WASHINGTON – The trade groups continue to push NCUA for further refinement of the definition of post-merger net worth.
At issue is a 2001 decision by the Financial Accounting Standards Board (FASB) that required credit unions and others to forego the use of the pooling method pooling method of accounting in mergers and instead follow the acquisition method that goes into effect after 2008.
Under the acquisition method, the value of assets acquired in a merger have to be reflected as an addition to equity, not as an addition to retained earnings, as they are under the pooling method. This means that in a merger of two credit unions, not only would the acquiring credit union not be able to include the retained earnings of the merging credit union in its net worth, the net worth ratio of the acquiring credit union likely would decline.
Earlier this year, NCUA proposed changes to its PCA rule that would implement the statutory provisions to allow the net worth ratio of an acquiring credit union, following a merger, to reflect the acquired retained earnings of the merging credit union. The proposal also would make parallel changes for corporate credit unions.
CUNA said it continues to have three concerns with the NCUA proposal:
* The proposed definition of net worth may not achieve the objective of properly implementing the statutory provisions because it appears to be inconsistent with the valuation of retained earnings under the FASB rule. CUNA is calling for changes to make it clearer that the entirety of the merging credit union’s retained earnings may be included in the net worth of the continuing credit union.
* CUNA said a chart showing how the proposed rule would be implemented taking Generally Accepted Accounting Principals (GAAP) is helpful, but the depiction of retained earnings in the last column, which shows the acquiring credit union’s retained earnings under GAAP plus the merging credit union’s retained earnings, does not properly reflect that this is the acquired retained earnings, as of the acquisition date, and not the GAAP-defined acquired equity at the time of reporting.
* Finally, CUNA is calling for more guidance to be provided regarding the accounting treatment of combined net worth.
