assess a premium charge only if the NCUSIF's equity ratio is less than 1.3 percent and the premium charge does not exceed the amount necessary to restore the equity ratio to 1.3 percent. If the equity ratio of NCUSIF falls below 1.2 percent, the NCUA board is required to assess a premium in an amount it determines is necessary to restore the equity ratio to, and maintain that ratio at, 1.2 percent.

12.61 FASB ASC 942-325-25-3 states that amounts deposited with the NCUSIF should be accounted for and reported as assets as long as such amounts are fully refundable.

12.62 The refundability of NCUSIF deposits should be reviewed for impairment, as stated in item (a) in FASB ASC 942-325-35-4. When the refundability of a deposit is evaluated, the financial condition of both the credit union and of the NCUSIF should be considered. Deposits may be returned to solvent credit unions for a number of reasons, including the termination of insurance coverage, conversion to insurance coverage from another source, or the transfer of operations of the insurance fund from the NCUA board. However, insolvent or bankrupt credit unions should not be entitled to a return of their deposits. To the extent that NCUSIF deposits are not refundable, they should be charged to expense in the period in which the deposits are made or the assets become impaired.

12.63 Item (b) in FASB ASC 942-325-35-4 states that in years in which the equity of the NCUSIF exceeds normal operating levels, the NCUA is required to make distributions to insured credit unions to reduce the equity of the NCUSIF to normal operating levels. Such distributions may be in the form of a waiver of insurance premiums, premium rebates, or cash payments. Distributions in connection with that reduction in the equity of the NCUSIF should be reported in the income statement in the period in which it is determined that a distribution will be made.

12.64 Item (c) in FASB ASC 942-325-35-4 also states that the system of savings account insurance established by the recapitalization of the NCUSIF, which provided for reserves of 1 percent of insured deposits, is based on the concept that the necessary deposits create a fund with an earning potential sufficient to provide for the risk of losses in the credit union system. In years during which the earnings of the fund have been adequate to provide insurance protection and cover all expenses and losses incurred by the fund, the NCUA has elected to waive the insurance premiums due from insured credit unions. In those years, it has been industry practice to net imputed earnings on the insurance deposits against imputed premium expense rather than present them as gross amounts on the statement of income. In years during which the insurance premiums are not waived by the NCUA, the premiums should be expensed in the period to which they relate. To the extent that the NCUA assesses premiums to cover prior operating losses of the insurance fund or to increase the fund balance to normal operating levels, credit unions should expense those premiums when assessed.

12.65 In a letter to federally insured credit unions (NCUA Letter to Credit Unions No. 09-CU-02, “Corporate Credit Union System Strategy”) issued on January 28, 2009, the NCUA announced certain actions it was taking to stabilize the corporate credit union system. The NCUA indicated that the expense of the actions would be passed on proportionately to all federally-insured credit unions through the partial write-off of such credit unions’ existing deposits with the NCUSIF, as well as the assessment of an insurance premium sufficient to return the NCUSIF’s equity to insured shares ratio to 1.30 percent.

12.66 On May 20, 2009, the Helping Families Save Their Homes Act of 2009 became law. The legislation amended the Federal Credit Union Act providing several provisions favorable to credit unions including, but not limited to the following:

  • The Temporary Corporate Credit Union Stabilization Fund was created to mitigate near term corporate credit union stabilization costs with NCUA authority to assess premiums over 7 years.
  • The NCUSIF was provided authority to assess premiums over 8 years to rebuild the equity ratio, if needed.

See NCUA Letter to Credit Unions No. 09-CU-14, “Corporate Stabilization Fund Implementation,” dated June 2009.

Other Investments

12.67 CUSOs.6 Credit unions are allowed under the NCUA regulations to own and operate outside entities that conduct business related to the general services of the credit union. The types of businesses are restricted as to operations within the regulations. These entities may conduct business with other credit unions, credit union members, and nonmembers. In addition, credit unions can own these entities with other credit unions or outside third parties.

12.68 Credit unions are restricted in the amount of money that can be invested in and loaned to the CUSO. Under current regulations, credit unions can invest up to 1 percent of the credit union’s unimpaired capital and surplus. Credit unions can also lend up to an additional 1 percent. This loan authority is independent and separate from the 1 percent investment authority. The CUSO can be structured as a corporation, a limited liability company, or a limited partnership as long as the credit union is not the general partner. All CUSOs must follow U.S. generally accepted accounting principles (GAAP), have an annual opinion audit, and prepare quarterly financial statements. A wholly owned CUSO is not required to obtain a separate annual financial statement audit if it is included in the annual consolidated financial statement audit of the credit union that is its parent. The recording of the investment in or loan to the CUSO must also be accounted for in accordance with GAAP.

