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Amended post-merger net worth definition proposed
Click to view larger imageDuring her last NCUA Board meeting, Chairman JoAnn Johnson listens to agency staff explain proposed changes to the definition of net worth following a credit union merger. (Photo provided by CUNA)
ALEXANDRIA, Va. (7/25/08)--The National Credit Union Administration (NCUA) board yesterday voted unanimously to propose changes to the prompt corrective action (PCA) definition of a natural person credit union’s “net worth” to include as capital the retained earnings of a credit union that is merging into it. The changes would be consistent for corporate credit unions as well. The agency will accept comments on the proposal for 60 days after publication in the Federal Register. At the time PCA requirements were mandated in 1998 by the Credit Union Membership Access Act, the “pooling method” was used for the financial reporting of a credit union merger. This allowed the acquiring credit union to combine its own retained earnings with that of the merged credit union for determining the post-merger net worth ratio for purposes of complying with PCA requirements. In 2001, Financial Accounting Statement (FAS) No. 141 replaced the “pooling method” with the “purchase method” for business combinations, with the effect that an acquirer’s net worth would not increase as a result of the merger. This potentially reduces the post-merger net worth. This was applied to mutual combinations, such as credit union mergers, in 2007, and is to be effective in fiscal years beginning after December 15, 2008. The Financial Services Relief Act of 2006 essentially reverses this policy by expanding the PCA definition of “net worth” to incorporate the retained earnings of the merged credit union. This would also apply to other combinations, such as purchase and assumption transactions. These changes will only apply to measuring capital under PCA and will not apply for other financial reporting purposes. NCUA staff members told the board that credit unions have a more limited statutory definition of “net worth” than banks and thrifts do and that--had credit union net worth been defined in a manner similar to the definition applicable to banks and thrifts--the “congressional fix” for the “merger accounting problem” would not have been necessary.
Click to view larger imageFrom left: Federal Housing Finance Board Director and former NCUA board member Geoff Bacino, CUNA Deputy General Counsel Mary Dunn and NCUA Vice Chairman Rodney Hood before Thursday's monthly agency board meeting. (Photo provided by CUNA)
NCUA staff also noted that the new regime for net worth calculation in mergers would not reinstate the “pooling method” but would have a similar practical effect. Also during yesterday’s meeting, the NCUA Board approved guidance for the provisions in the Federal Credit Union Act that prohibit persons convicted of certain criminal offenses from participating in the affairs of the credit union.


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