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Credit Unions Object to FASB Loan Loss Proposal

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June 7, 2013

A trade organization for credit unions has written to the Financial Accounting Standards Board asking for changes in its proposed standards for credit losses in its financial instruments project, which differ from those of the International Accounting Standards Board.

“I think that the proposal from the Financial Accounting Standards Board is potentially bad for most financial institutions, not just credit unions but in particular for credit unions as they are financial institutions owned by their members,” said Credit Union National Association CEO Bill Cheney in an interview.

He pointed out that credit unions are owned by their members and the credit unions’ deposits are insured.

Bill Cheney

“It’s one thing when an investor is relying on the financial statements to determine whether or not they want to buy shares in stock in that institution,” said Cheney. “It’s another thing when you have members that own the institution as a cooperative.”

He noted that credit unions are non-joint stock companies, so investors aren’t relying on the financial statements to determine whether or not they should invest in the credit union.

“Their deposits are insured, most of them, and I think today the allowance for loan losses is supposed to reflect all the known and anticipated losses in the loan portfolio,” Cheney added. “I think that the procedures and practices that have been in place over the years, and have been refined over the years both by practitioners and by regulators, have served the credit union industry quite well. I think what FASB is suggesting, not only would it have a very detrimental one-time effect on credit unions by requiring people to restate their allowance, and by some estimates double or triple the allowance of loan losses for some institutions, which for institutions that are just emerging from the financial crisis can create some unintended consequences, but there is also a downstream impact that could curb credit union lending and bank lending. That is, when you make a loan, you earn your interest on that loan and the principal repayments as they occur over time, but you have to book all of the future unanticipated losses on that loan on the day you book that loan. How long does it take for that loan to become profitable?”

CUNA met with one of the members of FASB, Russell Golden, who will soon be chairing FASB, and shared the groups concerns with him and Golden seemed to understand the credit unions’ concerns (see Credit Unions Worried about FASB Credit Loss Proposal). CUNA also sent a comment letter to FASB expressing its concerns (see Study Co-Authored by FASB Member Rebuts FASB’s Proposed Changes in Fair Value Accounting Standards).

“Part of what we suggest in our letter is that we believe the proposal is flawed,” said Cheney. “That’s the most important thing. We also argue that if you implement the proposal, then you should exempt cooperatively owned financial institutions because of our different structure and he seemed interested in that point as well."

Cheney would like to see FASB go back to the proposal for credit losses from the International Accounting Standards Board, which FASB had initially agreed to use.

“I think they should consider something that’s consistent with what the International Accounting Standards Board and not make it more onerous for U.S.-based financial institutions,” said Cheney. “Most credit unions are doing that today. Today you still have to have your known and anticipated losses in your portfolio, but you don’t have to book five, six or seven years of losses all at once.”

He said it isn't a question of complexity. “I’m not CPA, but my understanding of accounting, which I’ve been involved with for many years is that the accounting should reflect the future cash flows and you should as much as possible try to match revenues with the expenses,” said Cheney. “By accelerating the losses, it seems to me we’re getting away from that principle and you’re going to make it very difficult for financial intermediaries to continue to be active lenders simply because of the accounting rules. That just doesn’t make sense to me.”

FASB spokesman Robert Stewart pointed out in response to CUNA's comment letter last month that FASB’s proposed model is intended to fix the problem that the Financial Crisis Advisory Group identified with current GAAP related to the delayed recognition of credit losses. “The FASB model and the IASB model both would require that expected credit losses be estimated based on past events, current conditions and reasonable and supportable forecasts about the future,” Stewart wrote. “Furthermore, both models ultimately will require the same reserve; the only difference is that the FASB model will require it sooner so that initially, it will be larger. Under the FASB model, an organization would record its current estimate of expected credit losses every period.  The IASB model would record a portion of the expected credit losses until a significant credit deterioration has occurred, at which point the full estimate of expected credit losses would be recognized. While estimating credit losses involves significant judgment under any accounting approach, the FASB believes that using a consistent measurement principle and removing any threshold for recognition reduces management's discretion as to when expected losses should be recognized."

Cheney pointed to a letter from the federal regulator, National Credit Union Administration chair Debbie Matz, in which she expressed a safety and soundness concern relative to credit unions.

“If we get something closer to the IASB model, that’s essentially what credit unions are doing today,” said Cheney. “That seems to be reasonable and it would allow credit unions to continue to recover from the financial crisis and continue to lend, and still have their financial statements reflect what they should reflect, which is known and anticipated future losses.”

 

 

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