Accounting and Auditing Update 
Credit Union Advisor, 2008 Winter


FASB Merger Guidance Effective Date Set for 2009

In connection with our continued updates on the Merger Guidance, the Financial Accounting Standards Board (“FASB”) has set January 1, 2009 as the effective date for its change to credit union accounting for business combinations. This guidance will require credit unions to use purchase accounting instead of the traditional pooling method. The traditional method allowed for a simple combination of balance sheets for mergers, whereas purchase accounting requires the acquiring credit union to record the fair market value of the acquired credit union.

Financial Accounting Standards Board (FASB) Number 157, Fair Value Measurements

The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The expanded disclosures about the use of fair value to measure assets and liabilities should provide users of financial statements with better information about the extent to which fair value is used to measure recognized assets and liabilities, the inputs used to develop the measurements, and the effect of certain measurements on earnings (or changes in net assets) for the period.

Financial Accounting Standards Board (FASB) Number 159, The Fair Value Option for Financial Assets and Financial Liabilities

This statement permits entities to choose to measure many financial instruments, and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. Therefore, this standard permits an election to report certain instruments at fair value with changes in fair value included in earnings. This option is not available for pensions, deferred compensation, post-retirement benefits, leases, and demand deposits. Management’s reasons for electing to adopt FASB 159 require disclosure and a thorough analysis. The election is irrevocable when made. Any time new financial instruments are acquired, the fair value option can be elected at the acquisition date.

Both FASB 157 and 159 are applicable for fiscal years beginning after November 15, 2007.

Financial Accounting Standards Board (FASB) Number 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits

This statement, an amendment to Statements No. 87, 88, 106, and 132r, changes the measurement and recording of the funded status of the benefit plans. New treatment involves recognizing the liability based on the projected benefit obligation for both pension and other postretirement plans. While this part of the standard was effective for December 31, 2007 year end, the measurement date changes that require measuring the liability as of the financial statement date is effective for fiscal years ending after December 31, 2008.

The Risk Assessment Standards

The AICPA issued eight new auditing standards (SAS 104-111) which address the auditor’s risk assessment process. The new standards represent significant changes to the existing audit practices for all entities which undergo an audit, and are effective for audits for periods beginning on or after December 15, 2006.

The new standards primarily require auditors to:

• More thoroughly examine and evaluate the credit unions’ accounting processes and controls, including the overall control environment, key controls over significant transactions and the quality of internal oversight of the financial reporting process
• More thoroughly assess and document conditions in the credit unions’ systems and processes that create risks of material misstatement in their financial statements, and perform additional testing in response to these risks
• Design and perform more analytical tests of accounting and financial data
• Better link the assessed risks and the audit procedures performed in response to those risks

SAS No. 114 — Auditor Communication With Those Charged With Governance

This new standard focuses on the communications that should take place between an auditor and those charged with governance, including a credit union’s board of directors and the audit/supervisory committee. Required formal communication covers such topics as:

• Auditors responsibility under U.S. General Accepted Auditing Standards
• Qualitative Aspects of Accounting Practices
  • Significant accounting estimates
  • Changes in accounting policies and adoption of new pronouncements
  • Significant account policies in controversial or emerging areas
  • Significant risks and exposures and uncertainties
• Difficulties encountered in performing the audit
  • Significant delays
  • An unreasonably short window to complete the audit
  • Restrictions imposed by management
  • Unavailability of expected information
• Correct and Uncorrected Misstatements
  • Material adjusting entries and immaterial adjusting entries that are frequently occurring
• Disagreements with Management
• Consultations with other independent accountants
• Other audit findings or issues
  • Unusual transactions
  • Management’s selective correction of misstatements