“Loans are assets and deposits are liabilities on the balance sheet.” Wait, what?! If you’re unfamiliar with the industry-specific accounting required for depository and lending institutions, you may be scratching your head after reading that statement. However, for a bank, loans aren’t a liability, but rather their largest income-producing asset. Banks are unique. Therefore, don’t settle for generic U.S. GAAP training.
So where can you find the requirements for U.S. GAAP for banks? When it comes to accounting guidance, the Financial Accounting Standards Board (FASB), agrees that the industry is specialized – therefore, it has dedicated an entire codification topic specific to banks and similar institutions: ASC 942, Financial Services – Depository and Lending. That said, ASC 942 is not a “one-stop shop,” Besides fair value measurements (ASC 820), you also need to be familiar with the Codification Topics related to the core activities and key transactions entered into by a bank:
- Deposits and other funding sources (ASC 405 and ASC 470)
- Lending (ASC 310 and ASC 326)
- Investing (ASC 320 and ASC 321)
- Risk management (ASC 815)
Are you new to the banking industry? Or maybe you need a refresher of the industry-specific accounting rules applicable to depository and lending institutions? If so, we’ve got a banking training program for you! We’ve bundled together 9 online, eLearning courses totaling 11.5 CPE credits at a great price, covering all the topics you need to know if you’re responsible for financial reporting for, or auditing of, banks.
Let’s take a look at each of the courses in the collection. If you want to watch the introductory video or learn more about a particular course, just click the images below.
1. Industry Overview
What is a bank? How do they make money? Why are they so special? Don’t worry, we’ll answer these questions (and more!) as we walk through the core activities and key transactions of a bank to provide an overview of this special industry.
These core activities are:
- Gather deposits
- Lend money
- Make investments
- Manage risks
For each of these core activities, we’ll introduce the area, provide a high-level overview of initial and subsequent accounting, review the key accounting issues, and briefly look at the related disclosures using real-life financial statements of a bank. Additionally, we discuss critical accounting estimates and the regulatory environment specific to banks. It’s the perfect course to get you started on your journey to learn about the banking industry!
2. Fair Value: Overview of ASC 820
What does fair value have to do with the banking industry? EVERYTHING! Fair value permeates a bank’s balance sheet. Whether it’s investments, derivatives, or even loans, in certain circumstances, you must be knowledgeable of fair value measurements in accordance with ASC 820. Therefore, we recommend taking this course before setting out to tackle the other topics in the collection.
After a review of the various balance sheet items which utilize fair value measurements, the course defines fair value, exploring the key concepts within this definition as set out in ASC 820:
- Utilizing market participant assumptions
- Distinguishing between orderly transaction versus forced transactions
- Using exit prices and not entry prices
- Determining the principal market
The course then discusses the various approaches to determine fair value measurements, including the importance of inputs and their classification within the fair value hierarchy. The course concludes with a look at “real-life” fair value disclosures, highlighting the requirements within ASC 820, Fair Value Measurement.
3. Interest Method and Effective Interest Rates
The interest method is used to amortize premiums, accrete discounts, defer fees and costs, and allocate principal and interest payments for proper recognition in interest income or interest expense. When it comes to banks, let’s just say the interest method is used quite frequently! Debt securities, loan receivables, lease liabilities, and debt liabilities all utilize the interest method described in ASC 835, Interest.
This course explains what the interest method is, where it is commonly used in U.S. GAAP, and how the method works. Applying the interest method can seem tricky, but don’t fret – we walk through applying the interest method, including journal entries for both a mortgage loan receivable and a debt security investment.
Lending is one of the core activities of a bank. Loans usually comprise the largest asset on the balance sheet, and income from interest and fees are primary sources of a bank’s income. Do banks make only one type of loans? No way! There are many different types of loans, such as commercial, residential mortgage, auto, agricultural, and construction just to name a few. Some loans are held by a bank until maturity, and some are sold after origination. Some loans are purchased outright, rather than being underwritten by the bank itself. All of these situations have unique accounting considerations set out in ASC 942 and ASC 310, Receivables.
In this course, we’ll have some fun with references to banks found in movies to learn about the lending process, the different types of lending arrangements and the risks associated with each, the initial recognition and subsequent measurement for loans, and the accounting considerations when good loans go bad under U.S. GAAP.
5. Credit Losses: Introduction to the CECL Model
Even with the best credit strategy and the strictest lending policies, not all loans will pay in full. Unfortunately, that is the case for many financial assets, including investments like debt securities and trade receivables, too. ASC 326, Financial Instruments – Credit Losses provides the guidance for establishing an allowance for credit losses using the current expected credit losses (CECL) model to reflect these expected credit losses associated with in-scope assets.
