[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29269]
[[Page Unknown]]
[Federal Register: November 29, 1994]
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FARM CREDIT ADMINISTRATION
12 CFR Part 621
RIN 3052-AB54
Accounting and Reporting Requirements
AGENCY: Farm Credit Administration.
ACTION: Interim rule with request for comment.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts an interim rule amending its
regulations on accounting for high-risk assets. The interim rule
reflects recent changes in generally accepted accounting principles
(GAAP) and is intended to avoid eliminating useful and necessary
regulatory guidance for System institutions.
DATES: These interim regulations shall become effective on December 15,
1994. Comments should be received by the FCA on or before January 31,
1995. Notice of the final adoption of the regulation will be published
in the Federal Register.
ADDRESSES: Comments may be mailed or delivered (in triplicate) to
Patricia W. DiMuzio, Associate Director, Regulation Development, Office
of Examination, Farm Credit Administration, McLean, Virginia 22102-
5090. Copies of all communications received will be available for
examination by interested parties in the Office of Examination, Farm
Credit Administration, McLean, Virginia.
FOR FURTHER INFORMATION CONTACT:
Linda C. Sherman, Policy Analyst, Policy Development and Planning
Division, Office of Examination, Farm Credit Administration, McLean,
Virginia 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, Virginia
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION:
I. Background
Amendments to the FCA's regulations on Accounting and Reporting
Requirements at 12 CFR part 621 (See 58 FR 48780, September 20, 1993)
became effective on December 31, 1993. These regulations include
requirements and standards for institutions to use in accounting for
high-risk assets and disclosing loan performance characteristics. A
primary function of these amendments was to promote consistency with
industry practices pertaining to accounting and reporting issues, and
to ensure that the regulatory requirements and standards remain
consistent with GAAP.
Subpart C of part 621 provides Farm Credit System (System)
institutions and FCA examiners with clear and consistent guidance on
how to categorize, account for, report, and disclose the performance of
high-risk assets. The regulations provide specific criteria for placing
loans in nonaccrual status, using cash basis versus cost recovery
accounting practices, upgrading loans from nonaccrual to accrual
status, and for aggregating nonaccrual loans. This results in
consistent financial reporting among System institutions, and
Systemwide financial statements that are more comparable with other
federally regulated financial institutions.
Subpart C is subject to a ``sunset'' provision, because the FCA
believed that once System institutions implemented the provisions of
Statement of Financial Accounting Standards (SFAS) No. 114, issued by
the Financial and Accounting Standards Board (FASB),1 subpart C
would provide conflicting guidance. Accordingly, this sunset provision
was designed to avoid any inconsistencies between the FCA regulations
and the standards of SFAS No. 114.
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\1\Statement of Financial Accounting Standards No. 114,
``Accounting by Creditors for Impairment of a Loan,'' an amendment
of FASB Statement Nos. 5 and 15, dated May 1993.
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In October 1994, the FASB amended SFAS No. 114 by adopting SFAS No.
118,2 which removes those elements of SFAS No. 114 that would have
conflicted with subpart C.3 As amended, SFAS No. 114 is not
inconsistent with subpart C. Additionally, it will not significantly
change industry accounting practices nor is it expected to have a
material impact on System financial statements. The FASB's amendatory
action, however, makes it necessary for the FCA to retain the
regulatory guidance in subpart C and eliminate the sunset provision.
Retaining subpart C will provide a consistent method of recognizing
income on loans that have not performed according to their contractual
terms. To avoid the detrimental effect of encouraging inconsistent
practices for reporting income on high-risk assets, this amendment is
effective December 15, 1994, with a request for subsequent public
comment.
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\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.
\3\Copies of SFAS Nos. 114 and 118 may be obtained by writing
the Financial Accounting Standards Board of the Financial Accounting
Foundation at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut
06856-5116, or by calling (203) 847-0700.
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II. Accounting Developments
In May 1993, the FASB released SFAS No. 114, ``Accounting by
Creditors for Impairment of a Loan,'' which was intended to provide
guidance for establishing and maintaining allowances for loan losses
and recognizing income on specifically identified impaired loans. Under
SFAS No. 114, a loan is impaired when it is probable that a creditor
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. When first released, SFAS No. 114 stated
that a creditor should apply its normal loan review procedures in
making this determination. If a loan is determined to be impaired, an
appropriate allowance must be established. SFAS No. 114 also prescribed
specific income recognition methods used to account for changes in the
net carrying amount of the loan subsequent to the initial measure of
impairment.
After SFAS No. 114 was issued, FASB received numerous requests to
delay the effective date and provide additional guidance on
implementation of the statement. The comments focused primarily on
application of the income recognition provisions, which were
interpreted to be inconsistent with current industry practices for
nonaccrual loans.
In response to these concerns, in October 1994, the FASB issued
SFAS No. 118, which amends SFAS No. 114 by eliminating the provisions
that prescribe specific methodologies for how a creditor could account
for income on an impaired loan. Under SFAS No. 118, creditors will be
allowed to continue to use traditional nonaccrual practices (i.e., cost
recovery and cash basis methods) to account for interest on impaired
loans. Both SFAS Nos. 114 and 118 will be effective for financial
statements for fiscal years beginning after December 15, 1994.
