[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