New to credit losses altogether? Or maybe you’re familiar with legacy GAAP (the incurred loss model under old ASC 450-20 and 310-10) but worried how to incorporate the future forecasts required by the expected credit loss model? Don’t worry, this course is for you! It helps you leave the stone age of legacy GAAP behind and launch into the space age of CECL!
This course focuses on amortized cost instruments such as loans and held-to-maturity debt securities, as well as purchased credit deteriorated (PCD) assets. In addition to initial and subsequent accounting, we’ll cover the key concepts to be applied when forming an estimate of expected credit losses, such as collective assessment, contractual life, various methodologies, forecasts of future conditions, and write-offs and recoveries.
6. Deposits and Other Sources of Funding
We mentioned above that deposits are the primary source of funding for banks, but how exactly does a bank obtain these deposits and other sources of funds? Is there strategy involved? You bet there is! Common sources of funding include deposits, short-term and long-term borrowings, repurchase agreements, and more – all covered in this course!
With the help of some famous pigs throughout history, we explain characteristics of each funding source, how they are accounted for under ASC 405, Liabilities and ASC 470, Debt, and the key issues to keep in mind. We’ll wrap it up with the required disclosures under U.S. GAAP for deposits and debt.
7. Investments: Equity Securities
What do banks do with any “extra” money? They invest it, of course! And, depending on the type of investment, the accounting differs. For investments in equity securities, the applicable guidance is found within ASC 321, Investments – Equity Securities.
In this course using references to the movie Trading Places, we explore the specific characteristics of and accounting requirements for equity securities within the scope of ASC 321. We’ll cover the concepts of readily determinable fair value and the use of net asset value (NAV) as a practical expedient. What if the investment doesn’t have a readily determinable fair value? ASC 321 allows for use of a measurement alternative and we cover that too!
8. Investments: Debt Securities
Debt securities, by far, are the largest investments made by a bank. Therefore, it’s imperative that you know the accounting for debt securities, which differs depending on its classification, described in ASC 320, Investments – Debt Securities.
With the help of a British secret agent, this course walks through the definition of a debt security to make sure it is even within the scope of ASC 320. It discusses the characteristics and accounting for debt securities classified as either held-to-maturity, available-for-sale, or trading. Unfortunately, there’s always a chance these investments will experience credit losses and, therefore, we also explain the impairment models for held-to-maturity and available-for-sale securities. Disclosures are covered at the end of this course…before it self-destructs!
9. Derivatives: Characteristics and Scope Exceptions
Derivatives are primarily used by banks for risk management purposes. While many people hear the word “derivative” and get nervous, this course will help ease those jitters by de-mystifying these financial instruments, introducing the common types of derivatives used by entities, and the accounting for derivatives prescribed by ASC 815, Derivatives and Hedging.
After introducing derivatives, including the common types of derivatives used by entities to manage risk, this course covers the basic derivative terminology, including the characteristic-based definition prescribed by ASC 815. We’ll look at each of the three characteristics in detail, so you’ll be able to spot derivative contracts on your own! ASC 815 does have several scope exceptions to the basic definition, so we’ll also spend some time in this area. This course concludes with an overview of the definition of fair value, since that’s how derivatives are required to be accounted for in accordance with U.S. GAAP.
ONLINE COURSE COLLECTION
Although each of these courses can be purchased separately, we recommend purchasing them as a collection. Why? Because when you purchase them as a collection, you’ll save over 40%!
Searching for more help when it comes to U.S. GAAP for banks? Check out our Banking Industry Topic Page! This page is chock full of information and resources specific to the depository and lending industry.
About GAAP Dynamics
We’re a DIFFERENT type of accounting training firm. We don’t think of training as a “tick the box” exercise, but rather an opportunity to empower your people to help them make the right decisions at the right time. Whether it’s U.S. GAAP training, IFRS training, or audit training, we’ve helped thousands of professionals since 2001. Our clients include some of the largest accounting firms and companies in the world. As lifelong learners, we believe training is important. As CPAs, we believe great training is vital to doing your job well and maintaining the public trust. We want to help you understand complex accounting matters and we believe you deserve the best training in the world, regardless of whether you work for a large, multinational company or a small, regional accounting firm. We passionately create high-quality training that we would want to take. This means it is accurate, relevant, engaging, visually appealing, and fun. That’s our brand promise. Want to learn more about how GAAP Dynamics can help you? Let’s talk!
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