ALEXANDRIA, Va. – NCUA and banking regulators provided new guidance yesterday on accounting for mergers of troubled institutions, so-called bargain purchases.
Credit unions and banks should use the acquisition method of accounting to all business combinations in accordance with the Financial Accounting Standards Board’s ASC Topic 805. The acquiring institution should recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree. The application of the acquisition method may result in the acquirer recognizing some assets and liabilities not previously recognized by the troubled institution, such as an indemnification asset resulting from a loss-sharing agreement with one of the federal regulators.
The guidance comes amid a growing wave of federally assisted mergers of banks and credit unions. In most cases the assets of a troubled credit union or bank, such as offices, branches and accounts, are being assigned to acquiring institutions at a steep discount, a discount the regulators are calling a “bargain purchase.” This excess, said the regulators in yesterday’s guidance, previously referred to as “negative goodwill,” should be recognized immediately as a gain in earning, which increases GAAP equity.
“At the acquisition date, the acquiring institution generally will not have obtained all of the information necessary to measure the fair values of the assets acquired and liabilities assumed in a business combination,” states the guidance, “This is particularly true in the acquisition of a failed institution where the acquiring institution can perform only limited due diligence prior to the acquisition date. Accordingly, when accounting for a business combination, the acquiring institution should initially record provisional amounts for the fair values of the assets acquired and liabilities assumed based on the best information available at the acquisition date.”
“Management should then retrospectively adjust these provisional amounts to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. Any retrospective adjustments to acquisition-date fair values will affect the provisional amount of goodwill or bargain purchase gain recognized in a business combination”