12.69 The following are the general approved categories of CUSOs within the regulations:

  • Checking and currency services
  • Clerical, professional and management services
  • Business loan origination
  • Consumer mortgage loan origination
  • Electronic transaction services
  • Financial counseling services
  • Fixed-asset services
  • Insurance brokerage services
  • Leasing
  • Loan support services
  • Record retention, security, and disaster recovery services
  • Securities brokerage services
  • Shared branching
  • Student loan origination
  • Travel agency
  • Trust and trust-related services
  • Real estate brokerage services
  • Non-CUSO service providers
  • Credit card loan origination
  • Payroll processing services

12.70 Under current IRS regulations, federally chartered credit unions do not have to pay taxes on income from flow-through entities. However, state chartered credit unions may be liable for taxes on flow-through income. All CUSOs must follow all relevant IRS and state reporting and filing requirements.

12.71 In accordance with FASB ASC 323, Investments—Equity Method and Joint Ventures, the equity method of accounting should be used if the institution has the ability to exercise significant influence over the operating and financial policies of the investee or CUSO. The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial decisions of the investee, as stated in FASB ASC 323-10-05-5. The investor then has a degree of responsibility for the return on its investment, and it is appropriate to include in the results of operations of the investor its share of the earnings or losses of the investee. Influence tends to be more effective as the investor's percent of ownership in the voting stock of the investee increases. Investments of relatively small percentages of voting stock of an investee tend to be passive in nature and enable the investor to have little or no influence on the operations of the investee.

12.72 A majority-owned subsidiary is an entity separate from the institution and may be a VIE that is subject to consolidation in accordance with the “Variable Interest Entities” subsections of FASB ASC 810-10, according to FASB ASC 810-10-15-9. The “Variable Interest Entities” subsections of FASB ASC 810-10 clarify the application of the “General” subsections to certain legal entities in which equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, according to “Pending Content” in FASB ASC 810-10-05-8, as a group, the holders of the equity investment at risk lack any one of the following three characteristics:

  1. a. The power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance
  2. b. The obligation to absorb the expected losses of the legal entity
  3. c. The right to receive the expected residual returns of the legal entity.7

Contributed Assets

12.73 Many credit unions receive substantial contributions (for example, use of facilities and utilities, telephone services, data processing, mail services, payroll processing services, pension administration services and pension plan contributions, and other materials and supplies) from their sponsoring organizations. Many credit unions also rely on volunteers to provide various services to their members; some credit unions are staffed exclusively by volunteers. In addition, credit unions occasionally receive contributions of assets of material value.

12.74 Contributions received, as provided by FASB ASC 958-605-25-2, should be recognized as revenue or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. FASB ASC 958-605-25-8 clarifies that, pursuant to FASB ASC 958-605-25-2, an unconditional promise to give should be recognized when it is received. However, to be recognized there must be sufficient evidence in the form of verifiable documentation that a promise was made and received. Contributions of services should be recognized only if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, as explained in FASB ASC 958-605-25-16.

12.75 Contributions received should be measured at their fair values, according to FASB ASC 958-605-30-2. FASB ASC 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. See chapter 20, “Fair Value,” of this guide for a summary of FASB ASC 820.

12.76 A reporting entity should measure the fair value of an asset using the assumptions that market participants would use in pricing the asset, as stated in FASB ASC 820-10-35-9. In accordance with FASB ASC 958-605-30-6, unconditional promises to give that are expected to be collected in less than one year may be measured at net realizable value because that amount results in a reasonable estimate of fair value. Contributions of services that create or enhance nonfinancial assets may be measured by referring to either the fair value of the services received or the fair value of the asset or of the asset enhancement resulting from the services, as stated in FASB ASC 958-605-30-10. A major uncertainty about the existence of value may indicate that an item received or given should not be recognized, according to FASB ASC 958-605-25-4. The future economic benefit or service potential of a tangible item usually can be obtained by exchanging it for cash or by using it to produce goods or services, as stated in FASB ASC 958-605-25-5. FASB ASC 958-605-50-1 sets forth certain disclosure requirements for receipts of contributed services.

Auditing8

Objectives

12.77 Other assets. The primary objectives of audit procedures applied to other assets are to obtain sufficient appropriate evidence that

  1. a. the assets exist and are owned by the institution;
  2. b. the assets are properly classified, valued, described, and disclosed in the financial statements;
  3. c. intangible assets that should be amortized are being amortized on a consistent basis over the estimated period of benefit;
  4. d. adequate provisions have been made for impairment, if any, of the assets;
  5. e. sales of assets, including the recognition of gains and losses, have been properly recognized; and
  6. f. appropriate disclosures, including the existence of liens, have been made.

