CUs Should Change Accounting Terms To Highlight Difference
I've worked in the credit union industry for over 30 years. For the past 20 years I have been making this case about credit union accounting terminology. The reception for the ideas have been mixed-maybe it's that I'm talking about accounting or maybe it's my New York accent, but the general message has been "go away."
I guess the problems from having spent my high school years in New York's "Hells Kitchen" have not allowed me to shut up or go away. So here I go again:
Change "Net Income" to "Net Contribution to Reserves."
Credit unions do not make "net Income" like the banks and the rest of the for-profit world. We make contributions to reserves. The money left over from operations are all about safety and soundness, and not future distributions to the Rockefellers or the Mellons.
Change "Undivided Earnings" to "Secondary Reserves."
We call our statutory primary reserves "regular reserves." Why do we call our secondary or unallocated reserves "undivided earnings"? Calling them undivided earnings is more like the for-profit world? Let's call them what they are: "Reserves." The credit union structure is different than the for-profit banking industry. They really do have undivided earnings. We really do not!
Change "Dividends" to "Interest On Savings."
We call interest on loans, "interest on loans." Why do we call the interest we pay on savings "dividends?" I understand the argument as to why they were originally called dividends, but we now pay interest on savings products, we are not paying dividends to stockholders like for-profit stock companies pay dividends to stockholders. We pay interest on savings products.
Place a Cap on the "Net Contributions to Reserves."
This is the item that invites the most debate. Is it eight, 10 or 12%, or some other number? Whatever the target, this is the change that would really differentiate us from our for-profit neighbors. When a credit union reaches the reserve limit, the credit union board would be left to decide whether the excess reserves would be used to decrease the Interest paid on loans or Increase the interest paid on savings products. When the Ways and Means Committee comes looking for new taxes, they will have to make the argument for lowering the maximum reserve level! The "new" taxes would come from where they have always been...the level playing field that has always been in existence between credit union and banking organizations-Members/Consumers/Customers who have always paid taxes on interest on savings products.
I think that the changes in accounting terminology that I have recommended will go a long way toward making it clear that the credit union structure is different from the for-profit banks. Why should we continue to use bank-like accounting terminology. If you agree, let your trade association and regulator know that some simple accounting word changes can go a long way to help explain the structural differences between banks and credit unions.
Thomas J. Powers, Jr. is CEO of Hudson River Teachers FCU in Cortlandt Manor, N.Y.