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Visa IPO presents unique situation for CUs
WASHINGTON (3/19/08)—As the Visa Inc. initial stock offering was set to hit the markets this morning--at $44 a share--credit unions prepared to accept and hold Visa stock issued to them in connection with the card giant’s conversion to public ownership. The Visa offering presents a unique situation for credit unions. Generally, the Federal Credit Union Act does not authorize federal credit unions to invest in the stock of companies other than credit union service organizations (CUSOs) and Visa Inc. is not a CUSO. However, as Visa’s plans for an initial public offering (IPO) advanced, the National Credit Union Administration (NCUA) in 2007 issued a legal opinion letter that cleared federal credit unions for the stock deal. In the letter addressed to Visa Inc. General Counsel Joshua Floum, the NCUA wrote: “Members will not compensate Visa Inc. for the stock, will receive the stock without taking further any action, and no cash or other rewards to members are available in lieu of the stock." Under the IPO plan, Visa U.S.A. becomes a subsidiary of Visa Inc. as part of the restructuring and its members will receive stock in Visa Inc. calculated on the basis of fees a member institution has generated in the past, according to the letter. The NCUA cautioned that federal credit unions may receive and retain the stock unless "its examiner determines holding the stock is a safety and soundness problem for that federal credit union." State-chartered credit unions, the NCUA said, should consult with the appropriate state supervisory agency about “the permissibility of their receipt of stock and any regulatory restrictions that may apply." In January, the Credit Union National Association’s (CUNA’s) Accounting Task Force issued an analysis of the complex accounting issues associated with treatment of VISA Class B stock. Task Force Chairman Scott Waite, who is also SVP-CFO of Patelco CU, San Francisco, has urged all credit unions affected by the stock offering ultimately to consult their own accountants for specific guidance for their situations. However, Waite and the task force offer these following tips for credit unions:
* Financial institutions should record their investment in Visa USA common stock received at its historical cost (carryover basis) which is most likely $0 (per SEC); * When and if recognized in 2008, the stock exchanged from Visa USA common stock to CLASS B common stock should be recorded at its carryover basis, in other words $0 (per SEC); * A liability should be established in 2007 for both the Amex settlement and the Discover estimate per FIN 45 and FAS 5; * The amounts are $2.065 billion for AMEX and $650 million for Discover – as disclosed, recorded, and SEC filed by VISA with the SEC; * Technically a FIN 45 liability should also be established for the remaining pending litigation; * A charge should be taken through earnings; * The amount is an estimate but should be generally based on an institution's membership proportion of interest in Visa USA times the AMEX and Discover amounts; * Despite the outcome of the IPO and its potential stock value, the restructuring agreement (already in effect in 2007) contains an indemnification clause (see VISA SEC filings S4 page 96 and VISA SEC filing 10K, item 3, page 49) that is now being considered the member's guarantee to pay as its liability, not VISA's; * The escrow will be funded when and if the IPO is completed by calculating a pro rata reduction of the stock held by financial institutions that may be converted to CLASS A stock so that the escrow account will have a balance to pay the litigation settlement. We understand that the SEC has indicated that the pro rata value of stock deposited in the escrow account should be considered "as if sold" and a gain recorded when the IPO is complete but only to the extent that a FIN 45 and FAS 5 liability was previously recorded. Or course this makes a timing difference in the recognition of the litigation indemnification and the gain of the conversion ratio of the shares used to fund the litigation escrow; and * The payment of the litigation costs by Visa members in the form of receiving less stock (net proceeds) still constitutes a payment by the members regardless of any exchange of cash.
This CUNA information is based on the general conclusion that there will be carryover basis in the stock in 2008 and a liability for the fourth quarter of 2007 for the indemnification of litigation losses, Waite stated.


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