[Federal Register Volume 85, Number 4 (Tuesday, January 7, 2020)]
[Proposed Rules]
[Pages 647-649]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27573]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 85, No. 4 / Tuesday, January 7, 2020 / 
Proposed Rules  

[[Page 647]]



FARM CREDIT ADMINISTRATION

12 CFR Part 620

RIN 3052-AD37


District Financial Reporting

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes 
amending the regulation governing how a Farm Credit bank presents 
information on its related associations when preparing annual bank 
financial statements on a stand-alone basis. We propose to provide an 
additional presentation option that would allow the related association 
financial information to be in a supplement.

DATES: You may send us comments on or before March 9, 2020.

ADDRESSES: We offer a variety of methods for you to submit comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by email or through FCA's website. As facsimiles (fax) 
are difficult for us to process and achieve compliance with section 508 
of the Rehabilitation Act, we are no longer accepting comments 
submitted by fax. Regardless of the method you use, please do not 
submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA website: http://www.fca.gov. Click inside the ``I want 
to . . .'' field near the top of the page; select ``comment on a 
pending regulation'' from the dropdown menu; and click ``Go.'' This 
takes you to an electronic public comment form.
     Mail: Barry F. Mardock, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or on our website at http://www.fca.gov. Once you are 
on the website, click inside the ``I want to. . .'' field near the top 
of the page; select ``find comments on a pending regulation'' from the 
dropdown menu; and click ``Go.'' This will take you to the Comment 
Letters page where you can select the regulation for which you would 
like to read the public comments. We will show your comments as 
submitted, but for technical reasons we may omit items such as logos 
and special characters. Identifying information that you provide, such 
as phone numbers and addresses, will be publicly available. However, we 
will attempt to remove email addresses to help reduce internet spam.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Joi Neal, Senior Accountant, Office of 
Regulatory Policy, (703) 883-4223, TTY (703) 883-4056.
    Legal information: Laura McFarland, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The objective of the proposed rule is to improve shareholder access 
to district financial information by providing an additional method of 
presenting financial information on a bank's related associations to 
those banks preparing annual financial statements on a stand-alone 
basis.

II. Background

    FCA regulation Sec.  620.2(g) currently provides a Farm Credit bank 
with two alternatives for reporting information on its related 
associations within the bank's Annual Report to Shareholders. The first 
alternative, located in Sec.  620.2(g)(1), allows each bank to issue a 
combined or consolidated report on the Farm Credit bank and its related 
associations. This presentation requires using a footnote disclosure 
that summarizes the bank's ``stand-alone'' balance sheet and income 
statement. The second alternative, located in Sec.  620.2(g)(2), allows 
issuance of a bank's annual financial statements on a stand-alone 
basis, where limited financial information on the bank's related 
associations is placed in a footnote. This footnoted information may be 
unaudited but must include a condensed statement of condition and 
statement of income for the related associations. The Sec.  620.2(g)(2) 
alternative was primarily added to the regulation in recognition of the 
creation of the Agricultural Credit Bank (ACB).\1\ There is only one 
ACB in the System and it has both association stockholders and 
cooperative entity stockholders, requiring special consideration in 
reporting presentations to ensure the two groups of stockholders 
understand the information being disclosed.
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    \1\ The ACB structure resulted from the merger of the Title III 
Banks for Cooperatives and a Farm Credit Bank, resulting in the 
merged entity known as CoBank, ACB.
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    When adding the Sec.  620.2(g)(2) alternative in 1997, FCA 
explained that because both methods of presenting combined bank and 
related association financial information were consistent with 
Generally Accepted Accounting Principles (GAAP) provisions at the time, 
FCA made both alternatives available to all the banks.\2\ However, 
whichever presentation is used, it must both comply with GAAP and 
provide the most meaningful disclosure to shareholders. Thus, each year 
Farm Credit banks may select from either reporting presentation when 
issuing their annual reports as long as it complies with GAAP and 
serves to provide the most meaningful disclosure to bank shareholders.
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    \2\ See 62 FR 15089, March 31, 1997.
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    In November 2018, all four of the Farm Credit banks jointly 
requested that FCA amend Sec.  620.2(g)(2) by allowing disclosure of 
related association financial information in a separate supplement to a 
bank's Annual Report to Shareholders instead of through use of a 
footnote within the annual report. We evaluated the merits of the 
banks' request and concluded permitting use of a supplement instead of 
a footnote in a bank's Annual Report to Shareholders could be 
beneficial so initiated this rulemaking. Nothing in this proposed 
rulemaking affects quarterly reporting requirements.

