NORWALK, Conn. – The Financial Accounting Standards Board is preparing a proposal that would ease the strain of mark-to-market accounting by allowing credit unions and other entities to separate the actual expected losses on their holdings from the diminished market value, or fair value, of the holdings.
Under the proposal, only the estimated actual losses would be recorded through the income statement, according to Scott Waite, the chief financial officer for Patelco CU, who is monitoring the issue as chairman of CUNA’s accounting task force.
The other piece, the non-performing or diminished value of the holdings, would be noted as an adjustment to the balance sheet, according to Waite.
Mark-to-market has come under attack by financial entities holding large amounts of marketable securities because the seizing up of the credit markets has vastly diminished the fair value of those securities, requiring the entities to record the loss in market value through their income statements.
The diminished value of their securities value and the question of actual losses forced NCUA last Friday to take the nation’s two largest corporate credit unions, U.S. Central FCU and WesCorp FCU, under conservatorship. NCUA is working to determine what amount of U.S. Central’s $10.5 billion in unrealized losses and WesCorp’s $3 billion of unrealized losses will ultimately be realized.
"There has to be some flexibility in separating out the credit losses from the actual losses," Waite told The Credit Union Journal, of the proposed rule change. "This would lighten the impact of mark-to-market."
Several credit union executives have endorsed this new approach to mark-to-market accounting in comment letters submitted to the FASB. The credit union execs hope that the new rules will not only apply to the first quarter of 2009, but will apply retroactively to 2008.
Daniel Leclerc, chief financial officer for Lacamas Community CU, for example, urged the FASB to make the new rules effective as of Dec. 15, 2008, stating "the reader of financial statements will gain a more thorough understanding of the impairment and the underlying causes for impairment."
"Failure to finalize this action, or failure to make it retroactive to 12/31/08, may result in the full collapse of banks and credit unions around the country," stated Dana Sisk, chief financial officer for NavyArmy FCU.
Thomas Graham, president of SunCorp FCU, which has $160 million of unrealized losses on its books, also urged the rule be applied retroactively. "The application of the previous rules may grossly mis-state the financial statements in some institutions because of the dislocated financial markets," commented Graham. "Please permit earlier application, but do not require it to be applied."
