CUNA Comment Letter

American Institute of Certified Public Accountants' (AICPA's) Combined Guide Proposal

September 8, 2000

Ms. Sydney Garmong
Technical Manager
Professional Standards and Services
File 2373
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-1081

Dear Ms. Garmong:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the American Institute of Certified Public Accountants' (AICPA's) Exposure Draft entitled Proposed Statement of Position: Accounting by Certain Financial Institutions and Entities that Lend to or Finance the Activities of Others (SOP). As a national trade association, CUNA represents over 90 percent of the nation's more than 10,500 state and federal credit unions.


CUNA commends the ACIPA for its consistent efforts to provide clear, complete accounting guidance and standards for financial institutions. CUNA appreciates the importance of having accounting principles that treat financial institutions equitably. However, CUNA does not support integrating the existing AICPA Audit and Accounting Guides - Banks and Savings Institutions (BSI Guide), Audits of Credit Unions (CU Guide), and Audits of Finance Companies (FC Guide) - into a combined Guide. The Exposure Draft notes that "[t]he proposed SOP eliminates differences in accounting established by the Guides among financial institutions (that is, banks, credit unions, finance companies, and savings institutions), where such differences are not warranted." CUNA strongly believes that the special circumstances of credit unions, in fact, warrant retaining a separate CU Guide. While credit unions do engage in many of the same financing activities that banks, finance companies, and savings institutions do, they also have unique characteristics that should not be ignored. 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. Further, credit unions are cooperative associations, owned and democratically controlled by their members. Accordingly, guidance on financial reporting by credit unions should clearly recognize the differences between credit unions and for-profit financial institutions in terms of mission, organization, and structure. We believe credit union distinct characteristics warrant a separate CU Guide. Also, if credit union differences are not clearly recognized in the applicable AICPA accounting guide, credit unions and the users of credit union financial information - members, examiners, and auditors - would likely be frustrated and confused by a large, comprehensive guide because they would have to wade through a lot of information that is simply inapplicable to the financing activities conducted by credit unions. In fact, many of the financing activities/instruments that would be covered in the combined Guide, such as interest-only strips, are not even available to credit unions by law and regulation.

For the same reasons, CUNA does not believe that corporate credit unions should be included in an accounting guide that addresses accounting principles for for-profit entities. CUNA does, however, believe it would be appropriate to include corporate credit unions in the scope of the CU Guide so that they would be subject to the same accounting, reporting, and disclosure provisions that non-corporate credit unions are.

AICPA, through these proposed accounting changes in the new Guide, seeks to represent credit unions as banks or other for-profit financial institutions. This approach flies in the face of Congress' separate treatment of credit unions and is in direct opposition to the distinct regulatory framework established for credit unions. The AICPA's proposed accounting treatment in the new Guide would jeopardize this distinct treatment of credit unions by making them appear similarly situated to other financial institutions when that is simply not the case.

While CUNA supports a separate CU Guide, we have several recommendations regarding the proposed combined Guide as it relates to credit union operations.


CUNA supports changing the requirement for credit unions to account for regular-way securities (a contract to purchase or sell a publicly traded equity security requiring settlement within 3 business days) at the trade date. CUNA believes it is more appropriate to account for such security transactions at settlement date. We believe this approach is more reasonable because the settlement date is when the funds associated with such transactions are actually paid or received.

Currently, standby commitments to purchase loans are either accounted for as commitment fees or at the higher of fair value or historical proceeds. CUNA supports the retention of the existing guidance for these transactions.

CUNA agrees with AICPA's decision not to carry forward the specific guidance on income recognition for impaired loans already provided in the FC Guide.

Paragraph 8 a in the Exposure Draft states that "[d]elinquency fees should be recognized in income when chargeable, assuming collectibility is reasonably assured." Many credit unions currently recognize delinquency fee income when the fee is received. Changing this method of recognition would require system modifications, including the establishment of a receivable account and an automated method for recognizing these fees. Further, once a delinquency fees receivable account is set up, credit unions would have to be certain to remove uncollectible delinquency fees from this receivable account on a regular basis; otherwise, such fees could result in an artificial inflation of the balance sheet. Delinquency fees represent an immaterial portion of a credit union's income. The amount of delinquency fees receivable would also be immaterial. Credit unions normally do not break out immaterial income items on their balance sheet but rather group them together under "other assets". Consequently, CUNA feels this change in delinquency fee recognition would create a lot of work yet would add no information of value for the average financial statement user. CUNA suggests that should AICPA decide to issue a combined Guide, the provision relating to delinquency fees should be worded as it is in the current FC Guide (Paragraph 2.20): "Delinquency fees conceptually should be recognized in income when chargeable, assuming collectibility is reasonably assured. In practice, delinquency fees are recognized in income when collected, because that approach simplifies efforts to account for such relatively minor receipts."


