CUNA Regulatory Comment Call
May 2, 2002
Draft Chapters for AICPA Combined Audit and Accounting Guide:
Credit Union Industry Overview and Equity/Disclosures Regarding Capital Matters
- In 2000, the American Institute of Certified Public Accountants (AICPA) began a 2-part project to reconcile and conform its 3 Audit and Accounting Guides - Banks and Savings Institutions Guide (BSI Guide), Audits of Credit Unions (CU Guide), and Audits of Finance Companies (FC Guide) - to create a combined AICPA Audit and Accounting Guide (new Guide or combined Guide). The first part of the project was the issuance of a Statement of Position (SOP) to reconcile the specialized accounting and financial reporting guidance. A final SOP was issued in January 2002. CUNAs analysis of the final SOP is available on our website at the following Internet address: http://www.cuna.org/reg_advocacy/member/analysis/aicpa_030802.html. The second part of the project is to combine and redraft the chapters from the 3 existing Audit and Accounting Guides for consistency in the new combined Guide. AICPA is requesting feedback on the draft chapters regarding user-friendliness and completeness of the Combined Guide.
- There are 23 draft chapters plus appendices, which mostly consist of industry overviews and managerial discussions of the specific accounting topics. The two chapters which are most relevant for credit unions are:
- Chapter 2 -- Industry Overview Credit Unions (including corporates)
- This chapter covers: description of credit union business; charter, bylaws, and minutes; regulation and oversight; regulatory capital matters; and annual audits.
- Chapter 17-- Equity and Disclosures Regarding Capital Matters
- This chapter covers: members equity and disclosures for natural person and corporate credit unions with a discussion of Prompt Corrective Action (PCA) requirements; the objectives of and planning for the audit by an independent auditor; and the appropriate internal controls over financial reporting.
- To access Chapter 2, please go to the following Internet address: http://ftp.aicpa.org/public/download/members/div/acctstd/edo/chap_2.pdf. To access Chapter 17, please go to: http://ftp.aicpa.org/public/download/members/div/acctstd/edo/chap_17.pdf. The other draft chapters are available on the AICPA website at: http://www.aicpa.org/members/div/acctstd/edo/chapters.htm.
- Comments are due to the AICPA by June 3, 2002. Responses should be sent to: Ms. Sydney Garmong, Technical Manager, Professional Standards and Services, File 2373, AICPA, 1455 Pennsylvania Avenue, N.W., Washington, DC 20004-1081; her e-mail address is email@example.com. Please send your comments to CUNA by May 27, 2002. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org or to Senior Regulatory Counsel Catherine Orr at email@example.com; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004. You may also contact us if you could like a copy of the draft chapters.
SUMMARY OF THE 2 DRAFT CHAPTERSChapter 2 Industry Overview Credit Unions
- Description of Credit Union Business
- Brief history of credit unions.
- Legislation affecting credit unions (including Federal Credit Union (FCU) Act, National Credit Union Share Insurance Fund (NCUSIF), Credit Union Membership Access Act (CUMAA), and Gramm-Leach-Bliley).
- Field of membership issues and types of common bonds.
- CUMAAs new requirements regarding financial statements and audits.
Board of Directors
Establishes the general operation of a credit union and ensures that it follows applicable laws and regulations and adheres to its bylaws. In addition, the board is responsible for ensuring that a credit union maintains its financial stability, follows good business practices, and is properly insured and bonded. The board appoints the supervisory committee.
Responsible for ensuring that member funds are protected, financial records and operations are in order, and elected officials carry out their duties properly.
Establishes and monitors a credit unions lending policies, approves loan applications, and provides credit- counseling services to members.
Charter, Bylaws, and Minutes
There is a dual chartering system. Regulatory authorities generally require monthly meetings of the board of directors and other volunteer committees.
Credit unions primary source of funds is members share and savings account deposits.
To enhance member services and profitability, many credit unions have become much more aggressive in the areas of fees and charges, real estate, short-term construction, and business lending.
Credit Union System
Most credit unions are affiliated with the credit union system through membership in their state credit union leagues. In turn, leagues belong to CUNA, the principal trade association for credit unions in the United States.