With the changes made by SFAS No. 118, SFAS No. 114 now focuses on
the valuation of impaired loans on the balance sheet and does not
address the accounting for income on impaired loans. SFAS No. 114 also
introduces different approaches that can be used in establishing an
appropriate allowance for loan losses, including the use of discounted
cash flow techniques, and, as now amended, requires certain additional
disclosures regarding impaired loans. Utilization of the allowance
approaches outlined in SFAS No. 114 is not expected to have a
significant impact on the total level of the allowance for loan losses
in the various Farm Credit districts because existing practices are not
materially different. Further, based upon discussions with
representatives of the financial services industry, existing industry
practices with respect to the accounting for nonaccrual loans are not
expected to change significantly with the implementation of these FASB
pronouncements.
Subject to any additional guidance from the FASB, the definition of
impaired loans will generally encompass all nonaccrual loans and most
troubled debt restructurings. When a loan is determined to be impaired,
based on the creditor's normal loan review procedures, the creditor
would also typically need to evaluate the loan's performance status to
confirm the appropriate income recognition treatment on that loan. The
same analytical process is used for determining whether a loan is
impaired, and for identifying and recognizing income on high-risk
loans. However, while the process for categorizing these loans is
similar, the intended focus is slightly different. Subpart C provides
necessary guidance for income recognition on high-risk assets. SFAS No.
114, on the other hand, addresses the valuation of impaired assets on
the balance sheet. Likewise, the regulatory disclosure requirements for
``high-risk'' assets under Sec. 621.6 and the disclosure requirements
for impaired loans in SFAS No. 114 also serve separate, if
complementary, purposes. On balance, subpart C continues to fulfill an
important function and must be retained.
III. Necessity for Immediate Regulatory Action
In light of the FASB's recent amendment of SFAS No. 114, and the
continued value of subpart C in guiding System institutions on how to
account for, report and disclose high-risk assets, the sunset of
subpart C on December 15, 1994, would be undesirable. The resulting
uncertainty in System accounting and reporting could cause inconsistent
reporting to the public and the FCA, in turn compromising the FCA's
ability to monitor high-risk asset data for safety and soundness.
Regulatory action to replace subpart C would take several months under
normal circumstances, leaving System institutions without regulatory
guidance for at least the first three quarters of 1995. Moreover, re-
implementation of even temporarily abandoned reporting procedures could
cause System institutions unnecessary expense.
For the reasons set forth above, the FCA Board is continuing the
effectiveness of subpart C by eliminating Sec. 621.11. A quick response
is necessary because the FASB's amendment of SFAS No. 114 (by FASB No.
118) was not issued until mid-October 1994. To accomplish this
regulatory action prior to the scheduled sunset of subpart C on
December 15, 1994, the FCA finds good cause to omit, as neither
practicable nor in the public interest, prepromulgation notice and
comment pursuant to section 553(b)(B) of the Administrative Procedure
Act, 5 U.S.C. 553-59 (APA). The same time constraints provide good
cause to require the FCA to adopt a final effective date for deletion
of Sec. 621.11 that is less than 30 days after publication in the
Federal Register. 5 U.S.C. 553(d). Finally, consistent with the reasons
for its expedited actions under the APA, the FCA Board finds that,
pursuant to section 5.17(c)(2) of the Act, an emergency exists that
requires that these regulations be effective prior to the expiration of
the 30-day congressional notice and waiting period for final agency
regulatory action. The FCA is providing for public comment on this
interim action and will publish notice of final adoption at a later
date.
IV. Regulatory Philosophy
The regulatory action discussed above is consistent with the ``FCA
Board Policy Statement on Regulatory Philosophy'' dated February 2,
1994. The continuation of existing high-risk asset accounting and
reporting requirements in conjunction with the implementation of SFAS
Nos. 114 and 118 will not add a measurable burden to System accounting
and reporting responsibilities. The FCA believes that subpart C
requirements for income reporting are a useful and necessary complement
to the guidance contained in SFAS Nos. 114 and 118, which requires
disclosure of a creditor's policy for recognizing income on impaired
loans. The subpart C requirements remain consistent not only with GAAP,
but also with industry practice and similar guidance being provided by
other Federal financial institution regulators.
This rulemaking provides for a 45-day public comment period, during
which time any additional ramifications of this regulatory action may
be considered. The FCA will continue to monitor this area closely,
particularly with regard to implementation of SFAS Nos. 114 and 118 and
any further guidance from the FASB on this subject. If necessary, the
FCA may issue further guidance to examiners and System institutions
through a bookletter or other means. The FCA also recognizes that
additional regulatory changes may be necessary in the future and
encourages continued dialogue with System institutions and the general
public.
List of Subjects in 12 CFR Part 621
Accounting, Agriculture, Banks, Banking, Penalties, Reporting and
recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, part 621 of chapter VI,
title 12 of the Code of Federal Regulations is amended to read as
follows:
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
1. The authority citation for part 621 is revised to read as
follows:
Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C.
2252, 2279aa-11).
Sec. 621.11 [Removed]
2. Part 621 is amended by removing Sec. 621.11.
Dated: November 17, 1994.
Floyd Fithian,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 94-29269 Filed 11-28-94; 8:45 am]
BILLING CODE 6705-01-P
