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February 19, 2009

This article discusses the recommended accounting treatment for actions recently taken by the National Credit Union Administration (NCUA), with regard to the National Credit Union Share Insurance Fund (NCUSIF).

The NCUA Board Actions

The NCUA Board has recently taken the following actions, described in its letter to credit unions (LTCU) No. 09-CU-02:

1. The NCUSIF is offering a temporary guarantee of member shares in corporate credit unions through February and will extend the guarantee on a voluntary basis to all corporate credit unions through December 31, 2010.
2. NCUA is injecting $1.0 billion of cash from the NCUSIF to U.S. Central Corporate Federal Credit Union (U.S. Central), in the form of capital, to offset their anticipated losses related to mortgage backed securities in their investment portfolio.

Effects on Non-Corporate Credit Unions—Accounting and Auditing Issues

These actions will have several effects on non-corporate credit unions.  First, it is apparent that the carrying amount of the NCUSIF is partially impaired, as a result of the cash infusion to U.S. Central.  Credit unions have historically carried the deposits made to the NCUSIF on their balance sheets as a refundable deposit.  That deposit is now partially impaired, which will require a write down for the impairment amount.  Secondly, The NCUA Board approved a plan to declare a premium assessment to restore the NCUSIF equity ratio to 1.30 percent, which will be collected in 2009. The NCUA estimates the premium to be 0.3% of insured member shares. This is a contingent liability that credit unions will need to accrue for.

While practitioners in the accounting profession unanimously agree that, for entities that follow a calendar year reporting period, the NCUA Board actions constitute subsequent events¹  relative to the year ended December 31, 2008, the practitioners are about evenly split about whether the NCUA Board actions constitute recognized subsequent events, which are, by definition, subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, or unrecognized subsequent events, which are, by definition, subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but that arose after the balance sheet date, with each school of though expressing respectable opposing views.

The accounting treatment varies depending on whether the subsequent event is characterized as a recognized subsequent event or as an unrecognized subsequent event. A reporting entity is required to recognize in the financial statements the effects of all recognized subsequent events, i.e. subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. On the other hand, a reporting entity is not required to recognize unrecognized subsequent events, i.e. subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date, which require prospective accounting.

At this writing, no authoritative accounting guidance has been issued by either the American Institute of Certified Public Accountants (AICPA) or the NCUA Board.

Recommended Accounting Treatment

Credit unions should write down the impaired portion of their NCUSIF deposit, estimated by NCUA to be 51%, as a non-extraordinary item.  It can be reported as a non-operating loss and thus shown “below the line” and not as part of operating net income. The additional .3% contingent premium should also be accrued.

With due respect to the opposing views expressed by the two schools of thought referred to above, we believe that credit unions that have a December 31, 2008 reporting date, should report both the impairment and the additional contingent premium in the first quarter of 2009. We recommend that each credit union exercise its best judgment and take the position that it believes would be in the best interest of its constituencies. We will allow credit union to record the impairment in 2008, if they so decide.

Contact for additional information

Contact Allen P. DeLeon, CPA, Credit Union Service Partner at 301-948-9825 Ext. 203; .(JavaScript must be enabled to view this email address) or Lutamila Sallu, CPA, Credit Union Audit Manager at 301-948-9825 Ext. 218; .(JavaScript must be enabled to view this email address) for additional info.

¹ Subsequent events, as defined in the accounting literature, are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.