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CUNA Regulatory Comment Call

July 14, 2000

EXECUTIVE SUMMARY

The American Institute of Certified Public Accountants (AICPA) has distributed a proposed Statement of Position (SOP) exposure draft with the aim of reconciling and conforming its 3 Audit and Accounting Guides - Banks and Savings Institutions Guide (BSI Guide), Audits of Credit Unions (CU Guide) , and Audits of Finance Companies (FC Guide) - to create a combined AICPA Audit and Accounting Guide (new Guide or combined Guide. The provisions of this proposed SOP are to be effective for financial statements issued for fiscal years beginning after December 15, 2000, and for financial statements for interim periods in fiscal years after the year in which the proposed SOP is first applied.

AICPA requests comments on the proposed SOP by August 31, 2000. Please submit your comments to CUNA by August 25, 2000. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Regulatory Advocacy Attorney Catherine Orr at corr@cuna.com. Responses may also be mailed to Ms. Sydney Garmong, Technical Manager, Professional Standards and Services, File 2373, AICPA, 1455 Pennsylvania Avenue, N.W., Washington, D.C. 20004-1081 or e-mailed to sgarmong@aicpa.org. Please forward any comments sent directly to AICPA to CUNA as well.

REQUIREMENTS ELIMINATED FOR CREDIT UNIONS

• Disclosure of the carrying amount and fair value of mortgage-related derivative securities
• Disclosure of certain additional information relating to repurchase agreements (repos) and reverse-repos, such as a description and market valuation of the securities underlying the agreement(s)
• Disclosure of certain additional information about servicing activities, including the following:

  Amount of the servicing portfolio maintained by the credit union;

  Rollforward of deferred loan sale premium or discount;

  Nature and extent of any recourse provisions; and

  Nature and extent of off-balance sheet escrow accounts

• Disclosure of information regarding Members’ share and savings accounts including:

  Major types of interest-bearing and non-interest bearing deposits by interest rate ranges;

  Weighted average interest rates at which the credit union paid interest on deposit accounts and the related deposit balances at year-end;

  Means by which interest rates are determined by the board of directors;

  Fair values of members’ share and savings accounts; and

  Dividend (interest) expense by type of account

NEW REQUIREMENTS FOR CREDIT UNIONS

• Disclosure of regulatory capital matters, including:

  Compliance or non-compliance with the regulatory requirements for capital adequacy purposes established by the prompt corrective provisions of Section 216 of the FCUA as amended by the Credit Union Membership Access Act with respect to capital ratios and capital amounts;

  Prompt corrective action category in which the institution was classified; and

  Additional information required when there is substantial doubt about the credit union’s ability to continue as a going concern for a reasonable period of time

• Disclosure of accounting policies for placing loans on non-accrual status, charging off uncollectible loans and determining past due status of loans
• Disclosure of the total amount of loans past due 90 days or more and still accruing
• Accounting for obligations incurred in short sales as liabilities and adjusting to fair value through the income statement at each reporting date
• Classification of Federal Home Loan Bank (FHLB) or Federal Reserve Bank stock as a restricted investment security, carried at cost, and evaluated for impairment
• Reporting of non-mortgage loans held for sale at the lower of cost or market value
• Accounting guidance for forward standby commitments to purchase loans
• Accounting for deposit "float" as a liability
• Accounting guidance for dividends on redeemable preferred stock
• Recognition of delinquency fees in income when chargeable, assuming collectibility is reasonably assured
• Non-recognition of prepayment penalties in income until loans are prepaid
• Accounting guidance that differences between rebate calculations and accrual of interest income merely adjust original estimates of interest income and should be recognized in income when loans are prepaid or renewed
• Recognition of commissions from factoring arrangements over the period of the loan contract (If the factor in a secured borrowing obtains control of the collateral, the factor must record on its balance sheet the collateral and its obligation to return the collateral)
• Accrual of income from experience-rated or retrospective commission arrangements over the applicable insurance period
• Disclosure of the carrying amount of investment assets and loans pledged as collateral for borrowings
• Disclosure of the classification and method of accounting for interest-only strips, loans, other receivables, or retained interests in securitizations that can be contractually prepaid or otherwise settled in
• Disclosure of the allowance for credit losses and, as applicable, any unearned income, any unamortized premiums and discounts, and any net unamortized deferred fees and costs
• Disclosure of certain items with respect to financial instruments with off-balance sheet credit risk including:

  Face or contract amount; and

  Nature and terms

• Classification of repossessed assets as a separate balance-sheet amount or inclusion in other assets on the balance sheet with separate disclosures in the notes to the financial statements



• Reporting of net gains or net losses on dispositions of premises and equipment in non-interest income or non-interest expense
• Disclosure of certain items regarding deposit liabilities including:

  Aggregate amount of time deposit accounts (including certificates of deposit) in denominations of $100,000 or more at the balance-sheet date;

  Securities, mortgage loans, or other financial instruments pledged as collateral for deposits; and

  Aggregate amount of any demand deposits that have been reclassified as loan balances, such as overdrafts

• Presentation of significant categories of borrowings as separate line items in the liability section of the balance sheet, or as a single line item with appropriate note disclosures of components
• Description of the principal terms of debt agreements including:

  Title or nature of the agreement, or both;

  Interest rate;

  Payment terms and maturity date(s);

  Collateral;

  Conversion or redemption features; and

  Whether it is senior or subordinated

• Classification of mortgage-backed bonds treated as borrowings separately from advances, other notes payable, and subordinated debt
• Recognition guidance as to servicing rights relating to loans previously sold as well as loans that are retained
• Specific disclosure and presentation guidance related to insurance subsidiaries

CORPORATE CREDIT UNIONS

Corporate credit unions are included in the scope of the proposed SOP. Corporate credit unions, which were previously excluded from the scope of the CU Guide, will now be subject to all of the accounting, reporting, and disclosure provisions in the new combined Guide, including disclosure about regulatory capital and net worth requirements.

