ASC

ASC 505-942

Financial Services—Depository and Lending

505 Equity

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In brief

IntermediateDisclosureIndustry-specificDebt and equity

This Subtopic prescribes the note disclosures a bank, savings institution, credit union, foreign bank branch, or holding company must make about regulatory capital. At a minimum, the entity must describe the capital adequacy and prompt corrective action requirements, the actual/possible effects of noncompliance, whether it is in compliance (with required and actual capital ratios and amounts for each balance sheet date), and the prompt corrective action category it was assigned at its most recent notification (942-505-50-1). Noncompliance may, with other factors, raise substantial doubt about going concern.

Key points (7)
  • An entity must disclose a description of regulatory capital requirements both for capital adequacy purposes and under the prompt corrective action provisions of Section 38 of the Federal Deposit Insurance Act, the actual or possible material effects of noncompliance, and whether it is in compliance (942-505-50-1(a)-(c)).
  • Quantitative disclosure includes required and actual regulatory capital ratios and amounts (which may include Common Equity Tier 1, Tier 1 leverage, Tier 1 risk-based, total risk-based, and, for savings institutions, tangible capital) as of each balance sheet date, plus factors that may significantly affect capital adequacy (942-505-50-1(c)).
  • The prompt corrective action category as of the most recent notification must be disclosed for each balance sheet date, along with whether management believes subsequent conditions or events have changed that category (942-505-50-1(d)-(e)); state requirements more stringent than or significantly different from federal ones must also be disclosed (942-505-50-1A).
  • 'Adequately capitalized' or 'undercapitalized' entities must present the minimum amounts and ratios needed to be adequately capitalized, including the effect of any supervisory action, in narrative or tabular form; institution-specific higher capital levels imposed by regulators must be disclosed and are the basis for the compliance assertion (942-505-50-1B).
  • If, as of the most recent balance sheet date, the entity is not in compliance with capital adequacy requirements or is less than adequately capitalized, the possible material effects of those conditions on the financial statements must be disclosed (942-505-50-1D through 50-1E); other regulatory limitations that could materially affect economic resources must likewise be disclosed (942-505-50-1F).
  • The disclosures apply to all significant subsidiaries of a holding company and to bank holding companies themselves, except the prompt corrective action category disclosure, because bank holding companies are not subject to the prompt corrective action provisions; savings institution holding companies have no separate capital requirements (942-505-50-1G).
  • Credit unions and corporate credit unions make parallel disclosures, including whether the institution meets the NCUA definition of a complex credit union and whether events after the balance sheet date but before issuance changed its prompt corrective action category (942-505-50-1H); branches of foreign institutions disclose capital-equivalent deposit and mandated reserve requirements with actual balances (942-505-50-3), and trust-asset-based capital requirements are disclosed under 942-505-50-5.

For students. Regulatory capital disclosures are a signature audit and exam issue for financial institutions; note that the requirement is disclosure-only (no recognition or measurement), and students often forget that the classification disclosed is the category from the most recent regulator notification, not a self-assessment as of the balance sheet date.

regulatory capital requirementsprompt corrective actioncapital adequacyrisk-based capital ratioscredit unionsbank holding companygoing concern doubtcapital-equivalent deposits

Machine-generated study aid for ASC 505-942. Check the source paragraphs below.

505-942-00Status

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505-942-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
942-505-50-1 Amended Accounting Standards Update No. 2018-09 07/16/2018
942-505-50-1F Amended Maintenance Update 2016-11 (PDF) 06/27/2016
942-505-50-1H Amended Maintenance Update 2016-11 (PDF) 06/27/2016

505-942-05Overview and Background

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505-942-05-1
This Subtopic provides regulatory capital disclosure guidance for credit unions, branches of foreign institutions, trust operations, and post-business-combination entities.

505-942-15Scope and Scope Exceptions

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Overall Guidance

505-942-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 942-10-15.

505-942-50Disclosure

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Regulatory Capital Disclosures

