CUNA Comment Letter

Revised Exposure Draft: Business Combinations and Intangible Assets--Accounting for Goodwill

March 16, 2001

Financial Accounting Standards Board
of the Financial Accounting Foundation
ATTN: RTA Director--File Reference 201-R
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

Re: File Reference 201-R, Revised Exposure Draft: Business Combinations and Intangible Assets--Accounting for Goodwill

Dear Sir or Madame,

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Financial Accounting Standards Board’s (FASB’s) Revised Exposure Draft: Business Combinations and Intangible Assets--Accounting for Goodwill (proposed Statement). As a national trade association, CUNA represents more than 90 percent of the nation's over 10,600 state and federal credit unions. This letter, which reflects the view of our member credit unions, was drafted under the auspices of CUNA’s Examination and Supervision Subcommittee, chaired by Gary Wolter, President of the Alabama Credit Union League, with the assistance of Ron Parker, a partner in the accounting firm of Clifton Gunderson LLP.

CUNA strongly believes that credit unions should not be included within the scope of FASB’s Business Combinations Project along with for-profit entities. Basically, the Business Combinations Project eliminates the pooling-of-interests method of accounting for business combinations interests (simple combination of the balance sheets of the merging entities) and requires the use of the purchase method of accounting (fair valuing of assets and liabilities with recognition of intangible assets). In addition, the proposed Statement would require the use of an "impairment only" approach in which goodwill would be reviewed for impairment--written down and expensed against earnings only in the periods in which the fair value of goodwill drops below its value recorded at the date of acquisition. In our view, purchase accounting with applicable goodwill does not fit credit unions. CUNA’s position is that credit unions should more appropriately be included in FASB’s Combinations of Not-for-Profit (NFP) Organizations Project.

Most importantly, credit unions are not-for-profit cooperative associations, owned and democratically controlled by their members. Credit unions exist to provide a safe, convenient place for members to save money and to get loans at reasonable rates. In fact, in the Credit Union Membership Access Act (Public Law 105-219), Congress explicitly stated in its findings that "Credit Unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards…." (emphasis added)

Since the inception of the credit union movement, credit unions have prided themselves on their ability to fulfill their mission of providing low cost credit to their members. Many credit union mergers are necessary combinations of an operationally troubled credit union with a healthy credit union forged through regulatory efforts to ensure continued member service of the merged credit union’s members. Application of the proposed rule in the Business Combinations Project may impair the attractiveness of mergers for credit unions and, therefore, jeopardize the ability of such troubled credit unions to be revitalized through mergers.

The Combinations of Not-for-Profit Organizations Project guidelines would seem to be applicable to credit unions based on the rationale given for providing a separate guidance on accounting and reporting for combinations of NFPs. Further, credit unions share many common characteristics with organizations included as NFPs in terms of their respective merger activity. The NFP Combinations Project Summary (Summary) notes that "[s]ome combinations between NFP organizations have characteristics that distinguish them from business combinations. For example, some combinations do not include the exchange of cash or other assets as consideration." Later, the Summary enumerates the decisions the Board made regarding "the accounting for a combination of two NFP organizations in which (1) the acquiring organization can be identified and (2) no cash or other assets are exchanged as consideration." This is the case with most credit union mergers. When two credit unions merge, the surviving or acquiring credit union can typically be identified. In addition, normally no consideration is exchanged. In a credit union merger, the equity section of the balance sheet of both credit union entities consists primarily of accumulated earnings; there is no stock as such. Stock is not exchanged, and usually neither is cash, other assets or the issuance of debt. Therefore, there is no cost starting point.

The regulatory and industry practice has been to account for credit union combinations using the pooling method. The Summary indicates that "[i]n practice today, many combinations of NFP organizations are accounted for in a manner similar to the pooling method." Credit union mergers are unlike business combinations within other industries because stock is not involved and ownership interests continue as before in that members have one vote before the merger and one vote after the merger. As a result, CUNA feels that the use of the pooling method and not the purchase method more accurately represents what actually happens in credit union mergers. The federal regulator of credit unions, the National Credit Union Administration (NCUA) agrees with this approach. In a letter to FASB in February 2000, NCUA asserted that "[p]urchase accounting in combination with … capital standards which define net worth purely in terms of GAAP [Generally Accepted Accounting Principles] retained earnings … works to the detriment of the survival of credit unions through the merger option."

Finally, credit union mergers using purchase accounting in accordance with the Business Combinations Project would involve negative goodwill, defined as any excess of the acquirer’s interest in the fair values of the identifiable assets and liabilities acquired over the cost of the acquired entity. Under the proposed Statement, credit unions would be required to record negative goodwill, assign it to acquired assets (other than those specifically excluded) and record any excess as an extraordinary gain. In contrast, the Summary states that in mergers between NFPs, "[t]he assets acquired and liabilities assumed should initially be recognized at their fair values, and the excess of the sum of the fair values of the identifiable assets acquired over the sum of the fair values of the liabilities assumed should be recognized as a contribution received." Using the above provision, the acquiring credit union would record the fair value of the identifiable assets and assumed liabilities and recognize any difference as income. This treatment would be preferable to that in the proposed Statement.

CUNA understands that the FASB Board soon will be considering the issue of whether credit unions and mutual thrifts should be included in the not-for-profit category in their rulemaking process. CUNA urges FASB to recognize that the not-for-profit nature of credit unions and the similarities of credit union merger activity with that of other NFPs warrants the inclusion of credit unions in the Not-for-Profit Organizations Project. We would like to meet with FASB to discuss this issue as well as other FASB accounting projects which are important to credit unions and will be in contact with the Executive Director to arrange such a meeting soon. In the meantime, if you have any questions, please contact Mary Dunn or Catherine Orr at (202) 682- 4200.


Mary Mitchell Dunn
Associate General Counsel

Catherine A. Orr
Senior Regulatory Counsel