CUNA Regulatory Comment Call


July 29, 2003

AICPA Proposal Regarding Allowance for Credit Losses

EXECUTIVE SUMMARY

DESCRIPTION OF THE PROPOSAL

The following items are the significant provisions of the proposed SOP.

  • The provisions of the proposed SOP would be effective for financial statements for fiscal years beginning after December 15, 2003, with earlier application permitted. The effect of initially applying the provisions of the proposed SOP would be reported as a change in accounting estimate.
  • QUESTIONS REGARDING THE PROPOSED SOP

    Scope

    Issue 1

    Is the scope of the proposed SOP readily understandable with respect to the kind of loans and the kinds of entities to which the proposed SOP would apply?

    Yes ______ No ______

    Please explain why or why not.
















    Do you agree with the scope?

    Yes ______ No ______

    If you do not agree, what changes would you recommend?
















    Issue 2

    The scope of the proposed SOP would 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. That implies (a) that unconditional promises to give that are assets of not-for-profit organizations are loans, as that term is defined in paragraph 4 of FAS No. 114 and (b) that unconditional promises to give that are assets of not-for-profit organizations and that are due in more than one year are in the scope of the proposed SOP. Do unconditional promises to give that are assets of not-for-profit organizations meet the definition of loans?

    Yes ______ No ______

    If not, why not?
















    Do you believe unconditional promises to give that are assets of not-for-profit organizations and that are due in more than one year should be included in the scope of the proposed SOP regardless of whether they meet the definition of loans?

    Yes ______ No ______

    If not, why not?
















    Recognition and Measurement

    Issue 3a

    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, as defined, and thereby use a composite interest rate and cash flow expectation for the pool for purposes of the recognition, measurement, and disclosure provisions of that SOP. SOP 03-X requires investors to maintain the integrity of such a pool once it is assembled. In contrast, this proposed SOP states in paragraph 17 that certain loans should be grouped for purposes of collective loan impairment evaluation into pools based on similar credit risk characteristics, as defined in the proposed SOP. The AICPA’s Accounting Standards Executive Committee (AcSEC) chose to use a different basis for the grouping of loans into pools in the proposed SOP because AcSEC believes the concept of common risk characteristics, as defined in SOP 03-X, is too restrictive for purposes of collective loan impairment evaluation. In addition, AcSEC viewed SOP 03-X as a revenue recognition model rather than a loss recognition model. Is the difference between the guidance in the proposed SOP and the guidance in SOP 03-X on pools of loans appropriate?

    Yes ______ No ______

    Please explain why or why not.
















    What practical difficulties would the application of the guidance in the proposed SOP by an entity that is also complying with SOP 03-X present?
















    Would the proposed SOP’s aggregation guidance impose an unjustifiable cost on an entity that is also complying with SOP 03-X?

    Yes ______ No ______

    If yes, please explain the costs involved.
















    Issue 3b

    The proposed SOP would apply to loans that are within the scope of SOP 03-X. Concerning recognition and measurement of any impairment subsequent to acquisition, however, this proposed SOP states that, although paragraphs 19 and 20 are applicable to loans that are within the scope of 03-X for purposes of determining whether impairment of multiple loans accounted for as a single asset may have occurred, the methodology for recognition and measurement of any loss is set forth in SOP 03-X. Other guidance in the proposed SOP, such as the guidance on loan impairment concepts and components of the allowance for credit losses and the proposed disclosure requirements, would apply to loans within the scope of SOP 03-X. in its entirety. Is the applicability of the proposed SOP to loans within the scope of SOP 03-X sufficiently clear?

    Yes ______ No ______

    If not, how could the applicability be made clearer?
















    Issue 4

    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. Is the concept of observable data described in paragraph 19 of the proposed SOP understandable?

    Yes ______ No ______

    If not, how could the concept be made more understandable?
















    Do you agree with the proposed SOP’s requirements concerning relevant observable data?

    Yes ______ No ______

    If not, why not?
















    Issue 5

    The proposed SOP requires in paragraph 25 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, taking into account the interaction of components of collective loan impairment over time. Is that concept understandable?

    Yes ______ No ______

    If not, how could the concept be made more understandable?
















    Do you agree with that guidance?

    Yes ______ No ______

    If not, why not?
















    Issue 6

    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. AcSEC considered several measurement methods and techniques but could identify no single measurement method or technique that should be required in all situations to capture losses that have been incurred while excluding from the measurement those future losses that are expected to occur but that have not yet occurred. AcSEC decided not to prescribe any specific methodology. Should the proposed SOP require a specific impairment measurement method or technique for pools of loans?

    Yes ______ No ______

    If so, please describe the method or technique you would propose and your views on why it would produce results that are in conformity with existing authoritative literature.
















    Disclosures

    Issue 7

    Paragraph 28 of the proposed SOP sets forth additional disclosure requirements related to the allowance for credit losses. Do you believe the volume of disclosures set forth in the proposed SOP is too much, just right or not enough?
















    Will the proposed disclosures be useful to users of financial statements?

    Yes ______ No ______

    Please explain.
















    Will preparers be able to develop the proposed disclosures from existing information?

    Yes ______ No ______

    If not, would it be unjustifiably costly to obtain the necessary information and why?
















    Other Comments

    Other comments?
















    Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
    Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
    Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
    Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com