summary of accounting concepts

8/9/2019 Summary of Accounting Concepts

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Accounting Basics for Section 200

Recording Transactions

Accounting Manual for Federal Credit Unions December 2002

Page1

Page No.

ACCURATE AND CURRENT RECORDSESSENTIAL 3PURPOSE OF RECORDS 3BASIC ACCOUNTING RECORDS 3

Double-Entry System 3Types Of Accounts 4

BRIEF OUTLINE OF THE PRESCRIBEDACCOUNTING SYSTEM 4

MODIFIED CASH BASIS 4ACCRUAL BASIS 4THE BASIC CREDIT UNION ACCOUNTING SYSTEM

DESCRIBED 4

Records Of Original Entry And Record Of Final Entry

5The Records Of Original Entry 5The Record Of Final Entry 5

BASIC CONCEPTS AND GENERAL PRINCIPLES 5SEPARATE ENTERPRISE 5GOING CONCERN CONCEPT 5MONETARY BASIS FOR ACCOUNTING 6CONSISTENCY IN ACCOUNTING FROM PERIOD

TO PERIOD6

TIMELY RECOGNITION IN ACCOUNTINGRECORDS

6

MATERIALITY 6

CONSERVATIVE ACCOUNTING 6INTERNAL CONTROL 6COMPLETE RECORDING OF INCOME AND

EXPENSES7

ACCOUNTING BASIS 7ACCOUNTING AND DIVIDEND PERIODS 7FISCAL YEAR 7

ACCOUNTING PROFESSIONPRONOUNCEMENTS

7

HIERARCHY OF GAAP STANDARDS 8HIERARCHY OF REGULATIONS 8

GENERAL LEDGER, SUBSIDIARY LEDGERS,

AND ACCOUNT RECONCILIATIONS 8CHART OF ACCOUNTS 8GENERAL LEDGER 9SUBSIDIARY LEDGERS 9

ACCOUNT RECONCILIATIONS 9

PRINCIPLES AFFECTING THE RECORDING OFASSETS 9


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Section 200 Accounting Basics for Recording Transactions

December 2002 Accounting Manual for Federal Credit UnionsPage 2

UNDER THE MODIFIED CASH BASIS OFACCOUNTING 9Assets General Bas is fo r Recording 9Cash Unrestricted or Restricted 9Loans 9

Investments 9Fixed Assets 10Depreciation 10Prepaid Expenses and Deferred Charges 11Assets Pledged 11

UNDER THE ACCRUAL BASIS OF ACCOUNTING 11Income on Loans 11Income on Investments 11Amor tization of Premium or Discount on Secur it ies

Purchased 11

PRINCIPLES AFFECTING THE RECORDING OFLIABILITIES 11

UNDER THE MODIFIED CASH BASIS OF

ACCOUNTINGLiabilit ies General Basis for Recording 11Accounts Payab le 11Notes Payable 11Accrued Interest Payable 11Dividends Payable 11Interest Refund Payable 12Accrued Expenses 12Accrued Div idends 12Deferred Credits 12Liabilit ies Secured by Liens 12Contingent Liabilit ies 12

UNDER THE ACCRUAL BASIS OF ACCOUNTING 12

Accrued Interest Payable 13Accrued Expenses 13

PRINCIPLES AFFECTING EQUITY 13

NET INCOME 13UNDIVIDED EARNINGS 13DIVIDENDS 13

APPROPRAITION FOR LOSS CONTINGENCIES 13DONATIONS 14SHARES AS EQUITY 14

PRINCIPLES AFFECTING THE RECORDING OFINCOME AND EXPENSES 15

UNDER THE MODIFIED BASIS OF ACCOUNTING 15

General Rules for Recording Income and Expenses 15Basis for Recording Income 15Basis for Recording Expenses 15Tangible Fixed Asset Expenses 15Amor tization of Defer red Charges 15Equipment Rental Expense 15Loan Losses 16Other Gains and Losses 16Cash Overage and Shortages 16Donations 16


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Accounting Basics for Recording Transactions Section 200

Accounting Manual for Federal Credit Unions December 2002Page 3

Pension Plan Costs 16NCUA Insurance Guaranty 16

UNDER THE ACCRUAL BASIS OF ACCOUNTING 16Income on Loans 16Income on Investments 16Accrued Expenses 17

Accrued Interest on Loans Included in Valuation Al-lowance 17

FINANCIAL STATEMENTS 17PURPOSE 17REQUIRED STATEMENTS 17

Statement of Financial Condition 18Statement of Income 18Notes to Financial Statements 18Disclosures About Fair Values of Financial Instru-

ments 18

OPTIONAL STATEMENTS 19Statement of Members Equity (including Other Com-

prehensive Income) 19

Statement of Cash Flows 19FULL AND FAIR DISCLOSURE REQUIRED 20FULL AND FAIR DISCLOSURE DEFINED 20REQUIRED CERTIFICATION 20

DEFINITIONS OF TERMS 20

ACCURATE AND CURRENT RECORDSESSENTIAL

PURPOSE OF RECORDS

The transactions of the credit union are compiled inits records which serve as a source of informationneeded by the directors to properly manage thecredit union. The accounting records also serve asthe basis for reports to the members and interestedthird parties. Therefore, it is essential that the rec-ords be accurate, current, and that they show thetrue financial condition of the credit union. Promptpreparation of reports will aid the credit union inachieving its objectives and fulfilling the purposesfor which it was formed.

BASIC ACCOUNTING RECORDS

Bookkeeping may be defined as the systematic re-cording of the financial transactions of a businessin a suitable form. To accomplish this, a well-defined system of accounts is necessary.

Double-Entry System

All federal credit unions should use a double-entryaccounting system. In this system each transactionresults in at least two entries: a debit (or entry onthe left side of an account ledger) and a credit (orentry on the right side of an account ledger). If the

transaction requires several debits and credits, thetotal of the debits and the total of the credits mustbe the same. In other words, for every debit entrythere must be an offsetting credit entry and viceversa. Following this rule and determining that thetotal debits equal the total credits can keep the rec-ords in balance.

Record financial transactions as journal entriesconsisting of debits and credits. Every transactionaffects at least two accounts. Accounting princi-ples assign each type of account a normal debit or

credit balance. The normal balance coincides withwhat is done to increase the balance in the account.For example, asset accounts are increased with deb-its; therefore, the normal balance in an assetaccount is a debit.

Debit refers to the left side of an account and creditrefers to the right side. Calculate the account bal-ance from the totals of the debit and credit sidesof


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an account and subtract the smaller sum from thelarger; and the difference is called the balance ofthe account. Debits and credits affect asset andexpense accounts in one way and liability, equity,and revenue accounts in the opposite way.

