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Post-merger net worth plan good with changes says CUNA
WASHINGTON (10/1/08)—The Credit Union National Association (CUNA) supports a federal regulatory proposal to implement statutory authority to allow the net worth ratio of an acquiring credit union, following a merger, to reflect the acquired retained earnings of the merging credit unions. The National Credit Union Administration (NCUA) rule would put into action a provision of the 2006 Financial Services Regulatory Relief Act that gives credit unions more flexibility in complying with a 2001 accounting rule on mergers. If approved, the NCUA rule would apply to both natural person and corporate credit unions. Prior to the 2001 Financial Accounting Standards Board (FASB) rule, credit unions and others could use the “the pooling method” of accounting to report net worth in a merger situation. This method allowed merging credit unions to combine net worths—which are retained earnings. The method facilitated mergers because it permitted the full amount of retained earnings of both institutions to be included in the net worth of the acquiring credit union. Under the acquisition method, as now required by FASB, the value of assets acquired in a merger must be reflected as an addition to equity, not as an addition to retained earnings, as they are under the pooling method. This method can drive down the net worth ratio of an acquiring credit union unnecessarily. To address this, in 2006 Congress voted to allow credit unions to follow the FASB acquisition method but nonetheless include the net worth of the merging credit union in the net worth of the acquiring credit union for purposes of net worth ratio calculations. In a comment letter supporting the NCUA’s implementation plan, CUNA also suggested three modifications to the current proposals before final adoption. They are:
* Changes are needed in the definition of net worth 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; * Changes are needed in the chart provided to illustrates how the proposed rule would be implemented taking Generally Accepted Accounting Principals (GAAP) into consideration compared to the application of GAAP without the proposal; and * Guidance is needed regarding how the NCUA anticipates a merging credit union’s retained earnings will be reported for accounting purposes as part of the net worth of the acquiring credit union.
The CUNA letter was developed under the auspices of its Accounting Task Force, chaired by Scott Waite, SVP-CFO of Patelco CU, San Francisco and an advisor to FASB. To read CUNA’s complete comment, use the resource link below.


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