FASB Backs CU Accounting Fix

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The nation's chief accounting standards-setter told Congress last week he sees nothing wrong with a proposal to amend the Federal CU Act to allow credit unions to skirt new rules on accounting for mergers.

The proposal, which would redefine the concept of "net worth" for credit unions to allow them to continue pooling their capital after mergers "will not legislate accounting standards," Robert Herz, chairman of the Financial Accounting Standards Board, assured lawmakers during a hearing before the panel of the House Financial Services Committee.

Herz emphasized that the FASB does not formally endorse or oppose legislation but addressed a key concern with lawmakers, that is that the proposal amounts to a legislating of accounting. The bill, said Herz, "does not appear to establish or change general-purpose standards of financial accounting and reporting. Therefore, the proposed legislation has no impact on the standard-setting activities of the FASB or GAAP."

Herz's statement appears to clear up a major impediment to passage of the bill because some members of Congress, specifically Sen. Paul Sarbanes, have expressed concern at attempts to get Congress involved in resolving accounting disputes.

In addition, no opposition has emerged from either other lawmakers or credit unions' traditional nemesis, the banking lobby.

The FASB has proposed new accounting rules that will require all mutual enterprises, including credit unions, to give up the current method of pooling for mergers, which allows them to count the combined equity of the merging credit unions in the surviving institution. The proposed bill would, in effect, allow the continuation of pooling, or the combination of, net worth.

NCUA Chairman JoAnn Johnson told the panel the change in definition is necessary because the FASB's new prohibition on the pooling method of accounting will dilute a credit union's net worth after a merger, threatening some credit unions with a brush with minimum capital rules, and thereby discouraging mergers. More importantly, noted Johnson, it could discourage some credit unions from acquiring troubled institutions in assisted mergers, thereby requiring that those institutions be liquidated instead at a cost to the National CU Share Insurance Fund.

George Reynolds, deputy commissioner of banking for Georgia who was testifying on behalf of NASCUS, said the potential impact of the FASB rule, if not amended through the legislation, could be dire. A disincentive to mergers of troubled institutions, said Reynolds, could cause an increase in liquidations of those institutions, "greater reputational risk, a severe loss of confidence for the credit union industry, greater losses to the deposit insurance fund and increased costs to the industry and ultimately to consumers."

Rep. Spencer Bachus, R-Ala., chairman of the panel, noted the accounting fix appears to be on the fast track to passage, as no one has come forward to oppose it and it has broad bipartisan support.

While FASB originally planned to adopt the new accounting rule for Jan. 1, 2006, Herz said a later adoption date is more likely now.

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