Accounting & Auditing
New Standards
FAS 156, Accounting for Servicing of Financial Assets (issued March 2006). This new standard addresses whether servicing rights should be carried at fair value or at lower of cost of market, the way the asset was previously accounted for. The new standard actually permits either method of accounting, but adds several new disclosures to provide comparability between the two methods. This new standard is effective for fiscal years beginning after September 30, 2006.
FAS 157, Fair Value Measurements (issued September 2006). This new standard focuses on how to measure fair value, not on what or when to measure (this will be addressed in a future standard). The standard creates a hierarchy of acceptable measurement methods and also requires additional disclosures. Interesting in this standard is the concept of fair value extending outside the entity. For example, if your credit union has a location (i.e., branch) that might be worth more as a retail establishment, the value to report would be the highest use value from market participants, not the value to the credit union. This standard is effective for fiscal years beginning after November 15, 2007.
FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R) (issued September 2006). This statement requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement also requires measurement of the funded status of a plan as of the date of its year-end statement of financial position. For the recognition of the funded status, this is required for the first fiscal year ending after June 15, 2007. The measurement date aspect of this provision is required for fiscal years ending after December 15, 2008. Two new auditing standards are also effective for this current audit.
SAS 103, Audit Documentation, basically deals with audit workpapers maintained by the auditor and further defines acceptable time frames for audit completion. A key implication of this change is that the auditor may likely have to return to the credit union to “finalize” work after the financial report is in final draft.
SAS 112, Communicating Internal Control-Related Matters Identified in an Audit, establishes standards and provides guidance on communicating matters related to an entity’s internal control over financial reporting identified in an audit of financial statements. In particular, this SAS defines the terms significant deficiency and material weakness, provides guidance on evaluating the severity of control deficiencies identified in an audit of financial statements, and requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. A key implication of this change is that the auditor likely will have to report certain internal control matters that have not been required to be reported in the past.
Several new auditing standards are also effective for next year’s audit. Eight new audit standards (SAS 104-111), collectively referred to as the “risk assessment standards,” will be effective for December 31, 2007 year-end audits. These standards will significantly increase the auditor’s required evaluation of internal controls and the overall control environment (including management and board oversight), require a closer review of control activities, limit the times when inquiry can be used as evidence, require additional support to be reviewed, and potentially increase testing samples. Needless to say, audits will become more complex and comprehensive. We will continue to communicate implications with you over the next 12 months.
SAS 114, The Auditor’s Communication With Those Charged With Governance, is also effective for the December 31, 2007 year-end audits. This standard revises how the letter to the supervisory committee/ audit committee must be constructed and expands the communication to the board of directors as well.
Standards in Process
Business Combinations — On October 9, the FASB issued two exposure drafts that would effectively eliminate the use of the pooling of interests method of accounting for credit union mergers and require the use of purchase accounting. The comment period is set to close on January 29, 2007, after which time the FASB will evaluate comments and make a decision whether to proceed with a formal standard.
The FASB also has an additional ongoing project related to additional fair-value accounting, which would permit entities a one-time election to report certain balance sheet items at fair value, with changes in fair value running through net income. Additional projects include pension accounting and loan participations. We will keep you abreast of developments in any of these areas.