Corporate Credit Union Network
In its role as a financial intermediary for corporate credit unions, U.S. Centrals primary purpose is to meet the corporate credit unions short-term and long-term liquidity needs. It also provides a variety of investment opportunities for excess liquidity as well as payment, settlement, safekeeping, accounting, correspondent and information services to corporate credit unions. Corporate credit unions provide similar services to their member credit unions plus some additional services.
- Regulation and Oversight
Credit unions operate under either a federal or state charter and, therefore, are subject to government supervision and regulation, including periodic examinations by supervisory agency examiners.
National Credit Union Administration
Approximately 60 percent of all credit unions are federally chartered by the NCUA, which issues regulations for both federal credit unions and federally insured, state-chartered credit unions.
- Regulatory Capital Matters
- Natural Person Credit Unions
The Credit Union Membership Access Act (CUMAA) established a new system of tiered net worth requirements for all insured credit unions other than corporate credit unions. CUMAA requires that NCUA establish a net worth standard for insured credit unions as well as risk based capital standards for complex credit unions as defined by the NCUA.
Prompt Corrective Action
CUMAA required the NCUA Board to adopt a system of PCA to be applied to federally insured credit unions that become undercapitalized. The new provisions impose a series of progressively more stringent restrictions and requirements indexed to five net worth categories. The provisions also mandate a separate system for new credit unions and additional risk-based net worth requirements for complex credit unions.
Corporate Credit Unions
Corporate credit unions are not covered by the net worth requirements applicable to other credit unions by virtue of CUMAA. The NCUA has established a regulatory capital requirement applicable to all corporate credit unions monthly minimum capital ratio of four percent. A state-chartered corporate credit union is also subject to its applicable state law capital requirement.
Under CUMAA, credit unions with assets of $500 million or more must obtain an annual independent audit of their financial statements by a certified public accountant (CPA) or licensed public accountant. Second, federally insured credit unions with assets of $10 million or more must follow generally accepted accounting principles (GAAP) for all reports or statements required to be filed with the NCUA Board. Third, any federal credit union with assets of more than $10 million that uses an independent auditor who is compensated for his/her services, the audit is subject to state accounting laws, including licensing requirements.
Other Reporting Considerations
For certain transactions, the independent accountant may be requested to perform assurance services other than those required by CUMAA.
- Regulatory Capital Matters for All Entities
Regulatory Disclosures for Business Combinations
This section discusses the disclosures that should be made for a business combination accounted for as a pooling of interests and disclosures that should be made for a business combination accounted for as a purchase.
- Credit Unions
Credit unions operate under a cooperative form of membership. Members, in effect, "own" the credit union, although their interests in the credit union (that is, their shares) have the characteristics of deposits. The equity section of a credit unions statement of financial condition generally consists only of retained earnings and other comprehensive income. Retained earnings includes statutory reserves, retained earnings and other appropriations as designated by management or regulatory authorities.
- Members Equity
Regular Reserves (Statutory Reserve)
The FCU Act and certain states require that a regular (or statutory) reserve be established and maintained to provide an equity base for credit unions. The regular reserve is established through a charge to undivided earnings and a credit to the reserve account.
Undivided earnings represent unappropriated accumulated earnings or losses of the credit union since its inception. The undivided earnings may also be increased or decreased as a result of transfers to or from appropriated accounts such as the regular reserve.
Appropriated Undivided Earnings
The board of directors may restrict or appropriate portions of undivided earnings for specific purposes, such as loss contingencies and major expenditures. Amounts appropriated may be returned to undivided earnings when they are no longer deemed necessary.
Accumulated Other Comprehensive Income
Banks and savings institutions are required by Financial Accounting Standards Board Statement No. 130 to transfer the total of other comprehensive income for a period to a separate component of equity until realized.
New Credit Unions and Low-Income Designated Credit Unions
The PCA regulations for credit unions designated as "new" are different than for other natural person credit unions. For credit unions designated as "low-income" by the NCUA, the net worth calculation includes certain uninsured, secondary capital accounts.
