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October 1, 2008 - NASCUS filed comments with the NCUA in response to NCUA’s proposed changes to the definition of “net worth” for credit union mergers. NCUA’s proposed rule would give effect to statutory changes allowing for an approximation of the pooling method of accounting in credit union mergers.
In 1998, the Credit Union Membership Access Act (CUMAA) mandated “prompt corrective action” (PCA) for credit unions. Regulations giving effect to PCA where codified in NCUA Rules and Regulations Part 702. At the time CUMAA mandated PCA, the predominant practice for financial reporting of a credit union merger, whether of natural person or corporate credit unions, was to apply the “pooling method.” That method required an acquiring or continuing credit union to combine its, and the disappearing credit union’s like financial statement components. Consistent with the limited statutory definition of net worth, that method allowed an acquiring credit union to combine its own retained earnings with that of the merging credit union for purposes of measuring the continuing entity’s post-merger net worth ratio.
In 2001, the Financial Accounting Standards Board (FASB) issued its Financial Accounting Statement No. 141, Business Combinations (2002) (“FAS 141”). FAS 141 replaced the “pooling method” of financial reporting of business combinations with the “purchase method” effective in June 30, 2001 (but implementation was deferred until the end of 2008).
As noted above, the change would have resulted in dilution on net worth after a merger. To remedy the problem, Congress enacted the Financial Services Regulatory Relief Act (2006 Relief Act) in 2006. Section 504 of the 2006 Relief Act expanded the original PCA definition of a natural person credit union’s “net worth” to include “any amounts that were previously retained earnings of any other credit union with which [it] has combined.”
NCUA’s proposed rule would implement those changes, and was supported by NASCUS. The ability to merge credit unions without diluting the net worth of the continuing entity is an important regulatory tool. However, NASCUS was concerned with language in the proposal that was not directly related to, or relevant to, the needed regulatory adjustments to Part 702 implementing Section 504 of the 2006 Regulatory Relief Act. NASCUS’ comments recommend NCUA move forward with the changes while reconsidering the superfluous language.
To view NASCUS’ comments, click here.
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