CUNA Comment Letter

Special Report by the Joint Working Group of
Standard Setters – Recommendations on Accounting
for Financial Instruments and Similar Items

July 13, 2001

Financial Accounting Standards Board of the Financial Accounting Foundation
ATTN: RTA Director
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116

Re.: Special Report by the Joint Working Group of Standard Setters –
Recommendations on Accounting for Financial Instruments and Similar Items

Dear FASB Board:

The Credit Union National Association (CUNA) appreciates the opportunity to comment to the Financial Accounting Standards Board (FASB) on the special report prepared by the Financial Instruments Joint Working Group of standard setters entitled Recommendations on Accounting for Financial Instruments and Similar Items (Draft Standard). The Draft Standard recommends full fair value-based reporting for virtually all financial assets and liabilities. 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.

Summary of Our Comments

CUNA strongly urges that credit unions be excluded from the scope of the Draft Standard. Based on comments from our credit union members, we believe that requiring fair-value based accounting would needlessly burden credit unions and provide no apparent practical benefit for credit union members. Although a theoretical case can be made for universal application of fair value accounting, the implementation of fair value accounting would impose huge costs on preparers and users of financial statements and in practice may well do more to confuse than inform users of financial statements. In particular, the use of fair value accounting for credit union financial reporting does not make sense because: it would not reflect credit unions’ unique nature; it would be impractical to conduct fair value calculations; it would decrease the comparability of financial statements; and it would cause variability in credit union financial statements making them difficult for users to understand. Our concerns are more fully addressed below.

Unique Nature of Credit Unions

The concept of fair value reporting for all assets and liabilities does not seem appropriate for credit unions given the differences between credit unions and for-profit financial entities in terms of mission, organization, and structure. Credit unions are not publicly traded, shareholder-owned institutions. Thus, the use of fair valuations for financial reporting of these types of financial instruments would not reflect the statutory intent of credit unions, which is to remain member-owned, consumer-based financial institutions. It is not reasonable to reflect financial information of credit unions in a fair value format because it is likely to produce fluctuations in the credit union’s net income, depending on market activity and short-term market aberrations, that are unrelated to the financial well-being of the institution. Further, the Draft Standard does not address several key distinct characteristics of credit unions. For example, it is unclear whether the Draft Standard would continue to permit deposits in credit union share accounts to represent member-owners equity, not liabilities.

Impracticality of Fair Value Measurements

Since the credit union market and products offered are unique in comparison to other entities, in many cases market prices would not be attainable to adjust assets and liabilities to a fair value basis. For example, there is no outside market to look at in determining an accurate discount rate for member shares.

Fair value accounting involves time-consuming, difficult calculations that would be especially burdensome for smaller credit unions. Smaller credit unions do not have staff and extra time available to devote to determining the fair value of all of their assets and liabilities, particularly given the numerous small consumer accounts in credit union portfolios. The implementation of this proposal would place an unnecessary burden on credit unions that do not have employees on staff qualified to make the adjustments. Given the relatively non-complex nature of the operations of many credit unions, it would not make sense for them to spend a lot of time trying to determine fair values. While there are many vendors that offer technology that will calculate fair value for an institution, the cost can be very expensive. Further, at present technology is not standardized so that all fair value is calculated in the same manner. The resources required to implement a fair value accounting scheme would be no longer be available to provide benefits to the members whom credit unions are organized to serve.

Incomparability of Financial Statements

Under the fair value regime proposed in the Draft Standard, it would be difficult to compare peer credit unions because not all credit unions would be using a standard fair value measurement. Adoption of fair value measurement would result in an inconsistent evaluation process by and among credit unions as well as by and among financial institutions. As mentioned previously, technology is not standardized so that fair value is calculated in the same manner for all financial institutions. Further, the Draft Standard would require individual entities to establish appropriate policies and procedures for estimating fair value of financial instruments. The lack of established market prices for many financial instruments would leave credit unions to determine fair value by their own valuation techniques incorporating estimates and assumptions. This would make comparisons between credit unions unreliable since each management group could have very different techniques. For the same reason, it also would be difficult to compare credit unions with other financial institutions.

Variability in Financial Statements and Confusion for Users

If credit unions are required to make the significant change to financial statements based on fair value, many of their financial statement users will likely be confused. Credit union volunteer Board members understand the financials as currently presented. Users of varying sophistication levels will see that results are inconsistent with past reporting. Because market-related gains and losses would be posted to earnings, credit union financial statement users could see frequent income fluctuations based on often small changes in unrealized gains/losses. Basically, credit union financial statement users are not large institutional investors accustomed to financial statement volatility, but rather the credit union’s member-savers and member-borrowers. It will be difficult, if not impossible, for credit unions with the majority of their balance sheets in financing instruments to explain to the average financial statement user how each of the financial components has been valued. If a fluctuation results in a large unrealized gain, members will wonder why the money is not being returned to them through increased deposit rates, reduced loan rates, or direct dividends returned. On the other hand, if a fluctuation results in a large unrealized loss, members will question the capability of management and the board of directors. In other words, this would generate a great deal of member confusion regarding financial statements.

Recommended Modifications to Draft Standard

If FASB does proceed with fair value accounting, CUNA recommends establishment of industry-wide standards so that users of financial statements would have the ability to make comparisons between financial institutions based on the same or similar standards. In addition, CUNA urges the FASB to allow credit unions to provide fair value measurements in footnote form only. That would be sufficient to allow the users of credit union financial statements to ascertain the degree of flexibility a particular credit union has with their financial instruments that may be exercised in extreme circumstances, such as liquidation. However, CUNA would not support a comprehensive fair value model for statements first in mandatory supplemental financial statements. If such supplemental financial statements are presented in parallel with financial statements prepared in accordance with existing accounting practices, presenting this information twice using different reporting models will be time consuming to prepare and expensive to maintain. CUNA believes that such reporting should be optional. Finally, if the Draft Standard is adopted, CUNA does not think two years between issuance of a final standard and the effective date is sufficient time to prepare for implementation. It is important to provide ample time for financial institutions to agree on industry-wide valuation methods, which is at least three years.

If you have any questions regarding this letter, please contact CUNA Associate General Counsel Mary Dunn at (202) 218-7769 or Senior Regulatory Counsel Catherine Orr at (202) 218-7794.


Mary Mitchell Dunn
Associate General Counsel

Catherine A. Orr
Senior Regulatory Counsel