Types Of Accounts

The "Asset Accounts" record what the credit unionowns. These include cash, loans, investments, etc.These accounts, as well as the expense accounts,normally have debit balances.

The "Liability Accounts" record what the creditunion owes and the "Equity Accounts" reflect themembers ownership interests. Together these ac-counts include notes payable, members' shares,undivided earnings and reserves. The "Liability

Accounts" and "Equity Accounts" as well as theincome accounts normally have credit balances.

A brief general rule for debits and credits is: Debitthe increase of an asset, the reduction of a liabilityor equity account, or the payment of an expense;credit the reduction of an asset, increase of a liabil-ity or equity account or, receipt of income.

BRIEF OUTLINE OF THE PRESCRIBEDACCOUNTING SYSTEM

The accounting records of federal credit unionsshould be maintained on either of two accountingbases: namely, the modified cash basis or the ac-crual basis. The accrual basis of accounting isrecommended for credit unions with assets totaling$2 million or more at the end of the accounting pe-riod.

MODIFIED CASH BASIS

Generally under a cash basis of accounting, income

is recorded and accounted for when actually col-lected and expenses are accounted for whenactually paid. Under the modified cash basis pre-scribed herein, the accounting is based on theactual receipts and disbursements of the credit un-ion except that provisions should be made toreflect:

Liabilities which are not promptly paid whendue,

Dividends and interest refunds applicable to theaccounting period but not yet paid,

Deferred income or expenses applicable to fu-

ture periods,

Estimated losses to be sustained on loans out-standing,

Estimated unrealized losses associated withmutual fund investments, and

Depreciation on fixed assets.

The foregoing exceptions to maintenance of ac-counting records on a strictly cash basis aredesigned to recognize in the accounts certain sig-

nificant financial transactions not involving theconcurrent receipt or disbursement of cash and toreflect their effect in financial reports preparedfrom the accounts. In unusual circumstances, theremay be other significant non-cash financial transac-tions that should be recorded. Therefore, the abovelist is not all-inclusive.

Credit unions for which adoption of the accrualbasis of accounting is not required or practicableshould use the modified cash basis of accounting.

ACCRUAL BASIS

The accrual basis of accounting refers to that meth-od under which liabilities and expenses arerecorded when incurred, whether or not paid, andincome is recorded when earned, whether or notreceived. It is intended that credit union account-ing be maintained on the accrual basis by all creditunions for which they deem such basis practicable.

Generally accepted accounting principles requirethe accrual basis of accounting.

THE BASIC CREDIT UNION ACCOUNTINGSYSTEM DESCRIBED

For credit unions following either the accrual basisor the modified cash basis of accounting, the ma-jority of entries originate with the receipt ordisbursement of cash. Other entries are relatively


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few in number and consist generally of adjustmentsor transfers between accounts, establishment andmaintenance of an allowance for loan losses, write-offs of bad loans, and recording depreciation oftangible fixed assets. In addition, credit unionsfollowing the accrual basis of accounting should

make entries to record accrued income and expens-es.

Records Of Original Entry And Record Of FinalEntry

A bookkeeping system can be broken down intotwo distinct parts: Records of Original Entry (theJournal and Cash Record) and Records of FinalEntry (the General Ledger). In addition, the CashReceived Voucher or its equivalent and the JournalVoucher or its equivalent serve as memorandum

records of the original transactions and the sourcesof entries in the Journal and Cash Record.

The Records Of Original Entry

The Records of Original Entry are diaries of thetransactions as they occur. The Journal and CashRecord is the main record used for this purpose.Each day's cash receipts, disbursements and othertransactions are entered in the Journal and CashRecord in chronological sequence. Thus, a runninghistory of each day's transactions are kept and may

be summarized as needed.

At the end of a given period, usually the monthend, the total of all transactions pertaining to eachaccount can be obtained by totaling the debit andcredit columns of the Journal and Cash Record.The accuracy of the entries can be proved in part bybalancing the debit columns against the credit col-umns.

The Record Of Final Entry

The Record of Final Entry is the General Ledger.This record serves as a means of summarizing theentries in a form that will enable the bookkeeper toprepare reports on the results of operations to date.Entries in the General Ledger consist of posting(simply transferring) the debits and credits (eitherindividually or in total at the end of the month) foreach account in the Journal and Cash Record to thecorresponding account in the General Ledger and

computing the net balance for each account. Theresult obtained shows the current balances of thecredit union's accounts and the results of operationsfor the period.

Sometimes, when a General Ledger account sum-

marizes a large number of transactions, it isnecessary to provide detailed information about thisaccount with a record known as a Subsidiary Ledg-er. The Individual Share and Loan Ledgers areexamples of subsidiary records which show thedetailed share and loan transactions with eachmember. The Share and Loan accounts in the Gen-eral Ledger reflect the total transactions with allmembers. These General Ledger accounts arecalled Control Accounts since they act as a controlor check over the numerous postings to the individ-ual or subsidiary ledgers. Subsidiary records are

balanced with related control accounts on a month-ly basis and the reconcilement, or other proof ofbalancing, is retained.

BASIC CONCEPTS AND GENERALPRINCIPLES

The basic concepts and general principles of thedetailed accounting principles and standards forfederal credit unions are:

SEPARATE ENTERPRISE

Each credit union is a separate corporate enterpriserequiring the maintenance of comprehensive ac-counting records and financial reporting practicesto provide meaningful information to members,officers, directors, the supervisory committee, theNational Credit Union Administration (NCUA),and interested third parties.

GOING CONCERN CONCEPT

Each credit union should normally maintain its ac-counts as a "going concern" on the basis that itsoperations will continue indefinitely. Therefore,assets and liabilities should represent the value tothe credit union as a "going concern" and shouldnot present liquidation values.

Whenever unusual circumstances indicate a limitedlife for a credit union, e.g., if the credit union liqui-


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dates, the "going concern" concept no longer ap-plies. As a result, a statement of realistic assets andliabilities and appropriate revenues and expensesmay require adjustments. These adjustments couldinclude:

Re-evaluation of the loan portfolio to recognizediscounts on sales of loans,

Evaluation of the realizable value of fixed as-sets in liquidation, and

Re-evaluation of the carrying value of deferredcharges and deferred credits, etc.

MONETARY BASIS FOR ACCOUNTING

State account values in terms of the dollar amounts

involved at the time transactions occur. Recordingeach transaction in terms of dollar units providesthe best feasible indicator of its relative impact onthe overall operations of the credit union. It alsopermits identification of the amount of assets, lia-bilities, equity, income, or expenses represented bythe transaction.