Questions Regarding AICPA Proposed Statement of Position

• In deliberating the scope of the proposed SOP and combined Guide, the Accounting Standards Executive Committee (AcSEC) noted that the existing FC Guide also applies to both "independent and captive financing activities of other companies." AcSEC agreed with the approach taken in the FC Guide. That is, the activities of companies engaged in finance activities are more important for determining the scope of the proposed SOP and combined guide rather than the organization of the companies themselves.

  Is this approach operational for determining the applicability of the proposed SOP and combined Guide to finance companies and financing activities?

  YES NO

  If not, why not and what is a workable alternative approach?

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• Unlike the existing CU Guide, this proposed SOP and the new Guide will include in their scope corporate credit unions. AcSEC concluded that corporate credit unions should be included on the basis that their activities are substantially similar to those of the other financial institutions covered by the new Guide.

  Is the scope of the proposed SOP with respect to corporate credit unions appropriate?

  YES NO

  If not, why not?

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  Are there any unique transactions or other issues that should be reflected in this SOP to accommodate corporate credit unions?

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RECOGNITION AND MEASUREMENT

• Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, does not modify other Generally Accepted Accounting Principles (GAAP) including AICPA Audit and Accounting Guides for certain industries, that require accounting at the trade date for certain contracts to purchase or sell securities. Guidance to that effect currently exists for banks, savings institutions, and credit unions in the respective Guides for those industries, but not for finance companies. In keeping with the objective of the project to reconcile accounting practices among similar financial institutions, AcSEC decided that accounting for regular-way securities (a contract to purchase or sell a publicly traded equity security requiring settlement within 3 business days) transactions at trade date should be required for finance companies.

  Should finance companies be required to account for such securities at the trade date?

  YES NO

  If not, should the accounting by banks, savings institutions, and credit unions be changed to settlement date?

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• The BSI Guide addresses accounting for forward standby commitments to purchase loans. Depending on the reasonableness of the settlement period and other factors, these transactions are either accounted for as commitment fees under FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated With Originating or Acquiring Loans and Initial Direct Costs of Leases, or at the higher of fair value or historical proceeds. AcSEC considered an alternative approach under which standby commitments to purchase loans would always be accounted for at fair value. Instead, AcSEC decided to retain the existing guidance and carry it forward to the combined Guide.

  Should the existing guidance in the Guide for banks and savings institutions be retained? Or should forward standby commitments to purchase loans always be accounted for at fair value. If so, how should they be distinguished from other kinds of commitments?

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• The FC Guide provides specific guidance on income recognition for impaired loans. AcSEC decided that specifying or illustrating certain income recognition methods could imply that one method is preferable to others, and concluded that such guidance should not be carried forward to the new Guide.

  Is this decision appropriate? Or should the specific guidance on income recognition for impaired loans be retained for finance companies, and if so, why? Or should other alternatives for income recognition for impaired loans be considered?

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PRESENTATION AND DISCLOSURE

• The proposed SOP requires disclosure of the classification and method of accounting for interest- only strips, loans, other receivables, or retained interests in securitizations that can be contractually prepaid or otherwise settled in a way that the holder would not recover substantially all of its recorded investment.

  Is this disclosure requirement appropriate?

  YES NO

  Why or why not?

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  Will these disclosures provide value to users of financial statements in assessing the impact of these instruments?

  YES NO

  Why or why not?

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• The proposed SOP requires disclosure of the extent, nature, terms, and credit risk of financial instruments with off-balance sheet credit risk, such as off-balance sheet loan commitments, financial guarantees, and letters of credit. These disclosures were previously required by FASB Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk, which was superseded by FASB No. 133, Accounting for Derivative Instruments and Hedging Activities. Because of the use of financial instruments with off- balance sheet risk is common to those entities engaged in lending activities, AcSEC concluded that such disclosure requirements should be retained.

  Is this disclosure requirement appropriate?

  YES NO

  Why or why not?

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  Will these disclosures provide value to users of financial statements in assessing the impact of these instruments?

  YES NO

  Why or why not?

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• The proposed SOP describes new regulatory capital disclosure requirements for credit unions. The current BSI Guide requires that such institutions disclose in footnotes to their financial statements certain matters about their capital adequacy relative to regulatory minimum capital standards and prompt corrective action requirements. Failure to comply with regulatory capital requirements could have a material adverse effect on the financial position and results of operations of affected institutions. The CU Guide does not contain such requirements. AcSEC concluded that a credit union’s relative compliance with minimum net worth and soon to be finalized capital and prompt corrective action requirements is equally important to readers of credit union financial statements and, therefore, similar disclosures of credit unions to those currently in place for banks and savings institutions should be required.

  Are the proposed disclosures appropriate?

  YES NO

  Why or why not?

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EFFECTIVE DATE AND TRANSITION

• The provisions of the proposed SOP are to be effective for financial statements issued for fiscal years beginning after December 15, 2000 and for financial statements for interim periods in fiscal years after the year in which the proposed SOP is first applied.

  Do you agree with this recommended implementation date?

  YES NO

  Why or why not?

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• AcSEC has prescribed transition guidelines for recognition and measurement provisions applied to an entity for the first time. For entities not previously subjected to these provisions, initial application may result in a change in accounting, and if so, that change would be reported as a cumulative effect of accounting change in conformity with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes. Transition

  guidelines also allow for certain disclosure transition options.

  Are these transition guidelines appropriate?

  YES NO

  Why or why not?

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  If not, what other transition guidelines should be provided and why?

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