CUNA Regulatory Comment Call
June 12, 2002
NCUAs Draft Accounting Manual for Federal Credit Unions With Less than $10 Million in Assets
- NCUA has rewritten its Accounting Manual for Federal Credit Unions (draft Manual) in accordance with the statutory mandate in the 1998 Credit Union Membership Access Act (CUMAA) regarding accounting and financial reporting practices. Under CUMAA, credit unions with $10 million or more in assets are required to follow generally accepted accounting principles (GAAP) in the call reports they file with NCUA. NCUA underscores that these federal credit unions (FCUs) should not look to this Manual as a guide in accounting for financial transactions and reporting; rather, they should look to the GAAP rules promulgated by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA). Additionally, they may need to seek the advice of an independent accountant to gain a full understanding of GAAP and its application to their specific circumstances.
- In this draft Manual targeted to those credit unions with assets under $10 million, NCUA aims to streamline and simplify its guidance on regulatory accounting practices (RAP).
- The draft Manual is also updated to reflect CUMAAs Prompt Corrective Action (PCA) approach for financial reporting. The PCA approach is reflected in the section on Regular Reserve. NCUA rules state that a credit union must determine its net worth category classification at the end of each calendar year and subsequently set aside accumulated earnings in its Regular Reserve account. The draft Manual notes that required transfers to the Regular Reserve are dependent on the net worth ratio calculation and related net worth classification. The net worth calculation and mandated transfer requirements are discussed in detail.
- Under the draft Manual, FCUs may continue to use the familiar chart of accounts numbers for their general ledger accounts as they have in the past or they may design their own chart of accounts numbering system to facilitate call reporting.
- The draft Manual may be adopted by federally insured, state chartered credit unions (FISCUs) under $10 million in assets at the option of the credit unions and their state supervisor.
- Shares are still classified as equity in the Statement of Financial Condition.
- The draft Manual will be posted on NCUAs website until the beginning of September, at which time a hardcopy Manual will be printed and distributed. Questions, comments or suggestions for changes may be sent to NCUAs Office of Examination and Insurance at E&Imail@ncua.gov. NCUA would like comments by September 30, 2002. Please send your comments to CUNA by September 25, 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 contact CUNA if you would like a copy of NCUAs draft Manual. Or you may obtain a copy of the draft Manual from NCUAs website at the following Internet address: http://www.ncua.gov/ref/accounting_manuals/accountingmanual.pdf.
DESCRIPTION OF THE DRAFT ACCOUNTING Manual
- In 1999, NCUA promulgated a final rule revising Part 741.6 of its rules (12 C.F.R. §741.6) implementing CUMAAs statutory mandate that Call Reports filed by credit unions having assets of $10 million or more be consistent with GAAP. While CUMAA also gave authority to the NCUA Board and state credit union supervisors the authority for credit unions under $10 million in assets to also follow GAAP, NCUAs rules do not require them to do so. As a result of the statutory change and implementing rule, NCUA has revised its Manual to eliminate the topics pertaining to large FCUs. FCUs under $10 million are provided the draft Manual as a guide on RAP. FCUs having assets under $10 million also have the option of following GAAP.
- The draft Manual eliminates the familiar chart of general ledger accounts. NCUA believes that the call reporting format and requirements should drive the credit unions financial reporting mechanism that the chart of accounts. Under the draft Manual, FCUs may continue to use these chart of accounts numbers as they have in the past. Or FCUs now may develop their own chart of accounts numbering system for their general ledger accounts if they feel a new system would better facilitate call reporting. The draft Manual recommends that FCUs use a chart of accounts that closely mirrors the Call Report for ease of reporting.
- The old Manual was organized according to chart of accounts numbers. With the elimination of the chart of accounts, the organization of the draft Manual has changed. The draft Manual is organized to track financial statement reporting and is divided into the following sections: introduction, accounting basics for recording transactions, assets, liabilities, members shares and equity, income, and expenses. Each section has a detailed table of contents to make it easy to find the information covered in that section.
- NCUA also has included a section titled Topics of Special Accounting Interest, which is temporarily blank. NCUA plans to provide insertions in the future. As was the case with the previous Manual, the draft Manual is designed as a looseleaf system into which periodic updates may be inserted.