CONSISTENCY IN ACCOUNTING FROMPERIOD TO PERIOD

Follow consistent accounting practices from one

accounting period to the next. Should a materialchange in accounting treatment occur, disclose thefacts on credit union financial statements. Includethe dollar effect upon the balance sheet and thechanges in net income for the period. For example,if a credit union converts to the accrual system ofaccounting because assets exceed $10 million, itshould make a complete conversion at one time andreport the conversion on the current period finan-cial statements.

TIMELY RECOGNITION IN ACCOUNTINGRECORDS

Record accounting transactions in a timely mannerso all material information applicable to each ac-counting period shows in the records. Provide forestimated losses to be sustained in the collection orconversion of loans and other assets via chargesagainst current expenses to properly recognize thereasonable value of assets, liabilities, and share-

holders equity in accounting records and financialreports. Estimate amounts for accruing income orexpenses if actual amounts are not known and can-not be determined readily. Absorb differencesbetween the actual and estimated amounts in theoperations of the subsequent accounting period.

MATERIALITY

Recognize material facts relating to credit unionfinancial activity in the accounts and report themon financial statements. GAAP provides that astatement, fact, or item is material if, giving fullconsideration to the surrounding circumstances asthey exist at the time, it is of such a nature that itsdisclosure, or the method of treating it, would belikely to influence or to "make a difference" in thejudgment and conduct of a reasonable person. The

accumulation of many small items, each of whichin itself would not be "material, would be "materi-al" if the overall effect would tend to influence thejudgment and conduct of a reasonable person.

CONSERVATIVE ACCOUNTING

Maintain accounting records on a conservative ba-sis. Make reasonable provisions in the accounts forpotential losses on assets and for the settlement ofliabilities. Do not materially overstate nor under-state its assets, liabilities, revenues or expenses.

INTERNAL CONTROL

Adopt appropriate measures of internal control toimprove the dependability of accounting records.These measures must include:

An organization plan to provide, to the extentfeasible, segregations of duties so different em-ployees will handle the operational, custodialand accounting functions;

A system of authorization and recording proce-dures adequate to provide reasonableaccounting control over assets, liabilities, in-come and expenses;

The employment of personnel capable of per-forming duties and responsibilities; and


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A supervisory committee to conduct effectiveand timely audits of records and accounts in-cluding verification of members' accounts, withassistance provided, where needed, by an inde-pendent auditing firm.

COMPLETE RECORDING OF INCOME ANDEXPENSES

Record income, expenses, gains, and losses in in-come and expense accounts and show them on theStatement of Income for the accounting period.Income and expense accounts should include actualand estimated loan and other asset losses.

ACCOUNTING BASIS

GAAP requires the accrual basis of accounting be-

cause it provides the most complete andinformative record of financial activities. The ac-crual basis refers to recording liabilities andexpenses when incurred, whether or not paid, andincome when earned, whether or not received.Credit unions with less than $10 million in assetsdo not have to adopt the full accrual basis of ac-counting. The alternative method is the modifiedcash basis of accounting. When a credit unionsassets reach $10 million or greater, managementmust convert to the accrual basis of accounting.

Determine the proper accounting basis using thefollowing guidelines:

If assets total $2 million or more at the end ofthe accounting period, adoption of the accrualbasis is recommended;

If the board of directors deems the accrual ba-sis practicable, use the accrual basis;

If following the accrual basis, credit unionswith less than $10 million in assets may apply

the cash basis to particular accounts where theresults would be only insignificantly differentfrom the accrual basis. For this purpose, "in-significantly" refers to differences which wouldnot be considered important for a proper evalu-ation of condition or operations of the creditunion; and

If adoption of the accrual basis is not requiredor practicable, use the modified cash basis.Under the modified cash basis, accounting isbased upon the cash receipt and disbursementtransactions except to make provision to re-flect:

a) Liabilities not paid promptly when due;

b) Dividends and interest refunds applicable tothe accounting period but not yet paid;

c) Deferred credits and charges applicable tofuture periods;

d) Estimated losses to be sustained on loansoutstanding and other risk assets; and

e) Depreciation of fixed assets.

ACCOUNTING AND DIVIDEND PERIODS

Accounting periods may be monthly, quarterly,semiannually, or annually depending on the periodselected by the credit union to close its books.Each credit union must close its books at least an-nually at the end of the fiscal year. Federal creditunions may choose toclose the books at the end ofeach regular share account dividend period unlessdividends are paid more frequently than monthly.

FISCAL YEAR

The fiscal year of all federal credit unions shouldtrack the calendar year beginning on January 1 andending on December 31.

ACCOUNTING PROFESSIONPRONOUNCEMENTS

Alternatives to the accounting principles authorizedby the NCUA - for certain types of transactions -are provided for adoption at the option of any credit

union with less than $10 million in assets. Thesealternatives provide the flexibility required formeaningful accounting under a variety of circum-stances in credit unions of different size and scopeof operations. Absolute uniformity is not requiredso long as each credit union conforms its account-

ing to authorized generally accepted accounting

principles. Consistency in accounting from period


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to period and disclosure of material accountingchanges is necessary.

The Financial Accounting Standards Board(FASB), the Accounting Standards ExecutiveCommittee (AcSEC) of the American Institute of

Certified Public Accountants (AICPA), and theircommittees establish generally accepted accountingprinciples (GAAP), accounting guidelines, and pre-ferred accounting treatment for various activities.Credit unions should refer to such accounting pro-fession pronouncements for guidance where aparticular activity is not addressed by this manualor other NCUA publications. Credit unions mayadopt such accounting profession pronouncementsprovided they are not inconsistent with the princi-ples, standards, and procedures set forth herein orstatutory or regulatory requirements.

Refer activities unique to credit unions and not ad-dressed in existing accounting industry literature orin NCUA publications to an independent account-ant for review and comment. Copies of thecorrespondence should be maintained in the creditunion's files.

HIERARCHY OF GAAP STANDARDS

External sources such as the FASB issue account-ing standards in multiple forms. Following is the

hierarchy of standards:

1. FASB Statements and Interpretations, APBOpinions, and AICPA Accounting Research Bulle-tins;

2. FASB Technical Bulletins, AICPA IndustryAudit and Accounting Guides, and AICPA State-ments of Position;

3. Consensus positions of the FASB EmergingIssues Task Force and AICPA Practice Bulletins;

4. AICPA accounting interpretations, Qs andAs published by the FASB staff, as well as indus-try practices widely recognized and prevalent; and

5. Other accounting literature, including FASBConcepts Statements; AICPA Issues Papers; Inter-national Accounting Standards CommitteeStatements; GASB Statements, Interpretations, and

Technical Bulletins; pronouncements of other pro-fessional associations or regulatory agencies;AICPA Technical Practice Aids, and accountingtextbooks, handbooks, and articles.