505-942-50-1
Noncompliance with regulatory capital requirements could materially affect the economic resources of a bank or savings institution and claims to those resources. Accordingly, at a minimum, an entity shall disclose all of the following in the notes to the financial statements:
  1. a
    A description of regulatory capital requirements for both of the following:
    1. 1
      Those for capital adequacy purposes
    2. 2
      Those established by the prompt corrective action provisions of Section 38 of the Federal Deposit Insurance Act.
  2. b
    The actual or possible material effects of noncompliance with such requirements.
  3. c
    Whether the entity is in compliance with the regulatory capital requirements, including, as of each balance sheet date presented, both of the following with respect to quantitative measures:
    1. 1
      The entity's required and actual ratios and amounts of regulatory capital, which may include Common Equity Tier 1, Tier 1 leverage, Tier 1 risk-based, and total risk-based capital, and (for savings institutions) tangible capital
    2. 2
      Factors that may significantly affect capital adequacy such as potentially volatile components of capital, qualitative factors, and regulatory mandates.
  4. d
    As of each balance sheet date presented, the prompt corrective action category in which the entity was classified as of its most recent notification.
  5. e
    As of the most recent balance sheet date, whether management believes any conditions or events since notification have changed the institution's category.
Noncompliance with regulatory capital requirements may, when considered with other factors, raise substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.
505-942-50-1A
Disclosures shall also be presented for any state-imposed capital requirements that are more stringent than or significantly different from federal requirements.
505-942-50-1B
For "adequately capitalized" or "undercapitalized" entities, the disclosure in paragraph 942-505-50-1(c) shall present the minimum amounts and ratios the institution must have to be categorized as adequately capitalized under the prompt corrective action framework and shall include the effect of any supervisory action that has been imposed. The amounts disclosed under that paragraph may be presented in either narrative or tabular form. The percentages disclosed shall be those applicable to the entity. Entities with CAMELS ratings of 1 that are not anticipating or experiencing significant growth and have well-diversified risk are required to maintain a minimum leverage ratio of 3.0 percent. An additional 100 to 200 basis points are required for all but these most highly rated entities. Also, if the institution has been advised that it must meet capital adequacy levels that exceed the statutory minimums, those higher levels shall be disclosed. Such institution-specific requirements also shall be the basis for management's assertion in paragraph 942-505-50-1(c) about whether the entity is in compliance.
505-942-50-1C
A bank or savings institution is (under federal regulations) deemed to be within a given capital category as of the most recent date of any of the following:
  1. a
    The date the institution filed a regulatory financial report
  2. b
    The date a final regulatory examination report is delivered to the institution
  3. c
    The date the institution's primary regulator provides written notice of the entity's capital category or that the institution's capital category has changed.
505-942-50-1D
If any of the conditions in the following paragraph exist, the possible material effects of such conditions and events on amounts and disclosures in the financial statements shall be disclosed.
505-942-50-1E
The guidance in the preceding paragraph applies if, as of the most recent balance sheet date presented, any of the following conditions exist:
  1. a
    The entity is not in compliance with capital adequacy requirements
  2. b
    The entity is considered less than adequately capitalized under the prompt corrective action provisions.
505-942-50-1F
Other regulatory limitations may exist despite compliance with minimum regulatory capital requirements. To the extent such limitations could materially affect the economic resources of the institution and claims to those resources, they shall similarly be disclosed in the notes to financial statements.
505-942-50-1G
The disclosures required by paragraphs 942-505-50-1 through 50-1F shall be presented for all significant subsidiaries of a holding company. Bank holding companies shall also present the disclosures required by paragraphs 942-505-50-1 through 50-1F as they apply to the holding company, except for the prompt corrective action disclosure required by paragraph 942-505-50-1(d). Savings institution holding companies are not subject to regulatory capital requirements separate from those of their subsidiaries. Bank holding companies are not subject to the prompt corrective action provisions of the Federal Deposit Insurance Act.
505-942-50-1H
Noncompliance with regulatory capital requirements could materially affect the economic resources of a credit union and claims to those resources. Accordingly, at a minimum, a credit union or corporate credit union within the scope of paragraph 942-10-15-2 shall disclose all of the following in notes to financial statements:
  1. a
    A description of the regulatory requirements for both of the following:
    1. 1
      Capital adequacy purposes
    2. 2
      Prompt corrective action.
  2. b
    The actual or possible material effects of noncompliance with those requirements.
  3. c
    Whether the entity is in compliance with the regulatory capital requirements, including, as of each balance sheet date presented, all of the following with respect to quantitative measures:
    1. 1
      Whether the institution meets the definition of a complex credit union as defined by the National Credit Union Administration
    2. 2
      The institution's required and actual capital ratios and required and actual capital amounts
    3. 3
      Factors that may significantly affect capital adequacy, such as potentially volatile components of capital, qualitative factors, or regulatory mandates.
  4. d
    As of each balance sheet date presented, the prompt corrective action category in which the institution was classified.
  5. e
    If, as of the most recent balance-sheet date or date financial statements are issued or are available to be issued (as discussed in Section 855-10-25), the institution is not in compliance with capital adequacy requirements, the possible material effects of such conditions on amounts and disclosures in the financial statements.
  6. f
    Whether after the balance sheet date and before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), management believes any events or changes have occurred to change the institution's prompt corrective action category.
Noncompliance with regulatory capital requirements may, when considered with other factors, raise substantial doubt about a credit union's ability to continue as a going concern for a reasonable period of time.
505-942-50-2
Disclosures shall also be presented for any state-imposed capital requirements that are more stringent than or significantly different from federal requirements.
505-942-50-3
Branches of foreign financial institutions, while they do not have regulatory capital requirements, may be required to maintain capital-equivalent deposits and, depending on facts and circumstances, supervisory-mandated reserves. These requirements carry regulatory uncertainty of a nature similar to that posed by the regulatory capital rules in that failure to meet such mandates can result in supervisory action and ultimately going-concern questions. Accordingly, branches shall disclose such requirements. Quantitative disclosure shall be made, highlighting mandated deposit or reserve requirements and actual balances in those reserve or deposit accounts at the balance sheet date(s) reported.
505-942-50-4
Further, if an uncertainty exists related to a parent that creates a higher-than-normal risk as to the viability of a branch or subsidiary, then that matter shall be adequately disclosed in the notes to the financial statements of the branch or subsidiary. If factors do not exist that indicate a higher than normal amount of risk or uncertainty regarding parent capital and other regulatory matters, then disclosures of capital and supervisory issues of the parent would not be required.
505-942-50-5
If an institution is subject to capital requirements based on trust assets under management, a discussion of the existence of these requirements, ramifications of failure to meet them, and a measurement of the entity's position relative to imposed requirements shall be disclosed in the notes to the financial statements.

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