The trade association representing credit unions believes that the Financial Accounting Standards Board’s recent proposal to redefine the meaning of a public business entity could open the door to more appropriate accounting standards for credit unions.

FASB issued for public comment Wednesday a proposal that would define a public business entity and affect which types of businesses might qualify for alternative accounting and reporting guidance as private companies (see FASB Proposes to Define Public Business Entities).

The Credit Union National Association sees this as a major positive step for credit unions as it might allow nonpublic business entities to use accounting and reporting alternatives under U.S. GAAP. Such entities, which could include credit unions, could be subject to more flexible accounting requirements, although FASB acknowledged that whether alternatives allowed under GAAP would be permitted “may ultimately be determined by regulators.” Comments are due to FASB on September 20, and CUNA plans to post a call for comments on its own regulatory advocacy Web site this week.

The proposal includes a revised definition of "public business entity." When finalized, the definition will be used by FASB to identify the different needs of users of private company financial statements as opposed to the users of public company financial statements, according to the proposed accounting standards update.

The framework should also help identify opportunities for reducing the complexity and costs associated with preparing financial statements in accordance with GAAP for nonpublic entities, CUNA noted, although the proposal in and of itself would not affect existing requirements.

The Credit Union National Association has long advocated to FASB that credit unions, based on their structure as not-for-profit, member-owned financial cooperatives, should not be subjected to a number of onerous and costly reporting requirements that should be applied to only publicly traded companies. Patelco Credit Union executive vice president and CFO Scott Waite, who has served on several FASB advisory councils for 10 years, was able to help draw FASB’s focus to the need for accounting treatment distinctions for credit unions.  

Before issuing the proposal, according to the exposure draft, the board members discussed whether a financial institution that does not otherwise meet any of the criteria of a public business entity as defined in the proposed accounting standards update should be included in the definition of a public business entity for financial reporting purposes and, therefore, would not be within the scope of the guide. “A financial institution referred to in this proposed Update would be subject to the description in paragraph 942-320-50-1 of the Accounting Standards Codification, which includes banks, savings and loan associations, savings banks, credit unions, finance companies, and insurance entities.”

In a comment letter on June 21 to FASB, CUNA deputy general counsel Mary Dunn stated, “Unlike most other financial institutions, credit unions do not issue stock or pay dividends to outside stockholders. By law, they must use their earnings to build capital and as member-financial institutions, credit unions do not issue stock or pay dividends to outside stockholders.”

She added, “By law, credit unions must use their earnings to build capital, and as member-owned cooperative institutions, work hard to provide favorable rates on loans and savings, and to minimize fees.”

“We see this as a positive step,” Dunn told Accounting Today. “We’ve been saying for some time that credit unions, because we’re not publicly traded, and because we’re member owned, not-for-profit and democratically controlled, we just didn’t feel that a lot of the elaborate costly accounting requirements that otherwise would apply should fall to credit unions. One example is the credit impairment proposal that’s pending. Not only would it be onerous, but it’s a deviation from how the proposed international standards would treat the reporting and accounting for credit impairment. If that were to go through from FASB, it would mean that credit unions would have to put a lot more into their allowance accounts in reserve. When funds are parked in reserve, you can’t use them for creating new loans and new services and growing your institution. We have a lot of concerns about that credit impairment proposal, but we think this newest proposal, which does seek to differentiate between publicly traded entities and those that aren’t, is a positive step.”

CUNA is not asking FASB for a separate document defining private entities that would specifically include credit unions, Dunn noted.

“We don’t advocate for more rules than are necessary,” she said. “If this accomplishes the purpose of giving credit unions more flexibility without more work on anybody’s part, then fine with us.”

CUNA also isn’t asking FASB for laxer accounting standards for credit unions, she stressed. “We don’t want laxer standards for credit unions,” said Dunn. “About 97 million consumers and small businesses are members of credit unions, and we don’t want our members to lose any confidence or have anybody say, ‘Hey, they’re subject to less rigorous standards.’ What we’re looking for are standards that are appropriate for the way credit unions are structured. It’s not a matter of being lax. It’s a matter of having standards that fit our business model and respect our business model because we think it’s inaccurate when we’re reflected as if we are publicly traded when we’re not.”

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