HIERARCHY OF REGULATIONS

The NCUA issues guidance in multiple forms. Asmanagement refers to the various forms of guid-ance, it is important to utilize the hierarchy ofregulations:

1. Federal Credit Union Act,

2. NCUA Rules and Regulations,

3. NCUA Interpretive Ruling and Policy State-ment (IRPS) if the IRPS was issued for notice

and comment, it has the same force a the NCUARules and Regulations, and

4. All other forms of regulatory guidance includ-ing:

Federal Credit Union Bylaws,

NCUA Letters to Credit Unions,

NCUA Instructions,

The NCUA Accounting Manual, and

NCUA General Counsel Opinions.

GENERAL LEDGER, SUBSIDIARYLEDGERS, AND ACCOUNTRECONCILIATIONS

CHART OF ACCOUNTS

Federal credit unions must design their own chartof accounts. Management is responsible for report-ing financial information to the NCUA on theperiodic Call Report. Therefore, we recommendthe credit unions chart of accounts closely mirrorthe Call Report for ease of reporting. Use the pre-scribed financial report forms in Section 900 as aguide for financial reports intended for posting tomembers.


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Whatever chart of accounts numbering systemmanagement adopts for its general ledger accounts,it should permit the classification of transactions inat least the detail required to properly complete theNCUA call report forms.

GENERAL LEDGER

The general ledger is a comprehensive record ofindividual accounts on the chart of accounts. Thechart of accounts is a listing of general ledger ac-count numbers and account names. The generalledger accounts contain entries pertaining to a spe-cific asset, liability, equity, income, or expense.Some computer systems will print various levels ofdetail for general ledger reports. Subsidiary ledgersand account reconciliations support the general

ledger.

SUBSIDIARY LEDGERS

Subsidiary ledgers store the details of certain gen-eral ledger accounts. Subsidiary ledgers supportgeneral ledger accounts. Use of subsidiary ledgersmay reduce the number of general ledger accounts.The fewer the number of accounts, the easier it is toavoid errors and find them when they occur. Sub-sidiary ledgers are often set up for loans, cash,investments, prepaid expenses, fixed assets, shares,

equity, income, and operating expenses. The betterthe system of organizing account details in subsidi-ary ledgers, the easier it is to avoid errors and findthem when they occur.

ACCOUNT RECONCILIATIONS

Account reconciliations prove account balances ona regular basis. Staff will typically prepare these atleast monthly. Accounts such as corporate invest-ments may require reconciliation weekly or daily.Reconciliations are not necessary for all accounts.

Managements written policy or procedures willguide staff to complete reconciliations appropriatefor the credit union.

PRINCIPLES AFFECTING THERECORDING OF ASSETS

UNDER THE MODIFIED CASH BASIS OFACCOUNTING

The principles and standards of accounting relatingto assets of federal credit unions following themodified cash basis of accounting are set forth be-

low.

Assets General Basis f or Record ing

Record assets at their cost to the credit union, nor-mally. There are some exceptions to this rule, e.g.,available-for-sale and trading securities.

Cash Unrestricted or Restricted

Record restricted cash on deposit or on hand inseparate accounts from other cash accounts. Show

each category of restricted cash separately on fi-nancial reports, other than change funds or pettycash.

Loans

Record the unpaid balances of loans outstandingand other receivables. Maintain appropriate valua-tion allowance accounts to cover estimated losses.Under the accrual basis of accounting, amortize netloan origination fees and costs over the life of therelated loans using the interest method. Under the

modified cash basis of accounting, at a minimum,amortize origination fees over 10 years or the lifeof the loan, whichever period is shorter.

Investments

Record investments and related transactions basedon the principles and standards described below.Generally, depository instruments are recorded atamortized cost while securities are recorded as fol-lows:

Classify debt and equity securities purchasedand held principally for the purpose of sellingthem in the near term as trading securitiesandreport at fair value through the income state-ment.

Classify debt securities (not equity) manage-ment has the positive intent and ability to holdto maturity as securities held-to-maturity and


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report at amortized cost, i.e., cost adjusted forthe amortization of premiums or the accretionof discounts.

Classify debt and equity securities not classi-fied as either trading or held-to-maturity

securities as securities available-for-sale. Re-port at fair value through a separate componentof equity in the balance sheet, AccumulatedUnrealized Gains/Losses on Available-for-Sale

Securities,an item of Other Comprehensive In-come.

Amortize premiums paid for securities usingthe interest method by periodic entries offset-ting income on investments over the periodfrom acquisition to maturity. Record amortiza-tion on a timely basis corresponding to the

recording of the related income. If interest oninvestments is recorded at the time the incomeis received by cash payments, record the pre-mium amortization similarly.

Record discounts on securitiesusing the inter-est method as income over the period fromacquisition to maturity by periodic entriesaugmenting income from investments. Coor-dinate entries to record the write-off ofdiscounts with the recording of the related in-come.

Record income earned on investments as in-come when received. An exception is incomeautomatically reinvested in common trust in-vestments, marketable equity securities, bankpassbook accounts, savings and loan shares,which should be recorded as an increase in thecarrying value of the investments when noticeof income credits are received by the credit un-ion; the offsetting credit should be to incomefrom investments; and

Record accrued interest purchased on bondsand securitiesas an asset and clear it by an off-set against interest received when the firstinterest payment on the related securities is re-ceived.

Refer to Section 300 of this manual for more de-tailed information regarding investments.

Fixed Assets

Record fixed assets in accordance with the follow-ing principles:

Record acquisitions of tangible fixed assets atcost. The acquisition cost is the net purchaseprice of the asset plus all incidental costs nec-essary to put the asset in condition for use, suchas freight and installation cost. If managementexchanges property for an asset, record cost asthe amount of cash paid plus the recordedamount of the asset surrendered. Do not rec-ognize a gain, if any, on the transaction; dorecognize the entire loss on the exchange, ifany. If management acquires property via ex-change without cost, use the fair market value

as the cost;

Establish a dollar value limit, i.e., $250, underwhich management records tangible propertypurchases as current expense even though theitems may be serviceable for more than 1 year;

Show cost of land (and land improvements)separately from the cost of the buildings andother improvements. In combination purchas-es, record the cost of land based on a fairmarket value estimate;

Depreciation

Fixed asset depreciation is a system of distributingthe cost and other basic values of fixed assets lesssalvage over the estimated useful life of the unit(which may be a group of assets) in a systematicand rational manner. Record depreciation in eachaccounting period by debiting expense and credit-ing valuation allowance accounts under either oftwo bases:

Use the unit depreciation basis to record de-preciation over the estimated useful lives ofassets based on the cost of the assets less esti-mated salvage value. For assets having aremaining use, the depreciation shall not ex-ceed the carrying value of the asset less:

a) the salvage value, orb) $1.00.