The SOP proposes that credit unions disclose in their financial statements the following items regarding uncollectible and past due loans: (1) their policy for placing loans on non-accrual status and recording payments received on non-accrual loans along with their policy for resuming accrual of interest, and (2) their policy for determining past due or delinquency status. CUNA believes such detailed disclosure serves no useful purpose for users of credit union financial statements. Therefore, CUNA disagrees with the proposal to make reporting of this information compulsory for credit unions.

In CUNA's view, it is appropriate to require 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. Disclosure of this additional information would enable users of financial statements to more accurately assess the potential impact of these instruments on the financial institution's bottom line.

CUNA disagrees with amending paragraph Paragraph 9i of the SOP to read "…repossessed assets may be classified as a separate balance sheet amount or included in other assets on the balance sheet with separate disclosures in the notes to financial statements." Previously, the CU Guide required only Other Real Estate Owned (OREOs) to be reclassified as other assets. We understand that some credit unions identify these repossessed assets (repo's) as "Collateral in Process", which is a separate loan category. These loans are reported as delinquent loans on credit union financial statements and Call Reports. An appropriate amount for these repo's is reserved in the Allowance for Loan Loss account. Currently, collection on these repo's is actively pursued. Removing these repo's from the category of loans would not only reduce reportable delinquencies but would also remove such repo's from the collector's tray as a workable loan, thereby reducing collection efforts. Consequently, CUNA favors keeping the wording as it is in the CU Guide.

The proposed SOP requires full 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. With the increasing use of off-balance sheet accounting, this information is important for users of financial statements when assessing the overall risk of a financial institution.

CUNA does not support the new regulatory capital disclosure requirements for credit unions. We do not believe that readers of credit union financial statements would be able to appreciate the importance of PCA categories and, in fact, may be given a false impression by such nomenclature. For example, a credit union with less than 6% net worth is "undercapitalized" yet could be quite healthy. CUNA thinks that a general note, if accurate, on a credit union's financial statement indicating that the credit union is in compliance with all regulatory capital requirements should be sufficient.


In enumerating the accounting practices unique to credit unions that would be carried forward in the combined Guide, the Exposure Draft incorrectly states in subpart 7b (page 24) that "[f]ederal credit unions are required to report members' shares as equity for regulatory purposes." The footnote to that provision (footnote #8) states that "The NCUA [National Credit Union Administration] has modified its call reporting forms to comply with H.R. 1151 [Credit Union Membership Access Act or CUMAA] effective September 30, 1999. Federally insured credit unions with assets if $10 million and over are no longer required, or permitted, to report members' shares as equity for regulatory purposes." In June of 1999, NCUA did revise its regulation governing Call Reports to comply with CUMAA. However, NCUA did not revise its practice of collecting members' share data in line items between liability and equity. NCUA determined that the application of Generally Accepted Accounting Principles (GAAP) is inappropriate for the classification of members' shares. NCUA does not classify shares as liabilities. Members' shares continue to be classified as "shares" on the Call Report. CUNA urges AICPA to correct this error.


If the AICPA ultimately makes the determination to issue a combined Guide, CUNA would prefer a later implementation date. If any system changes are necessary for credit unions to comply with the new Guide, such as compiling the data for disclosures, credit unions on a calendar year fiscal year would have only a short time to get up to speed. Delaying implementation, for example until June 30, 2001 or later, would allow credit unions time to study to the full impact of the changes to their accounting procedures and make the necessary changes.

In terms of the transition guidelines, CUNA is opposed to the provision in Appendix A.40 indicating that credit unions should already be complying with the requirements of Paragraph 7 of the SOP. Subparagraph 7(b) states that credit unions should classify shares as liabilities on their financial statements. As mentioned previously, CUNA's view is that it is inappropriate to classify shares as liabilities. CUNA strongly believes that shares are appropriately classified as equity.

For the reasons stated above, CUNA urges AICPA not to go forward with this combined Guide project but rather to retain the separate CU Guide. CUNA is not asking that the treatment of credit unions differ from that afforded to the other financial institutions for similar transactions. However, we firmly believe that any audit and accounting Guide for credit unions should reflect their unique nature as stated above. If AICPA ultimately decides to go forward with the combined Guide, CUNA urges AICPA to make a preliminary version of the new Guide available to credit unions for additional comment. Doing so would allow credit unions the opportunity to have a hands-on review of the new Guide and make useful recommendations concerning all aspects of the combined Guide before it is issued in final form. If you have any further questions, please contact Mary Dunn or Catherine Orr at (202) 682-4200.


Mary Mitchell Dunn
Associate General Counsel

Catherine A. Orr
Regulatory Advocacy Attorney