CUNA Comment Letter
Proposed Statement of Position Regarding Allowance for Credit Losses
September 18, 2003
Mr. Frederick Gill
Senior Technical Manager
1211 Avenue of the Americas
New York, NY 10036-8775
Dear Mr. McNamara:
The Credit Union National Association (CUNA) appreciates this opportunity to comment on the American Institute of Certified Public Accountants (AICPAs) proposed Statement of Position (SOP) regarding Allowance for Credit Losses. The proposed SOP addresses the recognition and measurement by creditors of the allowance for credit losses related to all loans, as that term is defined in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (FAS) No. 114, Accounting by Creditors for Impairment of a Loan, with certain exceptions. CUNA, a national trade association, represents more than 90 percent of the nations 10,000 state and federal credit unions. This letter reflects the views of our member credit unions and of CUNAs Accounting Task Force, chaired by Mr. Scott Waite, SVP and CFO of Patelco Credit Union in San Francisco, California.
Under the proposed SOP, the allowance for credit losses reported on a creditor's balance sheet should consist only of (1) a component for individual loan impairment recognized and measured pursuant to FASB Statement No. 114 and (2) one or more components of collective loan impairment recognized pursuant to FASB Statement (FAS) No. 5, Accounting for Contingencies, and measured in accordance with the guidance in the proposed SOP. If a creditor evaluates or grades an individual loan as part of a credit risk evaluation or grading process, that loan has been "identified for evaluation" within the meaning of paragraph 6 of FASB Statement No. 114.
The proposed SOP also provides that a creditor should group into pools, based on similar credit risk characteristics, loans other than those that were individually determined to be impaired. Those pools should be evaluated for collective loan impairment and include loans that were individually evaluated and determined to not be impaired and loans that were not individually evaluated. Loans that have been individually evaluated and have been determined to be impaired, regardless of whether an impairment allowance has been recorded, should not be included in those pools.
Summary of CUNAs Position
- The recognition and measurement standards in the proposed SOP are consistent with the National Credit Union Administrations (NCUAs) guidance regarding methodologies used to calculate the allowance for loan and lease losses as well as the related documentation requirements.
- The scope of the proposed SOP is straightforward and readily understandable; unconditional promises to give that are assets of not-for-profit organizations and that are due in one year or less should be excluded from the scope of the proposed SOP regardless of whether they meet the definition of loans.
- The difference between the guidance in the proposed SOP and the guidance in SOP 03-X on pools of loans is appropriate. We do not foresee significant difficulties for credit unions or other covered entities in complying with both SOPs. We recommend that the AICPA clearly indicate which paragraphs in the proposed SOP apply to loans that are also subject to SOP 03-X.
- We agree with the proposed SOPs requirements concerning relevant observable data. However, the concept of relevant observable data could be made more understandable by additional examples including observable data and component relationships.
- We agree with the proposed guidance requirement that creditors consider the directional consistency of the measurement of a component of collective loan impairment with changes in the relevant observable data from period to period; additional examples in this area would be helpful.
- The proposed SOP should not require a specific impairment measurement method or technique for pools of loans.
- The additional disclosure requirements set forth in the proposed SOP provide more information than most financial statement users need or want. This is particularly true for the consumer-member users of credit union financial statements. Should the AICPA decide to issue the SOP in final form, we urge that credit unions be exempted from those additional disclosure provisions.
Based on CUNAs analysis, we believe this proposed SOP, were it to become final, would not result in any significant accounting changes for those credit unions following NCUAs Interpretive Ruling and Policy Statement (IRPS) on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Federally Insured Credit Unions or the FASB Statements of Financial Accounting Standards. One general comment applicable to the SOP overall is given the complexity of the subject matter, before being issued in final form the SOP should be reviewed with an eye toward making it as clear as possible for the reader.
We think the scope of the proposed SOP is readily understandable with respect to the kinds of loans and the kinds of entities to which the proposed SOP would apply -- all creditors (including credit unions) other than state and local governmental entities and federal governmental entities. It is clearly written and provides useful references. The scope is limited for the most part to loans resulting from an exchange of goods or other assets and services. The definition of loans and the applicable entities covered by the SOP seem to be appropriate.