III. Section-by-Section Analysis

    FCA has consistently stated that the relationship between a bank 
and its related associations is an important one that warrants 
discussion in the financial statements and reports provided by the 
banks. Further, we believe that a bank's shareholders need financial 
information not just on the bank but also on the

[[Page 648]]

bank's related associations to properly evaluate the operations and 
financial position of the district which the bank funds.

A. Use of a Supplement When Issuing Bank-Only Annual Financial 
Statements

    We propose revising Sec.  620.2(g)(2) to allow a Farm Credit bank 
to use either a footnote or a supplement to provide financial 
information on its related associations when preparing the bank's 
annual financial statements on a stand-alone basis. Specifically, we 
propose adding regulatory language to Sec.  620.2(g)(2) that would 
allow Farm Credit banks issuing the bank's financial statements on a 
stand-alone basis within its Annual Report to Shareholders to provide 
financial information on their related associations either through 
footnote or a supplement if such a presentation is both allowable under 
GAAP and serves as the most meaningful disclosure presentation for the 
bank's shareholders. We believe permitting use of a supplement could 
facilitate shareholders locating and understanding district 
information. However, to preserve flexibility in how the annual report 
of a bank is presented, we are not proposing to remove the existing 
method of reporting information on a bank's related associations within 
a footnote.
    As proposed, all information provided through use of either a 
footnote or a supplement would still be considered part of the bank's 
annual report and therefore subject to the same accuracy, distribution, 
and internal control requirements of the annual report itself. We are 
proposing language specifying this to ensure the use of a supplement is 
not considered a separate, financial report. Further, we are 
specifically proposing that if a supplement presentation is used, it be 
distributed along with the bank's annual report. We do not believe 
allowing separate distribution of the supplement would achieve the 
stated purpose of facilitating shareholder comprehension of the 
financial condition of the bank and its district operations, including 
those of its related associations. All the financial information needs 
to be available to shareholders at the same time to accomplish that 
goal. Also, we believe the proposed requirement to have the supplement 
distributed along with the annual report information that it addresses 
will have little financial consequence to the bank's annual report 
distribution costs. A Farm Credit bank using the Sec.  620.2(g)(2) 
presentation method is allowed under FCA regulation Sec.  620.4(b)(1) 
to distribute its annual report exclusively through website postings, 
absent a significant event posing a material effect on the bank's 
related associations.\3\
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    \3\ See 66 FR 14299, dated March 12, 2001.
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    We also propose that if a supplement is used that the supplement be 
referenced within the body of the bank's annual report. We propose 
requiring a reference to the supplement within the annual report to 
ensure shareholders know where the additional information is available. 
We believe this proposed requirement is in keeping with recognizing the 
supplement is a part of the annual report and, just as the report would 
direct the reader to a footnote or appendix, it should direct the 
reader to the supplement.