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Maintain a depreciation record for each depre-ciable item. Management may use either thestraight-line, declining balance, or the sum ofyears' digits methods for the purpose of compu-ting the periodic amounts of the depreciation to

be charged; and

Under the composite basis, record depreciationcontinuously based on established compositerates. The accumulated depreciation allowanceaccount under the composite-life method ofdepreciation cannot exceed the related fixed as-sets account.

Prepaid Expenses and Deferred Charges

Record costs affecting subsequent accounting peri-

ods as prepaid expenses, if material in amount, andamortize them over the accounting periods towhich applicable. Examples include insurancepremiums, stationery and supplies, advances foraccounting services, annual share insurance premi-um, NCUA operating fee, and organization costs.Amortize deferred organization costs over a periodnot extending beyond the year incurred and the twosubsequent fiscal years.

Assets Pledged

Disclose the nature and extent of credit union assetspledged to secure debts in the financial statements.

UNDER THE ACCRUAL BASIS OFACCOUNTING

Apply the principles and standards of the modifiedcash basis of accounting except as noted below.

Income on Loans

Accrue interest earned each month or dividend pe-

riod on loans outstanding, as a debit to assets and acredit to income. Do not accrue interest on loans 3months or more delinquent.

Income on Investments

Accrue income on investments each month or divi-dend period based on the time the investments wereheld and the income was not received.

Amor tization of Premium or Discount on Secu-rities Purchased

Whether management accrues interest on invest-ments monthly, quarterly, semiannually, or

annually, record the premium amortization basedon the same time periods. Likewise, accrete dis-counts on securities via periodic entries increasingaccrued income from investments. Record entriesto write-off the discount within the same periods oftime.

PRINCIPLES AFFECTING THERECORDING OF LIABILITIES

UNDER THE MODIFIED CASH BASIS OF

ACCOUNTING

Liabilit ies General Basis fo r Recording

Record known liabilities at their actual amounts or,if the actual amounts are not known, record thembased on reasonably accurate estimates.

Accounts Payable

Record all bills due and unpaid as accounts payableif not paid before the end of the period.

Notes Payable

Record funds borrowed to show the outstandingamount payable on the notes. Include balances ofsenior liens on assets repossessed or foreclosedwhere the credit union acquires title subject to theprior liens.

Accrued Interes t Payable

If management records accrued interest, the offset-ting charge is the expense account, Interest onBorrowed Money. Recording accruals of interestdue on notes payable is not required.

Dividends Payable

Upon declaration of a dividend, record the actual orestimated amount payable as a liability unless thedividend is paid or credited to share accounts in the


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last month of the dividend period. Offset thecharge to Dividend Expense or Accrued DividendsPayable.

Interest Refund Payable

Upon declaration of an interest refund, record theactual or estimated amount payable as a liabilityunless the refund is paid or credited to share ac-counts in the last month of the dividend period.Offset the charge to Interest Refunds. Managementmay record estimated interest refunds monthly.

Accrued Expenses

When expenses are not paid promptly, accrue themas liabilities and debit expenses. When disburse-ment takes place, reverse these liabilities. Except

for dividends, credit unions following the modifiedcash basis are not required to accrue expenses andallocate the costs to the periods benefited.

Accrued Div idends

Whenever management specifies or contracts a div-idend rate on any type of account in advance,accrue the expense monthly or at the end of theshortest dividend period offered by the credit unionon any type of account. The only exception to thisrule is, accruals are never required more frequently

than monthly.

Dividends in any dividend period cannot exceed:

a) Undivided earnings available at the beginningof the period;

b) Plus - net income (or less net loss) before div-idends for the current dividend period.

Deferred Credits

Deferred credits include discounts on FHA loansand discount on loans purchased from other creditunions. Record deferred credits separately andamortize by crediting income during subsequentperiods as the income is earned. Report theamounts of discounts on loans recorded as deferredcredits as deductions from the related asset ac-counts in financial reports.

Liabilit ies Secured by Liens

Report the nature and extent to which particularliabilities are secured by a lien on assets on the fi-nancial statements.

Contingent Liabilities

A contingency is an existing condition, situation, orset of circumstances that may or may not result in again or loss to the credit union. The amount of theresulting gain or loss will be determined by futureevent(s). Accrue the amount of a contingent lossby charges to expense if:

Prior to issuing financial statements, it is prob-able a loss will actually occur because an assetwas impaired or a liability was incurred on the

date of the financial statements; and

Management can make a reasonable estimateof the resulting loss.

Note: Estimate the amount of the accrued con-tingent loss realistically based on all informationavailable. If some amount within a range appearsat the time to be a better estimate than any otheramount within the range, that amount shall be ac-crued. If no amount within the range is a betterestimate than any other amount, however, the

minimum amount in the range shall be accrued.

If both of the above conditions are not met but areasonable possibility exists that a loss may havebeen incurred, or if the estimated amount is notmaterial, a contingent loss need not be accrued butdisclosed as a note to the financial statements.

Examples of contingent liabilities are pending orthreatened litigation, selling loans with recourse,guarantees of the indebtedness of others, andagreements to repurchase assets sold previously.


The principles and standards applicable to the mod-ified cash basis of accounting apply under accrualbasis of accounting, except as follows.


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Accrued Interest Payable

Record in each month or dividend period the ac-crued interest payable on notes and mortgages withan offsetting debit to interest expense.

Accrued Expenses

Examples of accrued expenses are dividends andsalaries. Accrue expenses to allocate costs to theperiods benefited. Record the accruals normallyeach month or dividend period so all significantexpenses are shown on financial reports providedto directors and members.

PRINCIPLES AFFECTING EQUITY

NET INCOME

The net income or loss for the current accountingperiod should represent the difference between allincome and expense items.

UNDIVIDED EARNINGS

At the close of each accounting period, close theincome and expense accounts into the Net Income(Loss) account. Then transfer the balance of theNet Income (Loss) account to Undivided Earnings.

