[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