We support the current scope of the proposed SOP to exclude loans that are unconditional promises to give that are assets of not-for- profit organizations and that are due in one year or less. We believe that unconditional promises to give that are assets of not-for-profit organizations do not, in fact, meet the definition of loans. Limiting the definition of loans as essentially those assets which result from normal business transactions involving an exchange of tangible value seems appropriate. Such unconditional promises should be excluded from the scope of the proposed SOP regardless of whether they meet the definition of loans.
Recognition and Measurement
SOP 03-X, Accounting for Loans or Certain Debt Securities Acquired in a Transfer (which has not yet been issued), permits investors to aggregate smaller balance homogeneous loans that were acquired in the same fiscal quarter and that have common risk characteristics and requires investors to maintain the integrity of such a pool once it is assembled. In contrast, this proposed SOP states that certain loans should be grouped for purposes of collective loan impairment evaluation into pools based on similar risk characteristics. The difference between the guidance in the proposed SOP and SOP 03-X is appropriate. SOP 03-X addresses the valuation of loans and debt securities acquired in a transfer while the proposed SOP generally addresses the valuation of originated loans. We do not foresee significant difficulties in complying with both SOPs. We believe many financial institutions account for and manage acquired loans and debt securities separately from other assets; therefore, applying two different accounting standards should not be problematic. If the creditor used the same pools to comply with SOP 03-X and the proposed SOP, the creditor could possibly use some of the same information in order to comply with each SOP, thereby eliminating the need to develop and maintain two sets of loan pools.
The proposed SOPs aggregation guidance would not impose an unjustifiable cost on an entity that is also complying with SOP 03-X. The applicability of the proposed SOP to loans within the scope of SOP 03-X is not sufficiently clear. Therefore, we recommend that the AICPA specifically and conspicuously note which paragraphs in the proposed SOP apply to loans that are also subject to SOP 03-X.
The proposed SOP requires credit unions and other creditors to consider relevant observable data in the recognition and measurement of components of collective loan impairment and to support each component of collective loan impairment with one or more sets of observable data. We agree with the proposed SOPs requirements concerning relevant observable data. However, the concept of relevant observable data could be made more understandable by additional examples including observable data and component relationships such as: delinquency data and migration relationships; factors affecting repayment capacity unemployment rates and data; changes in institution credit strategy that would inherently add to credit risk; changes in underlying collateral values. Further, guidance on an appropriate time period of history that should be utilized would be helpful.
The proposed SOP requires creditors to consider the directional consistency of the measurement of a component of collective loan impairment with changes in the relevant observable data from period to period, taking into account the interaction of components of collective loan impairment over time. We agree with the proposed guidance in this area. However, the concept could be made more understandable by additional examples of observable data that might indicate a deterioration of a credit risk pool and the degree to which an amount of directional change of specific observable data might impact an adjustment to an historical charge-off experience component.
The proposed SOP, which is premised on an incurred loss model, provides only limited guidance on the measurement of impairment in a pool of loans. The proposed SOP should not require a specific impairment measurement method or technique for pools of loans. Instead, the SOP should remain flexible so that entities can choose measurement methods and techniques that are most appropriate for their pools of loans.
In our view, the volume of additional disclosure requirements set forth in the proposed SOP is excessive. While these additional disclosures might be useful to users of financial statements of for-profit entities, we feel they would be of little added value to the majority of users of credit union financial statements credit union consumer-members. We question whether the benefit would justify the cost of providing the additional disclosures to credit union members, who are generally not experts in analyzing complex financial statements. If such additional disclosure requirements are included in the final SOP, we urge the AICPA to exempt credit unions from those provisions.
We believe it may be difficult for preparers to develop the proposed disclosures from existing information. It would probably not be unjustifiably costly to obtain the necessary information; however, it may be in the case of smaller financial institutions, such as most credit unions, and businesses which may not be preparing full disclosure financial statements.
If you have any questions regarding this letter, please contact CUNA Associate General Counsel Mary Mitchell Dunn at (202) 508-6736 or Senior Regulatory Counsel Catherine Orr at (202) 508-6743.
Mary Mitchell Dunn
Associate General Counsel
and Senior Vice President
Catherine A. Orr
Senior Regulatory Counsel