Debit or credit undivided earnings with amountsrequired to establish or adjust other appropriationaccounts, including the appropriation for loss con-tingencies or the special appropriation for lossesestablished when so ordered by the NCUA Board.Other direct charges or credits to undivided earn-ings only include error correction for materialamounts which represent adjustments affecting pri-or accounting periods. Material errors in suchfinancial statements could include arithmetic mis-takes, the misuse or deletions of information,

mistakes in the applications of accounting princi-ples or procedures, and improper interpretations ofthe accounting aspects of major transactions. Errorcorrection should not result in the restatement ofthe prior year's financial statements to disclose theerror correction but should be reflected in currentperiod financial statements and those going for-ward.

Do not treat normal recurring corrections and ad-justments which are the natural result of the use ofestimates inherent in the accounting process as pri-or-year adjustments. Normal recurring correctionsinclude changes in estimated loan losses, accumu-lated depreciation on disposed assets, and estimated

dividends. These changes are properly recorded astransactions affecting the current year in the appro-priate income and expense accounts. Thedetermination of net income for the period mustinclude all items of profit and loss recognized dur-ing a period, including accruals of estimated lossfrom loss contingencies.

DIVIDENDS

Declare and pay dividends to shareholders fromcurrent income, plus any available balances of un-

divided earnings. Charge the dividends as a currentyear expense. Management should use caution inexpending undivided earnings to meet current op-erating expenses, particularly for payment of abovemarket dividends. Rather, credit unions shouldstrive to build capital.

APPROPRIATION FOR LOSSCONTINGENCIES

Management can establish an appropriation forcontingencies for possible or unforeseen decreases

in the value of assets or for other unforeseen or in-determinate liabilities not otherwise shown on thecredit union's records. Any such appropriation es-tablished only as a precautionary measure willrepresent a segregation of undivided earnings andshould be so classified in financial reports. Do notuse contingency appropriations as a substitute forvaluation requirements for the amount of currentlyestimated losses on loans or other assets. When thenet loss during any accounting period exceedsavailable undivided earnings, reduce the appropria-tion for loss contingencies and/or other

segregations of undivided earnings to offset suchexcess.

Even if management established an Appropriationfor Loss Contingencies for a particular liability orexpenditure, do not charge such expenditures di-rectly to the appropriation. Record the loss or costas an operating expense.


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Establish the Appropriation for Loss Contingenciesfor a particular event by a debit to Undivided Earn-ings. When the event occurs, or the liability ispaid, credit the balance of the account back to Un-divided Earnings. Transfers from theAppropriation for Loss Contingencies to Undivided

Earnings must be in amounts equal to costs chargedto expenses during an accounting period, therebyeliminating any reduction in Undivided Earningswhich would have occurred due to the contingencytaking place.

DONATIONS

GAAP affects how credit unions with $10 millionor more in assets measure and disclose donatedassets and services on their financial statements.Credit unions under $10 million in assets may fol-

low GAAP or the regulatory-basis of accountingdescribed herein. Regardless of the method used,management must consistently apply the methodthey choose, GAAP or regulatory-basis, as outlinedin this section.

From a regulatory perspective, NCUA considersthe donation of assets and services from a sponsorto a credit union as a reciprocal transfer (i.e., inreturn, sponsor gets the fringe benefit to employeesof on-site financial services). Thus, managementdoes not have to report the donation of assets and

services by the sponsor on their financial state-ments. From a GAAP perspective, managementmust recognize the fair value of the contributed useof facilities or other services as both a revenue andan expense in the period received and expended.

Under GAAP, record donations and gifts received(including donations made for the specified pur-pose of enabling the credit union to pay dividends)as income and show them as part of net income forthe current month. The regulatory approach pro-vides as an exception to the foregoing, if a credit

union receives a gift of a tangible fixed asset ofsubstantial value (i.e., a building or a computer) inorder to exclude such amounts from current incomeand undivided earnings, offset the entry for the fairmarket value of the asset recorded in the fixed assetaccount to Donated Equity. Depreciate these do-nated assets via charges to expense over theirremaining useful lives.

GAAP requires inclusion of all contributions madeor received in expense/income whenmade/received. Contributions include many of thedonations credit unions receive (i.e., office space,telephone services, data processing support); andsome volunteer services (i.e., some account-

ing/auditing services, some legal advice, etc.).Under GAAP:

Recognize some contributions simultaneouslyreceived and used as both a revenue and an ex-pense in the period received and used (i.e.,sponsor-contributed utilities); and

Treat contribution of office space as above(i.e., revenue and expense) as long as the spon-soring entity could discontinue providing thespace at any time. If the sponsoring entity pro-

vides the facility for a specified period of time(i.e., 5 years), the promise must be set up as areceivable at its fair value.

Recognize contributed services as both a revenueand an expense if the services received:

1) Create or enhance non-financial assets, or

2) Require specialized skills, are provided by in-dividuals possessing those skills, and are typicallypurchased if not donated.

For example, if the above two conditions are met,GAAP requires recognition of an audit performedby uncompensated Supervisory Committee mem-bers as a revenue and an expense on the creditunions books.

SHARES AS EQUITY

Classify shares as equity in the Statement of Finan-cial Condition:

The Federal Credit Union Act, as amended bythe Competitive Equality Banking Act (CEBA)of 1987, legally defines shares as equity;

Shares function as equity and represent owner-ship; and

Share dividends are based on earnings and arenot guaranteed.


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In some jurisdictions, boards of directors may al-low individual members to deposit more than themembers ownership interest. In these cases, man-agement should properly classify excess shares asliabilities on the Statement of Financial Condition.

PRINCIPLES AFFECTING THERECORDING OF INCOME ANDEXPENSES

UNDER THE MODIFIED CASH BASIS OFACCOUNTING

The principles and standards of accounting relatingto income, expenses, gains, and losses of federalcredit unions following the modified cash basis of

accounting are set forth below.

General Rules for Recording Income and Ex-penses

Record all income, expenses, gains, and losses af-fecting each accounting or dividend period throughincome and expense accounts. To correct an erroraffecting prior accounting period operations, referto GAAP.

Basis for Recording Income

Record income periodically as received. Recordfees and late charges as income when received.

Basis for Recording Expenses

Expenses are the uses and consumption of goodsand services in the process of producing income.Pay and record expenses related to current opera-tions promptly when due. Record all expensesincurred but not paid at the end of the month ascurrent month expenses: as accounts payable or

accrued expenses. Record significant amounts ofexpenses paid or accrued if applicable to futureperiods as prepaid or deferred expenses and amor-tize them over the periods to which they apply.

Tangible Fixed Asset Expenses

Expense depreciation of fixed assets over the usefullives of the assets under the unit or the compositebasis.

