Accounting and Reporting Requirements

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