Nothing Fishy Here, NCUA Accounting Rectifies GAP-Reg Incompatibilities
CU Times Correspondent-at-Large
WASHINGTON -- Effective this month for August call reports, the NCUA will add a footnote to corporate credit unions' statements of financial condition, adding member capital share accounts into equity equations.
The change was prompted by unrealized securities losses, which have created the appearance of insolvency on some corporate financial statements, said Brad Miller, executive director of the Association of Corporate Credit Unions.
However, Miller said, this isn't a case of the agency sweeping losses under the rug. Rather, a discrepancy between federal general accounting procedures and regulatory schedules is to blame.
NCUA corporate 5310 reports communicate equity as it is defined by GAP, which is more appropriate for public companies than financial cooperatives, Miller explained. Though member capital shares require a three-year advance withdrawal notice, GAP does not consider them to be permanent equity like publicly traded shares. Instead, they are classified as deposits.
Conversely, the NCUA includes member capital accounts in regulatory schedule C-1, which Miller said more accurately reflects corporate equity and carries far more weight in the financial world.
So, why the change?
GAP-standardized financial statements appear at the top of the NCUA's online 5310 reporting, which created panic among member credit union representatives who didn't scroll all the way down to schedule C-1, Miller said. Now, the financial statement will include a footnote that member capital accounts are now included in total equity numbers.
"The change doesn't represent a difference in how the agency looks at capital," Miller said. "Instead, I think the agency is simply trying to correct the miscommunication that's out there and provide a better report regarding the financial condition of corporates."
Miller said to his knowledge, the footnote will not have any effect on key corporate ratios or regulatory requirements. And he's confident corporate-owned mortgage-backed securities will regain value.
"I still consider mortgage-backed securities to be safe; we're just in a dislocated market, and they're getting more attention now," Miller said. "And because membership capital isn't shown in financial statements, unrealized losses have resulted in incorrect assumptions about the strength of some corporates. But, the fact is that there are no corporates with negative equity."
NCUA officials were not available for comment.