Mark-To-Market Accounting Proposal Poses New Threat To CUs

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NORWALK, Conn. – Credit union executives are unanimously against a proposal by the Financial Accounting Standards Board that would extend fair value accounting, also known as mark-to-market, saying the bid to disclose loans and even deposits at market value could wreak havoc on their books and further damage public confidence in credit unions.

“It is unreasonable to include loans and deposits held in portfolio with no intention of sale at fair value. Fair value is not relevant to these items since the purpose is not to sell/liquidate,” wrote Beverly Rutherford, vice president for compliance for Virginia CU, one of 1,500 executives and accounting practitioners, almost all of them opposed, to submit comment letters on the proposal.

NCUA and banking regulators, including Federal Reserve Chairman Ben Bernanke, also weighed in against the fair value accounting proposal.

“For our credit union,” wrote Francisco Nebot, chief financial officer for Santa Ana, Calif.’s SchoolsFirst FCU, “it will only serve to confuse our Member owners into believing numbers that are best contrived.” He said the ability to value deposits with any accuracy “is so diminished as to render any resulting ‘value’ as meaningless.”

Some credit union executives made dire predictions. “There are a significant number of credit unions that are already suffering from the current economy which were either liquidated by the NCUA or merged with another credit union or currently surviving but currently on NCUA’s watch list and implementing this new regulation would drive the credit union out of existence,” warned Alfred Gelasio, vice president finance and technology for Spectrum FCU, Frederick, Md.

Expansion of the controversial accounting method, which requires regular disclosures on the increase or decrease in the market value of an entity’s assets, comes as financial institutions are digging out of the biggest crisis since the Great Depression, which many say was exacerbated by mark-to-market rules. Many said the requirement to mark down tens of billions of dollars of investments to fire sale prices as the markets seized up over the past 30 months made a bad situation much worse.

The FASB, which sets the rules for accounting, said fair value accounting gives investors, regulators and depositors a more accurate snapshot of the financial condition of an entity. But credit union executives question the validity of this assertion in light of the recent market meltdown.

Brian Scharkey, chief financial officer for Brea, Calif.-based Evangelical Christian CU, which holds a $1 billion portfolio of church loans, said setting a market value for these loans would be extremely difficult, as each loan is unique. “Implementation of fair value will be difficult, costly and will not provide decision-useful information to the users of [a credit union’s] financial statement,” he wrote.

Some commenters suggested measures to limit the impact of fair value disclosures on credit unions. James Duke, the vice president for finance at Pentagon FCU, suggested that fair value disclosures be made in footnotes to financial statements, rather than as part of the financial statements. Michael Daugherty, president of Community Plus FCU, in Rantoul, Ill., suggested that if the FASB approves a final rule extending mark-to-market accounting to loans and deposits that credit unions be exempted.

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