[Federal Register Volume 61, Number 81 (Thursday, April 25, 1996)]
[Rules and Regulations]
[Pages 18235-18236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10238]
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FARM CREDIT ADMINISTRATION
12 CFR Part 621
RIN 3052-AB54
Accounting and Reporting Requirements
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA or Agency), by the Farm
Credit Administration Board (Board), adopts as final without change an
interim rule amending its regulations on high-risk assets. The interim
rule was adopted on November 17, 1994 (59 FR 60886, Nov. 29, 1994). The
interim rule reflected recent changes in generally accepted accounting
principles (GAAP) that supported retention of existing regulatory
guidance for Farm Credit System (System) institutions. Although the
need for immediate regulatory action did not permit a public comment
period before the interim rule took effect, the FCA requested post-
promulgation public comment on the interim rule. This final rule
addresses the comments received.
EFFECTIVE DATE: December 15, 1994.
FOR FURTHER INFORMATION CONTACT:
Linda C. Sherman, Policy Analyst, Regulation Development, Office of
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)
883-4498, TDD (703) 883-4444,
or
William L. Larsen, Senior Attorney, Regulatory Operations Division,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION:
I. Background
Substantial amendments to the FCA's regulations on Accounting and
Reporting Requirements at 12 CFR part 621 became effective on December
31, 1993. See 58 FR 48780, September 20, 1993. These regulations
include requirements and standards for institutions to use in
accounting for high-risk assets and disclosing loan performance
characteristics. The amendments promoted consistency with industry
practices in accounting and reporting and ensured that FCA regulatory
requirements and standards remained consistent with GAAP.
Subpart C of part 621 provides System institutions and FCA
examiners with clear guidance on how to categorize, account for,
report, and disclose the performance of high-risk assets. In
particular, the regulations provide specific criteria for placing loans
in nonaccrual status, for using cash basis versus cost recovery
accounting practices, for upgrading loans from nonaccrual to accrual
status, and for aggregating nonaccrual loans. The amended regulations
promote consistent financial reporting among System institutions and
Systemwide financial statements that are comparable to those of other
federally regulated financial institutions.
Subpart C was subject to a ``sunset'' provision when originally
adopted, because the FCA expected that aspects of subpart C guidance
might conflict with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114 when they were later implemented by System
institutions.1 However, in October 1994, the Financial Accounting
Standards Board (FASB) amended SFAS No. 114 by adopting SFAS No.
118.2 SFAS No. 118 removed those elements of SFAS No. 114 that
would have conflicted with subpart C. As a result, the FCA decided to
retain subpart C. To ensure the elimination of the sunset provision
before it automatically rescinded subpart C at year-end 1994, the FCA
issued an interim rule with a request for public comment (59 FR 60886,
Nov. 29, 1994).
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\1\ Statement of Financial Accounting Standards No. 114,
``Accounting by Creditors for Impairment of a Loan,'' an amendment
of SFAS Statement Nos. 5 and 15, dated May 1993, was subject to
mandatory implementation by institutions for fiscal years beginning
after December 15, 1994.
\2\ Statement of Financial Accounting Standards No. 118,
``Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures,'' an amendment of FASB Statement No.
114, dated October 1994.
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II. Analysis of Public Comments
The FCA received one comment letter on the interim rule. The letter
was submitted by the Farm Credit Council (FCC) on behalf of its
membership, together with the Farm Credit System's Accounting Standards
Work Group under the direction of the Federal Farm Credit Banks Funding
Corporation.
The FCC recognizes the FCA's efforts to promote accounting and
financial reporting requirements consistent with the current practices
of commercial banks. However, reiterating arguments from their July 14,
1993 comment letter on the proposed rule, the FCC continues to express
concern about adopting specific accounting and financial reporting
rules rather than general guidelines. The FCC believes the regulations
should be broad enough to allow for evolutionary changes in GAAP and
notes that other regulators do not
[[Page 18236]]
include such specific rules in their regulations. They urge the FCA to
rescind the interim rule. Rescission would restore the sunset provision
and retroactively eliminate Secs. 621.6, 621.7, 621.8, 621.9 and 621.10
(subpart C).
The FCC bases its concern on the length of time necessary to amend
FCA regulations. The FCC warns that the presence of specific
requirements in the regulations could cause the System's financial
reporting process to conflict with GAAP because the FCA would not be
able to change its regulations quickly enough to remain current with
GAAP guidelines for the accounting and financial reporting of high-risk
assets. The FCC also points out that if the Agency were to lack a
quorum of its Board, as has occurred in the past, it would be
impossible to amend the regulations to be consistent with changes as
may be required by GAAP.
