Pending FASB Rule Topic Of Debate

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The Financial Accounting Standards Board remains in the process of refining the rules regarding two issues of importance to credit unions: available-for-sale investment losses and merger accounting.

Mike Sacher, partner in the CPA firm of McGladrey & Pullen, told attendees at an educational session at the WesCorp Credit Union Outlook conference here that FASB's Emerging Issues Task Force (EITF) prompted confusion when it issued a statement of position regarding how to account for available-for-sale investments that have declined in value.

The statement of position, known as SOP 03-1, required management to assert the "intent and ability" to hold the investments for a period of time sufficient to allow for any anticipated recovery in fair value.

Sacher said if the investment is sold at a loss, the financial institution, "can't demonstrate the intent to hold the rest of the securities until recovery." This, in turn, has the effect of "tainting" an institution's remaining available-for-sale securities.

According to Sacher, on Sept. 15, FASB clarified that if a minor impairment on debt securities was caused by an interest rate fluctuation, it would be considered temporary and not require an assertion as to intent.

The FASB will be taking comments on proposed updates on the guidelines concerning available-for-sale investments losses through Oct. 29.

"It is not clear when the final rule will become effective," said Sacher. "It only matters if a financial institution sells an underwater security. I don't like accounting rules driving real-world, bottom-line decisions."

Merging Lane

The "pooling of interests" remains the most commonly used method to account for mergers. As the name implies, the two merging CUs would combine balance sheets, and the whole would equal the sum of the parts.

"This is way too logical, so something had to be done," Sacher quipped.

In June 2001, the pooling method was eliminated and replaced by the "cost" method. Credit unions and other mutual organizations were given delayed implementation of the rule, and the credit union trade groups have been critical of the effect it could have on mergers.

FASB was expected to issue guidance in the fourth quarter of 2004, but Sacher said final guidance probably will not come out until the second half of 2005, with enforcement probably not until Jan. 1, 2006.

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