When management computes depreciation on a

unit basis, eliminate the amount of the retiredasset together - including any related depreci-ation allowance. Record any materialdifference between the net amount realizedfrom disposition and the net carrying value ofthe depreciable assets as an "other gain or loss"and show it in financial reports separate fromregular operating income or expense; and

When management computes depreciation on acomposite-life basis, credit the cost of retiredunits to the appropriate fixed asset account;

charge the same amount less salvage value tothe allowance for depreciation account. Do notrecognize gain or loss in the accounts sinceitems in the group will retire both before andafter expiration of the estimated average life.When retirements are abnormal or unusual,record gains or losses in the accounts, similarto the unit basis since composite rates do notanticipate such retirements.

Amor tization of Defer red Charges

Examples of deferred charges include prepaid in-surance, leasehold improvements, and organizationexpenses. Include debits in expenses each monthor dividend period for amortization of deferredcharges.

Equipment Rental Expense

Charge rental charges under equipment leases di-rectly to expense unless they represent installmentpurchases of fixed assets. If a rental agreement

represents an optional purchase contract the creditunion plans to exercise by purchasing the equip-ment, record the cost of the equipment as a fixedasset and a liability. Thereafter, payments madewill reduce the liability amount, and managementwill record appropriate depreciation expense. Re-fer to GAAP for further guidance.


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Loan Losses

Record losses on loans and related assets as de-scribed below:

Charge off loan losses as they occur, with the

approval of the board of directors, by debits toAllowance for Loan Losses. Record recoverieson loans charged off, as they occur, as creditsto Allowance for Loan Losses;

Establish and maintain Allowance for LoanLoss to reflect the estimated amount of losseson:

(1) Originated member loans.

(2) Loans purchased from other credit unions.

(3) Lease receivables.

The value of the allowance account should be ad-justed monthly or at the end of the regular sharedividend period, if longer than monthly. For thispurpose, management should determine the amountof the allowance adjustment based on a logical,documented, defensible method which will result inthe estimation of all probable losses inherent in theloan portfolio as a given date, and (losses) whichare reasonably estimable.

Other Gains and Losses

Normally include other gains and losses when de-termining periodic net earnings or losses. Reportnon-recurring gains or losses (those unrelated toordinary credit union activities) separately as non-operating income or expense on periodic incomeand expense statements. For example, charge again or loss from the sale of a credit union officebuilding, and any loss charged off on a note or con-tract taken in connection with a sale of credit unionoffice quarters to Other Losses.

Cash Overage and Shortages

Record cash overages and shortages from the pro-cessing of cash transactions as debits or credits toexpense daily. Adjust the cash over and short ex-pense accounts whenever the reason for the cashoverage or shortage is determined. Consider any

overage or shortage in negotiable instruments a"cash overage or shortage" and record the appropri-ate adjustment at least prior to the close of eachmonth.

Donations

Refer to the discussion in Principles Affecting theRecording of Equity.

Pension Plan Costs

Pension plan accounting is beyond the scope of thispublication. Seek assistance from an independentaccountant.

NCUA Insurance Guaranty

Do not record any guaranty provided by the NCUAto a credit union to make it insurable under Title 11of the Federal Credit Union Act, as amended. Thisguaranty represents a claim by the credit unionagainst the NCUA which is payable only in theevent of liquidation of the credit union and thenonly to the extent needed to reduce or eliminateloss claims against the Title 11 share insurancefund. Amortize guaranties through charges to ex-pense in accordance with the terms of the guarantyagreement.


The principles and standards of accounting appli-cable to the modified cash basis of accountingapply under the accrual basis of accounting, exceptas follows:

Income on Loans

Record interest income earned each month or divi-dend period on loans outstanding as income and asan asset although it may not have been received.Many computerized loan systems will calculate theamount to accrue. Maintain supporting documenta-tion for the accrual.

Income on Investments

Management should record income as noted:


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Record income for investments in savings andloan associations and other credit unions ineach month or dividend period the investmentsare held and the interest or dividend incomewas not received. For example, accrue the

amount of each quarterly or other distributionapplicable to each dividend period as AccruedIncome on Investments with an offsetting entryto Income from Investments;

Record income for mutual fund and commontrust investments as income for the month ordividend period based on the time the invest-ments are owned. Adjust the amount eachmonth or dividend period as required based onthe change in value. If management receivesincome during the period, record the amount as

the actual amount of interest earned for thepreceding period;

Record income for other investments eachmonth or dividend period based on the actualtime the investments are held and interest ordividend income was not received. Recognizethe amount earned as income and as an asset.Accrue interest earned on the general type ofgovernment securities each month or dividendperiod based on the applicable portion of thesemiannual interest. Accrue interest on appre-

ciation-type savings bonds in each month ordividend period based on the pro rata amountof the bond appreciation for the period shownon the bond's table of redemption values. Ac-crue interest on loans to other credit unions,certificates of deposit and deposits in othercredit unions to record interest earned eachmonth or dividend period based on the actualtime the investments or deposits are held; and

Record differences between the amount of in-come accrued and actual income in the

appropriate accounts when income is received.

Accrued Expenses

Expense accruals include, but are not limited to,charges to expense for unpaid salaries, uncompen-sated leave, dividends, supervisory committeeaudit, taxes, and interest on borrowed funds. Payor accrue expenses and match them against period-

ic revenues with offsetting credits, where neces-sary, to cash, payables, or accrued expenses.

Accrued Interest on Loans Inc luded in Valua-tion Allowance

Include an amount to cover potential losses on ac-crued interest receivable from loans in thevaluation allowance for estimated losses on out-standing loans. Do not accrue interest on any loans3 months or more delinquent. Reverse previouslyaccrued interest on such loans via appropriate en-tries to Accrued Interestand Interest Income.

FINANCIAL STATEMENTS

PURPOSE

Federal credit unions financial statements mustpresent their financial position fairly as of a par-ticular date. This is the most important externalfunction of the accounting process. Financialstatements must be posted in a conspicuous loca-tion for the information of members at each creditunion location and as required by the NCUA. Theresults of operations for a particular period mustfollow GAAP if assets are $10 million or more.Other credit unions may follow GAAP and mustfollow the principles prescribed herein. Manage-

ment uses financial statements to:

Make sound decisions,

Effectively manage the credit union, and

Show how management has carried out itsstewardship to shareholders, creditors, and oth-ers having an interest in the credit union.

REQUIRED STATEMENTS

Management must prepare two financial statementsevery month for internal and external use. Thesestatements are:

Statement of Financial Condition, and

Statement of Income.


