Proposed Accounting Rule For Impairment ‘Too Complex’ For CUs

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NORWALK, Conn. – Credit unions are telling the Financial Accounting Standards Board a proposed rule setting aside potential losses for impaired assets is too complex and will do little to explain a credit union’s financial condition to regulators and members.

“Overall, we believe the proposal introduces more complexity with limited value, increasing the cost to comply especially for smaller institutions,” Beverly Rutherford, vice president compliance for Virginia CU, told the FASB in a comment letter on the proposal.

The proposal would require an entity to estimate the amount of any cash flows it does not expect to collect over the life of the financial instrument and recognize a related amount of credit losses within the same reporting period. This is aimed at ensuring that an allowance account is sufficient to cover all estimated credit losses.

Virginia CU’s Rutherford told FASB the approach, “simply makes it more complicated and overall will just require institutions to hold an overall higher allowance balance.” This will put downward pressure on earnings and capital during an implementation period, she added.

CUNA opposes the impairment proposal, saying it is inappropriate “to require an entity to immediately recognize all credit losses regardless of the entity’s assessment of the credit quality of the assets.”

The proposed rule, wrote Luke Martone, assistant general counsel at CUNA, “would require entities to estimate the lifetime expected losses on open portfolios of assets. We are concerned that many smaller reporting entities lack the ability to accurately estimate the expected losses for these assets.”

“On a more basic level,” wrote the CUNA counsel, “we question what, if any, benefit to a credit union’s members or its regulator would be achieved by establishing open portfolio-specific impairment guidance.”

The Pennsylvania CU Association said the FASB proposal will do little to lower the risk profile of credit unions, as NCUA and Congress have heightened their own supervisory and monitoring tools over the past few years. “We assert that the benefit of the newer model does not outweigh the compliance burdens to execute it,” Jim McCormack, president of the Pennsylvania league, wrote in his comment letter.

 

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