12.78 Other liabilities. The primary objectives of auditing other liabilities are to obtain reasonable assurance that

  • the liabilities represent authorized obligations of the institution; and
  • all contingencies and estimated current period expenses that will be paid in future periods that should be accrued during the period have been accrued, classified, and described in accordance with GAAP, and the related disclosures are adequate.

Planning

12.79 In accordance with AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AICPA, Professional Standards), the objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement (as described in chapter 5, “Audit Considerations and Certain Financial Reporting Matters,” of this guide). Presented in the following list are examples of factors related to other assets and other liabilities that may indicate higher risks of material misstatement for these areas:

  • A current interest rate environment that may adversely affect the values of intangible assets that derive their value from (a) loan relationships or (b) from the timing and amount of future cash flows
  • The use of unobservable inputs and higher degree of estimation uncertainty in the goodwill or intangible impairment test
  • Loss of depositor relationships
  • Prepayments of loans resulting in loss of servicing revenue and relationships
  • Operating losses and uncertainty about future taxable income
  • Declining real estate values
  • Unreconciled balances in suspense accounts
  • Litigation or regulatory enforcement actions or both
  • Planned branch dispositions
  • Operating losses at FHLBs or NCUSIF

Internal Control Over Financial Reporting and Possible Tests of Controls

12.80 AU-C section 315 addresses the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements through understanding the entity and its environment, including the entity’s internal control. Paragraphs .13–.14 of AU-C section 315 state that the auditor should obtain an understanding of internal control relevant to the audit and, in doing so, should evaluate the design of those controls and determine whether they have been implemented by performing procedures in addition to inquiry of the entity’s personnel. (See chapter 5 of this guide for further discussion of the components of internal control.) To provide a basis for designing and performing further audit procedures, paragraph .26 of AU-C section 315 states that the auditor should identify and assess the risks of material misstatement at the financial statement level and the relevant assertion level for classes of transactions, account balances, and disclosures.

12.81 AU-C section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (AICPA, Professional Standards), addresses the auditor’s responsibility to design and implement responses to the risks of material misstatement identified and assessed by the auditor in accordance with AU-C section 315 and to evaluate the audit evidence obtained in an audit of financial statements.

12.82 In accordance with paragraph .08 of AU-C section 330, the auditor should design and perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if (a) the auditor’s assessment of risks of material misstatement at the relevant assertion level includes an expectation that the controls are operating effectively or (b) substantive procedures alone do not provide sufficient appropriate audit evidence at the relevant assertion level. Typical financial reporting controls may include the following:

  • Written policies and procedures that, among other things, specify depreciation and amortization methods and periods for property and equipment
  • Proper authorizations for specific transactions, such as approval for property and equipment purchases and sales
  • Periodic reviews of balances, fair values, realizable values, and policies by persons specified in management's written policy
  • Written policies and procedures aimed at assessing possible impairment of assets on a periodic basis

Substantive Tests

12.83 Irrespective of the assessed risks of material misstatement, paragraph .18 of AU-C section 330 states that the auditor should design and perform substantive procedures for all relevant assertions related to each material class of transactions, account balance, and disclosure. In accordance with paragraph .A45 of AU-C section 330, this requirement reflects the fact that (a) the auditor’s assessment of risk is judgmental and may not identify all risks of material misstatement and (b) inherent limitations to internal control exist, including management override.

12.84 FHLB or FRB stock. If the institution is a member of the FHLB or Federal Reserve System, the auditor should consider (a) confirming stock ownership with the related FHLB or FRB and (b) reconciling the dollar amount of the shares with the institution's general ledger. For institutions holding FHLB stock, the auditor should consider the status of the FHLB's redemption of its stock at par value before concluding that income recognition is appropriate for any FHLB stock dividends.

12.85 Premises and equipment. Substantive procedures used to test premises and equipment consist primarily of physical inspection, review of documents of title or other documents supporting the acquisition, tests of disposals and other adjustments, and reasonableness tests of depreciation. Similar procedures are often used to test the classification, recording, and disclosure of leased premises and equipment.

12.86 Auditors should be alert for signs that premises and equipment are no longer in use and consider tests to determine whether there are any undisclosed liens on premises and equipment. If those signs are present, the auditor might test whether there is impairment of the premises and equipment that should be recognized. Also, computer hardware and software are particularly vulnerable to obsolescence and their valuation should be reviewed if not in use.

12.87 Intangible assets and goodwill. AU-C section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures (AICPA, Professional Standards), addresses the auditor’s responsibilities relating to accounting estimates, including fair value accounting estimates and related disclosures, in an audit of financial statements. Specifically, it expands on how AU-C section 315, AU-C section 330, and other relevant AU-C sections are to be applied with regard to accounting estimates. It also includes requirements and guidance related to misstatements of individual accounting estimates and indicators of possible management bias. In accordance with paragraph .06 of AU-C section 540, the objective of the auditor is to obtain sufficient appropriate audit evidence about whether, in the context of the applicable financial reporting framework, (a) accounting estimates, including fair value accounting estimates, in the financial statements, whether recognized or disclosed, are reasonable and (b) related disclosures in the financial statements are adequate.