The FCA observes in response that the application of GAAP to
specific areas of accounting and financial reporting is not always well
defined. This has been especially true of high-risk asset accounting.
GAAP has not consistently provided specific authoritative guidance in
the area of problem loan accounting and reporting until recently. While
other financial institution regulators have addressed this issue by
instituting specific guidance in their call report instructions, the
FCA is addressing them in the accounting regulations. There is little
substantive difference between these two approaches. Both the Office of
the Comptroller of the Currency's (OCC) Call Report instructions and
the FCA's regulations are published in the Federal Register, and both
give the public an opportunity to provide comments prior to
implementation of the revised policy direction.
The FCA continues to believe that, in areas such as high-risk
accounting, the promulgation of regulations covering subjects not fully
addressed by GAAP can be an effective method of promoting consistent
accounting and reporting by System institutions. Since its adoption,
the final regulation has improved the internal consistency of System
financial disclosures regarding high-risk assets and made System
accounting and reporting for such assets more comparable to the
practices of the rest of the financial services industry. If GAAP
provides future guidance and direction that conflicts with FCA
regulations, the FCA agrees that it is important to respond to the
changes. The FCA believes that it can address any inconsistencies that
may develop between its regulations and GAAP in a timely fashion.
In support of its contention that the detailed nature of FCA
regulations might make it difficult for the FCA to keep up with
evolving trends in regulatory accounting guidance, the FCC notes two
apparent inconsistencies between FCA regulations and the approach taken
by other federal bank and thrift regulators. While not commenting
substantively on the provisions, the FCC suggests that more flexible
accounting and financial reporting guidelines would facilitate keeping
System financial reporting consistent with other financial
institutions. As noted, the FCA agrees with the broad goal of
accounting and reporting consistency between the System and other
financial institutions. However, in certain circumstances, the unique
needs of the System may require FCA guidance that may differ from the
approach of other regulators without affecting broad comparability of
System financial reporting. This is the case with respect to the two
examples of accounting and reporting guidance noted by the FCC.
First, the FCC notes that Sec. 621.9(a) requires all contractual
principal and interest due on the loan to be paid and the loan to be
current before returning a nonaccrual loan to accrual status. The FCC
compares this to guidance by other financial institution regulators
that would permit institutions to return past due loans to accrual
status if they are ``reasonably assured of repayment within a
reasonable time period.'' 3
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\3\ Joint Statement of the OCC, Federal Deposit Insurance
Corporation, Federal Reserve Board, and Office of Thrift Supervision
titled ``Revised Interagency Guidance on Returning Nonaccrual Loans
to Accrual Status'' issued June 10, 1993.
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The FCA believes that any nonaccrual loan must demonstrate
performance in order to be reinstated to accrual status. An essential
demonstration of performance is that the loan be brought current. Under
the final regulation, this must occur before an institution can resume
interest accrual on that asset. However, the regulation also states
that ``[o]nce the ultimate collectibility of the recorded investment is
no longer in doubt, payments received in cash on such loan may qualify
for recognition as interest income,'' (i.e., cash basis accounting) if
certain characteristics are met at the time the payment is received.
Therefore, application of FCA's regulation results in an accounting
treatment of income recognition on such assets similar to that allowed
by the other financial institution regulators.
In a second example, the FCC states that the OCC allows for cash
basis interest income recognition on nonaccrual loans with partial
charge-offs before complete recovery of the charge-off. The FCC notes
that this differs from the requirement in Sec. 621.8 that interest
income cannot be recognized on a nonaccrual loan with an unrecovered
partial charge-off. The FCA believes that applying loan payments to
recover partial charge-offs prior to recording interest income is a
prudent and appropriate approach to eliminating doubt as to the loan's
ultimate collectibility and is not inconsistent with GAAP. In addition,
this requirement is mitigated by an exception in cases where the prior
charge-off was taken as part of a formal restructuring of the loan. The
FCA believes this approach is justified for this type of asset in light
of the unique structure of the System and its concentration of credit
in limited agricultural markets. Moreover, any differences in income
recognition between the FCA and the OCC requirements are likely to be
temporary if the loan continues to perform.
For the reasons stated in the interim rule release, supplemented by
the above analysis and discussion, the FCA Board adopts the interim
rule amending 12 CFR part 621, which was published at 59 FR 60886 on
November 29, 1994, as final without change. The effective date of this
rule remains December 15, 1994. The FCA will continue to follow closely
any further developments under GAAP in the area of problem loan
accounting and reporting and will adjust its requirements as necessary.
Dated: April 19, 1996.
Floyd F. Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 96-10238 Filed 4-24-96; 8:45 am]
BILLING CODE 6705-01-P