B. Reporting District Information When Issuing Bank-Only Annual 
Financial Statements

    We propose adding language to Sec.  620.2(g)(2) that the summary 
financial information on associations included as part of the bank's 
annual report be presented on a combined basis with the bank's 
information. FCA believes that shareholder and investors use the 
combined financial information to evaluate the operations and financial 
position of the district. Proposed changes to Sec.  620.2(g)(2) would 
facilitate this use by requiring combined financial information of each 
bank and its related associations. Although the supplemental district 
information required by Sec.  620.2(g)(2) is not a full set of 
financial statements, we believe the proposed condensed statements will 
provide information that is meaningful to stakeholders and investors, 
without providing the extensive detail captured in the Systemwide 
audited reports.
    We are also proposing language to clarify that the current Sec.  
620.2(g)(2) option for banks to issue the related associations' 
financial information on an unaudited basis extends to all the 
financial information provided for the related associations, whether in 
a footnote or the proposed supplement. Currently, some may believe only 
the condensed statements of income and condition named in the rule text 
may be unaudited. It is our intent that the proposed language removes 
any perceived ambiguities in the existing rule text of Sec.  
620.2(g)(2) regarding which information may be unaudited. This 
clarification would not affect the existing requirement that the 
footnote or the proposed supplement disclose the basis of presentation 
if different from the presentation of the bank-only annual financial 
statements.
    Additionally, we propose amending the Sec.  620.2(g)(2) regulatory 
text to emphasize that the financial information provided by a bank on 
its related associations (when preparing annual bank financial 
statements on a stand-alone basis) is not limited to the named 
condensed statements of income and condition. We propose this change 
because we believe additional information is, and should be, provided 
as part of the bank's annual report. Examples of district information 
that we would expect to see in either the footnote or proposed 
supplement of a bank's annual report include, but are not limited to, 
the following:
     The nature of business relationships between System 
entities within the bank's district;
     Summary of District financial information for the 
preceding three years;
     Summary of district loan portfolio, discussing 
concentration risks and significant changes in credit quality, 
nonperforming assets, past due loans, loan loss allowance and reserves, 
and loan aging analysis within the district as compared to previous 
years.
     A description of combined association investments;
     Districtwide capital levels and regulatory ratios;
     Summary of key districtwide income statement line items 
and profitability measures; and
     A description of any qualified and nonqualified 
districtwide defined pension plan(s), including each plan's current 
funding status, accrued benefit obligation and projected benefit 
obligation, and key actuarial assumptions.
    We believe the proposed change, along with the above list of items, 
will provide meaningful transparency on the financial condition of each 
Farm Credit District.

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
related associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

[[Page 649]]

List of Subjects in 12 CFR Part 620

    Accounting, Agriculture, Banks, banking, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons set forth in the preamble the FCA proposes to amend 
12 CFR part 620 as follows:

PART 620--DISCLOSURE TO SHAREHOLDERS

0
1. The authority citation for part 620 is revised to read as follows:

    Authority: Secs. 4.3, 4.3A, 4.19, 5.9, 5.17, 5.19 of the Farm 
Credit Act (12 U.S.C. 2154, 2154a, 2207, 2243, 2252, 2254); sec. 424 
of Pub. L. 100-233, 101 Stat. 1568; sec. 514 of Pub. L. 102-552, 106 
Stat. 4102.

Subpart A--General

0
2. Amend Sec.  620.2 by revising paragraph (g) to read as follows:


Sec.  620.2  Preparing and filing reports

* * * * *
    (g) Each Farm Credit institution shall present its reports in 
accordance with generally accepted accounting principles and in a 
manner that provides the most meaningful disclosure to shareholders.
    (1) Any Farm Credit institution that presents its annual and 
quarterly financial statements on a combined or consolidated basis 
shall also include in the report the statement of condition and 
statement of income of the institution on a stand-alone basis. The 
stand-alone statements may be in summary form and shall disclose the 
basis of presentation if different from accounting policies of the 
combined or consolidated statements.
    (2) Any Farm Credit bank that prepares its annual financial 
statements on a stand-alone basis must also provide financial 
information on its related associations as part of its annual report. 
The information on the related associations must be presented on a 
combined basis with the bank's financial information and, at a minimum, 
include both a condensed statement of condition and a statement of 
income. The combined bank and association financial information may 
either be in the footnotes of the bank's annual report or located in a 
supplement to the report. All combined information provided through 
either a footnote or a supplement will be considered part of the bank's 
annual report, subject to the same annual report preparation, 
distribution, and accuracy requirements of part 620.
    (i) The combined bank and association financial information may be 
unaudited but must disclose the basis of presentation if different from 
accounting policies used for the bank-only financial statements.
    (ii) If the combined bank and association financial information is 
presented in the form of a supplement, the supplement must be 
referenced within the bank's annual report and accompany the annual 
report when distributed.
* * * * *

    Dated: December 17, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019-27573 Filed 1-6-20; 8:45 am]
 BILLING CODE 6705-01-P