Disclosures for Natural Person Credit Unions
This section discusses the disclosures natural person credit unions should make in the notes to the financial statements.
Illustrative Disclosures for Natural Person Credit Unions
This section contains illustrative disclosures for well capitalized, adequately capitalized, and undercapitalized credit unions as well as new credit unions.
- Corporate Credit Unions
The equity section of a corporate credit unions statement of financial condition generally consists of membership capital, paid-in-capital, retained earnings and other accumulated other comprehensive income. Retained earnings include all forms of retained earnings such as regular or statutory reserves and undivided earnings.
Membership capital is comprised of funds contributed by the natural person credit unions, which are available to cover losses that exceed retained earnings and paid-in-capital.
Paid in capital is defined as the accounts or other intrests that are available to cover losses that exceed reserves and undivided earnings. The NCUSIF or any other insurer does not insure these funds. These funds are callable only at the discretion of the corporate and only if the corporate meets the minimum capital requirements after the funds are called.
Reserves and Undivided Earnings
Undivided earnings represent unappropriated accumulated earnings or losses of the corporate credit union since its inception. The accounting treatment of transactions in undivided earnings of a credit union is similar to that of transactions in retained earnings of corporate enterprises.
Accumulated Other Comprehensive Income
In accordance with Financial Accounting Standards Board Statement No. 130, corporate credit unions are required to transfer the total of other comprehensive income for a period to a separate component of equity until realized.
Disclosures for Corporate Credit Unions
Under current regulation, corporate credit unions are subject to regulatory capital requirements and not prompt corrective action. There is a list of minimum disclosures that corporates should make in their notes to the financial statements.
Illustrative Disclosures for Corporate Credit Unions
This section contains illustrative disclosures for corporates.
- Banks, Savings Institutions and Credit Unions
In addition to testing of disclosures, the independent accountant should consider the implications of capital noncompliance. The independent accountants objective is to obtain reasonable assurance that the financial statements include a proper description and disclosure of regulatory matters in the context of the financial statements taken as a whole.
In planning the audit, the independent accountant should consider the factors influencing inherent risk as they relate to financial statement assertions about regulatory capital. Independent accountants should have knowledge of capital regulations sufficient to understand Call Report instructions and to assess related application and classification decisions made by management.
Internal Control Over Financial Reporting
In all audits, the independent accountant should obtain sufficient understanding of each of the five components (the control environment, risk assessment, control activities, information and communication, and monitoring) to plan the audit by performing procedures to understand the design of policies and procedures relevant to audit planning and whether they have been placed in operation. Effective internal control over financial reporting should provide reasonable assurance that errors or fraud in financial statement disclosures about regulatory matters are prevented or detected.
The extent to which the independent accountant applies tests to specific transactions or amounts will depend on the independent accountants assessment of inherent and control risks and the materiality of the accountants. For credit unions, the auditor should be satisfied that regular reserve transfers have been made in accordance with regulatory requirements. Other entries, including direct charges and credits in accordance with regulatory requirements, should be tested for propriety. Other appropriations of net "retained earnings" should be traced to authorization by the board of directors. Certain charges to the regular reserves are subject to regulatory approval and the auditor should be familiar with these requirements.
QUESTIONS ABOUT THE DRAFT CHAPTERS
- Are there any modifications you believe should be made to the chapter on the credit union industry?
Yes ______ No ______
If yes, what modifications?
- Are there any topics you believe should be added to the overview of the credit union industry?
Yes ______ No ______
If yes, what additional topics would you like to see incorporated into that chapter?
- Are there any changes you believe should be made to the section in Chapter 17 concerning members equity or disclosures?
Yes ______ No ______
If yes, what changes should be made?
- Do you agree with the discussion on PCA in Chapter 17?
Yes ______ No ______
If not, how should the PCA discussion be modified?
- Do you believe any changes should be made to the auditing discussion in Chapter 17?
Yes ______ No ______
If yes, how should the auditing discussion be modified?
- Other comments on these or any of the other draft chapters (regarding substance or user-friendliness of the chapters)?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com