Written by Tessema Tefferi, Regulatory Affairs Counsel
While the pace of change in accounting rules appears to have slowed down, the Financial Accounting Standards Board (FASB) is still active, especially with projects geared towards converging U.S. Generally Accepted Accounting Principles (GAAP) with international accounting standards. While there are many FASB- and GAAP-related issues that affect credit unions, I thought it would be helpful to provide an update on three, each of which NAFCU members have inquired about in recent months.
Fair Value for Loans
Earlier this year, FASB tentatively dropped a proposal to require fair value accounting for all loans, including those credit unions hold to maturity (HTM loans). No action is expected on this front until the 1st quarter of 2012, at the earliest. Under the tentative decision, the value of loans is measured as follows:
- Financial assets being held for sale and are actively traded, entities to measure them at fair value and record any changes through net income.
- Financial assets that are considered investments with a focus on minimizing risk and maximizing return are measured at fair value, with any changes recorded through “other comprehensive income.” The effect is that the investments affect equity on the balance sheet rather than net income on the income statement.
- Financial assets are held to maturity are measured at amortized cost. So, they are booked at cost and written down each period as the loan is settled over time.
More information about this project can be found here.
In August 2010, FASB issued an Exposure Draft to make significant changes to its rules relative to lease accounting. The proposal is part of FASB’s work with the International Accounting Standards Board (IASB) to converge US GAAP with international standards.
An important part of the lease accounting proposal was to require leases (with terms longer than 1 year) to be recognized as fixed assets in credit unions’ balance sheets. Lease payments would be recognized in balance sheets as follows: (1) initially recognize a liability to make lease payments and a right-of-use asset, both measured at the present value of the lease payments; (2) subsequently measure the liability to make lease payments using the effective interest method; and (3) amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits.
The impact of the proposal is potentially critical for some credit unions because recognizing leases as assets could impact credit unions’ net worth ratio, specifically as to the calculation of “total assets’ in the denominator of the ratio. Some impacted credit unions may also incur additional costs, including costs associated from hiring outside experts and/or additional staff time.
Fortunately, FASB is re-considering the proposal. In fact, the proposal will be re-exposed (FASB lingo for re-proposed) for comments, likely in the first quarter of 2012.
To stay current on this project, follow FASB’s updates here.
Financing Receivables and the Allowance for Credit Losses
An accounting standard issued in 2010 will soon be effective for non-public entities, including credit unions. Accounting Standards Update 2010-20 applies to financing receivables, which is generally defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset on the entity’s balance sheet. These include loans, trade accounts receivable, notes receivable, credit cards, and receivables relating to leases that are other than operating leases. For such assets, the standard would require reporting on disaggregated basis.
The standard applies to credit unions, but the significant exclusions from the scope of the standard likely mitigate the effect of the standard on most credit unions. Notably, certain receivables are NOT within the scope of the standard, including: receivables measured at fair value, or the lower of cost or fair value; trade accounts receivable with contractual maturities of less than one year, and debt securities.
The standard is effective for the first reporting period after December 15, 2011 (note: for public entities, it became effective for reporting periods after 12/15/10).