- NCUA indicates that a comprehensive discussion of complex accounting topics such as pensions, derivatives and hedging, and stock compensation are beyond the scope of the new Manual.
- A chapter with sample financial statements is provided to general guidance on the financial statement reporting model an FCU under $10 million may wish to adopt.
- The previous Manual contained managerial discussions on some of the accounting topics, many of which have been eliminated from the draft Manual. NCUA aims for the new Manual to be more of a pure accounting Manual than previously.
- The draft Manual retains RAP (exceptions to GAAP) for the following:
- Modified cash basis of accounting relating to income, expenses, gains and losses;
- Settlement date accounting;
- Loan origination; and
- Member shares classified as equity in the Statement of Financial Condition.
- Prompt Corrective Action (PCA)
- All credit unions must determine their net worth category classification at the end of each calendar quarter and subsequently set aside accumulated earnings in its Regular Reserve account. Required transfers to the Regular Reserve are dependent on the net worth ratio calculation and related net worth classification.
- The net worth ratio is calculated as: Net worth divided by total assets.
- The net worth numerator is GAAP retained earnings consisting of undivided earnings, regular reserves, and any other appropriations of undivided earnings designated by management, regulatory authorities or the board.
- Net worth does not include:
- Allowance for loan and lease losses; or
- Contributions of tangible fixed-assets recorded as Donated Equity per RAP; or
- Unrealized gains or losses on available for sale securities and/or items of other comprehensive income; or
- Alternative sources of capital (for example, paid-in-capital accounts), except that for low-income designated credit unions, net worth includes uninsured secondary capital accounts subordinate to claims of creditors, shareholders, and the National Credit Union Share Insurance Fund (NCUSIF).
- For each quarter, a credit union must choose its method for determining the total assets denominator as measured by one of the following:
- Average quarterly balance; or
- Average monthly balance; or
- Average daily balance; or
- Quarter-end balance.
- This method also applies in the determination of whether or not a credit union is a new credit union. It does not apply to risk-based net worth for complex credit unions.
- The effective date of the credit unions net worth calculation is the most recent of the following:
- The last day of the calendar month following the end of the calendar quarter; or
- The date the credit unions net worth ratio is recalculated by or as a result of its most recent final examination report; or
- The date the credit union received written notice from NCUA or, if state-chartered, the appropriate state official, of reclassification on safety and soundness grounds.
|Other Than New Credit Unions||
New Credit Unions
(Less than 10 years in operation and less than $10 million in assets)
|Net Worth Category||Net Worth Ratio||Net Worth Category||Net Worth Ratio|
|Well Capitalized||7% or greater||Well Capitalized||7% or greater|
|Adequately Capitalized||6% to 6.99 %||Adequately Capitalized||6% to 6.99%|
|Undercapitalized||4% to 5.99%||Moderately Capitalized||3.5% to 5.99%|
|First Tier||5% to 5.99%||Marginally Capitalized||2% to 3.49%|
| Second Tier
(and failed RBNW)
|4% to 4.99%||Minimally Capitalized||0% to 1.99%|
|Significantly Undercapitalized||2% to 3.99%||Undercapitalized||Less than 0%|
|Critically Undercapitalized||Less than 2%|
Reasonable Timetable to Build Net Worth
|Within # of Years in Operation||Net Worth Ratio|
|3 Years||0% to 1.99%|
|5 Years||2% to 3.49%|
|7 Years||3.5% to 5.99%|
|10 Years||6% to 6.99%|
QUESTIONS REGARDING THE DRAFT MANUAL
- If your credit union has assets under $10 million, it may continue to use the traditional chart of accounts numbering or it may
design its own numbering system for its general ledger accounts. Do you think this flexibility will be helpful for your credit union
for financial reporting?
Yes ______ No ______
- NCUA has reorganized the draft Manual to track financial statement reporting; it is no longer organized according to chart of
accounts numbers. Do you feel this new organization is more user-friendly?
Yes ______ No ______
If not, why not?
- The section titled Topics of Special Accounting Interest is temporarily blank. NCUA plans to provide insertions in the future.
Are there specific accounting topics you would like to see addressed in that section?
Yes ______ No ______
If so, what are those topics?
- Do you agree with the discussion of PCA in the draft Manual?
Yes ______ No ______
If not, what changes should be made to make the PCA discussion more accurate?
- Other comments?
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