12.88 Paragraphs .12–.13 of AU-C section 540 states that based on the assessed risks of material misstatement, the auditor should determine (a) whether management has appropriately applied the requirements of the applicable financial reporting framework relevant to the accounting estimate and (b) whether the methods for making the accounting estimates are appropriate and have been applied consistently and whether changes from the prior period, if any, in accounting estimates or the method for making them are appropriate in the circumstances. In responding to the assessed risks of material misstatement, as required by AU-C section 330, the auditor should undertake one or more of the following, taking into account the nature of the accounting estimate:

  1. a. Determine whether events occurring up to the date of the auditor’s report provide audit evidence regarding the accounting estimate.
  2. b. Test how management made the accounting estimate and the data on which it is based. In doing so, the auditor should evaluate whether

i.  the method of measurement used is appropriate in the circumstances,

ii.  the assumptions used by management are reasonable in light of the measurement objectives of the applicable financial reporting framework, and

iii.  the data on which the estimate is based is sufficiently reliable for the auditor’s purposes.

  1. c. Test the operating effectiveness of the controls over how management made the accounting estimate, together with appropriate substantive procedures.
  2. d. Develop a point estimate or range to evaluate management’s point estimate.9 For this purpose,

i.  if the auditor uses assumptions or methods that differ from management’s, the auditor should obtain an understanding of management’s assumptions or methods sufficient to establish that the auditor’s point estimate or range10 takes into account relevant variables and to evaluate any significant differences from management’s point estimate.

ii.  if the auditor concludes that it is appropriate to use a range, the auditor should narrow the range, based on audit evidence available, until all outcomes within the range are considered reasonable.

In relation to intangible assets and goodwill, the auditor might consider such key factors and assumptions as the ability of the assets to generate income in the future, the expected lives of loans, expected losses on assets subject to contractual indemnities, or expected withdrawal rates of deposits. The auditor should consider whether the assumptions continue to be reasonable and evaluate the effect of changes in assumptions on the recoverability of the assets. Additionally, paragraph .14 of AU-C section 540 states that the auditor should consider whether specialized skills or knowledge with regard to one or more aspects of the accounting estimates is required in order to obtain sufficient appropriate audit evidence.

Considerations for Audits Performed in Accordance With PCAOB Standards

The second note in paragraph .A5 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AICPA, PCAOB Standards and Related Rules), discusses the inherent limitations of internal control. Because fair value determinations often involve subjective judgments by management, this may affect the nature of controls that are capable of being implemented, including the possibility of management override of controls. The auditor considers the inherent limitations of internal control in such circumstances in assessing control risk.

Paragraph .47 of AS 2502, Auditing Fair Value Measurements and Disclosures (AICPA, PCAOB Standards and Related Rules), states that the auditor should evaluate the sufficiency and competence of the audit evidence obtained from auditing fair value measurements and disclosures as well as the consistency of that evidence with other audit evidence obtained and evaluated during the audit. The auditor’s evaluation of whether the fair value measurements and disclosures in the financial statements are in conformity with GAAP is performed in the context of the financial statements taken as a whole (see paragraphs .12–.18 and .24–.27 of AS 2810, Evaluating Audit Results [AICPA, PCAOB Standards and Related Rules]).

12.89 Customers' liabilities on acceptances. Substantive tests that are performed on loans, such as confirmation and collectibility reviews, are generally used to test customers' liabilities on acceptances. (See chapters 8 and 9, “Credit Losses,” of this guide.)

12.90 Other liabilities. Substantive audit procedures relating to interest payable, accrued expenses, and other liability amounts that the auditor might perform include the following:

  • Tracing recorded amounts to supporting documentation
  • Agreeing rates used in the calculation of recorded amounts of interest payable to board of directors' authorization
  • Testing individual calculations of accrued interest (dividends)
  • Tracing recorded amounts to subsequent cash disbursements
  • Examining evidence supporting the carrying amount of other liabilities, including such items as an actuarial evaluation used to compute accrued pension costs, payroll tax returns, and invoices received from third parties
  • Confirming recorded amounts
  • Performing a search for unrecorded liabilities
  • Circulating attorney letters
  • Performing analytical procedures
  • Evaluating key assumptions, such as discount rates

12.91 Suspense accounts. The auditor should consider reviewing the suspense account for material items remaining in the account at year-end for reclassification entries to the appropriate account. The auditor should also consider reviewing for subsequent entries made to clear suspense account items.

Notes

__________________________