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New post-merger net worth definition effective today
WASHINGTON (12/31/08)—Today is the day that the National Credit Union Administration’s (NCUA’s) new post-merger net worth definition goes into effect, changing the definition of a natural person credit union's net worth to include as capital the retained earnings of a credit union that is merging into it. The rule applies to credit union mergers taking place after today and the change is consistent for corporate credit unions. The new definition, in effect, implements a statutory correction that was carried in The Financial Services Relief Act of 2006, which addressed accounting anomalies that have arisen since PCA requirements were first instituted. At the time PCA requirements were mandated in 1998 by the Credit Union Membership Access Act, the "pooling method" was used for the financial reporting of a credit union merger. This allowed the acquiring credit union to combine its own retained earnings with that of the merged credit union for determining the post-merger net worth ratio for purposes of complying with PCA requirements. In 2001, Financial Accounting Statement (FAS) No. 141 replaced the "pooling method" with the "purchase method" for business combinations, with the effect that an acquirer's net worth would not increase as a result of the merger. This potentially reduces the post-merger net worth. The Financial Services Relief Act of 2006 essentially reversed that policy by expanding the PCA definition of "net worth" to incorporate the retained earnings of the merged credit union. This would also apply to other combinations, such as purchase and assumption transactions. At the time the change was proposed in July, NCUA staff members noted that the new regime for net worth calculation in mergers would not reinstate the "pooling method," but would have a similar practical effect. Use the resource links below to read the NCUA rule and the Credit Union National Association’s final rule analysis.
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