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Post-merger net worth definition tweaked by NCUA
ALEXANDRIA, Va. (11/21/08)--The National Credit Union Administration (NCUA) board yesterday voted unanimously to change 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 rule applies to credit union mergers taking place after Dec. 31, 2008. The change would be consistent for corporate credit unions as well. The new rule, in effect, implements a statutory correction that was carried in The Financial Services Relief Act of 2006, which addressed accounting anomalies that have arisen since PCA requirements were first instituted. 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. The Financial Services Relief Act of 2006 essentially reversed that 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. At the time the change was proposed in July, 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. 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.
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