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Statement of Financial Condition

The Statement of Financial Condition (balancesheet) and notes thereto should show the financialcondition of the credit union as of the date it repre-sents. The statement should:

Recognize the basic concepts of the principlesand standards of accounting by showing, on aconservative basis, assets and liabilities includ-ing contingent losses, appropriateclassifications of credit union equity; and iden-tify any significant changes in the supportingaccounting practices from those used in theprevious presentation;

Provide valuation allowances as deductionsfrom related assets to show estimated amounts

of losses as well as depreciation on tangible as-sets. Management should include estimatedlosses to be sustained in collateral collection orvalue realization;

Separate unrestricted cash and restricted cash,and identify the nature and extent of any assetspledged or hypothecated;

Reflect the nature and extent to which specificliabilities are preferred liens on assets; i.e., in-dicate for any real estate mortgage the

particular assets pledged as security;

Statement of Income

This statement and notes thereto should reflect allincome, expenses, gains, and losses of the creditunion for the period for which prepared. It should:

Reflect the results of operations in accordancewith GAAP or at a minimum, the principlesprescribed herein;

Segregate regular operating income, expense,gains, and losses from any extraordinary in-come, expense, gains, or losses;

Include within regular operations, increasesand decreases in the valuation allowance estab-lished for estimated losses on loans and loanassets; and

Include as income all fees and charges made tomembers and borrowers.

Notes To Financial Statements

The objective of notes to financial statements is toprovide information not sufficiently describedwithin the body of the financial statements. Notesto financial statements are an integral part of thestatements and should provide:

a) A description of significant accounting policiesfollowed;

b) An explanation of changes in methods or tech-niques of handling accounting transactions;

c) An explanation of creditors' rights to specifical-ly pledged assets;

d) A disclosure of contingent assets and liabilities,restrictions on dividend payments, and executorycontracts; and

e) The market value of investments.

Disclosures About Fair Values of Financial In-struments

Credit unions with less than $10 million is assetsmay wish to disclose, either in the body of the fi-nancial statements or in the accompanyingfootnotes, the fair values of financial instrumentson their statements of financial condition. GAAPgenerally exempts all entities with assets of $100million or less from fair value disclosure require-ments.

The disclosure may be advisable for all financialinstruments, both assets and liabilities, recognizedand not recognized in the statement of financial

condition, for which it is practicable to estimatefair value. Refer to GAAP for guidance. It detailsprocedures for estimating the fair value of "finan-cial instruments" and illustrations for applying thedisclosure requirements about fair value of finan-cial instruments. For those affected credit unions,we recommend management obtain a copy ofGAAP and prepare a financial statement footnoteincluding the methods for establishing the fair val-


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ue of the assets, liabilities, and equity. Thesemethods should provide the basis for the dollar es-timates of the fair value. Retain historical recordsof your fair value calculations based on thesemethods and maintain an overall policy document-ing these methods. If it is not practicable to

estimate the fair value of a particular financial in-strument, disclose in the footnote the pertinentcharacteristics of the instrument and the reason forimpracticability of setting a fair value (i.e., it wouldbe excessively expensive to estimate).

Federal credit unions must provide fair value in-formation on the quarterly/semiannual NCUA CallReports. Include fair value information on thestatement of condition as management and the in-dependent auditing firm agree (i.e., if you areseeking an unqualified opinion).

OPTIONAL STATEMENTS

The following statements are optional for creditunions under $10 million. Post these statementswith the required statements if management pre-pares them. Prepare the first two on a quarterlybasis or at the end of the regular share account div-idend period (if the dividend period is longer thanquarterly). Prepare a Statement of Cash Flows atleast annually:

Statement of Members Equity,

Statement of Other Comprehensive Income(can be combined with Statement of Equity),and

Statement of Cash Flows.

Statement of Members Equity

This statement and notes thereto should showchanges in total earnings during the period report-

ed. At managements option, prepare thisstatement quarterly or at the end of the regularshare account dividend period (if the period islonger than quarterly) and present it with other fi-nancial statements.

Statement of Other Comprehensive Income (canbe combined with Statement of Equity)

Credit unions with more than $10 million in assetsmay complete this statement quarterly or at the endof the regular share account dividend period (if theperiod is longer than quarterly) and present it withother financial statements. Management preparesthis statement to report a measure of all changes in

equity resulting from recognized transactions andother economic events of the period other thantransactions with owners in their capacity as own-ers. This statement must accomplish twoobjectives:

a) Classify items of Other Comprehensive In-come by their nature in a financial statement; and

b) Display the accumulated balance of OtherComprehensive Income separately from RetainedEarnings and Additional Paid-in Capital in the eq-

uity section of a Statement of Financial Condition.

Other Comprehensive Income is total non-ownerchanges in equity during a period from transactionsand other events and circumstances. It includes allchanges in equity during a period except those re-sulting from investments by owners anddistributions to owners.

Statement of Cash Flows

This statement provides relevant information about

cash receipts and cash payments during the report-ing period and supplements the Statement ofFinancial Condition and the Statement of Income.At managements option, prepare the Statement ofCash Flows at least annually under the accrual ba-sis of accounting. Management may prepare thestatement more frequently. Federal credit unionsnot using the accrual basis of accounting may pre-pare this statement.

The Statement of Cash Flows, when used with therelated disclosures and other financial statements,

should help to assess:

a) Management's ability to generate positive fu-ture cash flows;

b) Management's ability to meet its obligations,pay dividends, and determine its need for externalfinancing;


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c) Reasons for differences between net incomeand associated cash receipts and cash payments;and

d) Effects on the credit union's position of both itscash and non-cash investing and financing transac-

tions during the reporting period.

More information pertaining to the Statement ofCash Flows, and its preparation and illustrations arefound in Section 900 of this manual.

FULL AND FAIR DISCLOSURE REQUIRED

The financial statements described above shall pro-vide full and fair disclosure of all assets, liabilities,appropriations, and retained earnings. A limitednumber of valuation allowance accounts may be

necessary to fairly present all income and expensesand the overall financial position for the reportingperiod.

FULL AND FAIR DISCLOSURE DEFINED

"Full and fair disclosure" is the level of disclosure areasonable person would provide to a member of acredit union, a creditor, or the NCUA in order tofairly inform them of the financial condition andthe results of operation. Management provides fulland fair disclosure by preparing financial state-

ments consistent with this accounting manual orGAAP as long as GAAP is not inconsistent withregulatory requirements.

REQUIRED CERTIFICATION

When presenting financial statements to members,creditors, and the NCUA, include a declaration bythe treasurer and the president that the report is trueand correct to the best of their knowledge and be-lief, and presents fairly the financial position andthe results of operations for the reporting period. In

the absence of the president, any other officer des-ignated by the board of directors may make suchdeclaration.

DEFINITIONS OF TERMS(presented alphabetically )

Unless the context requires otherwise, the follow-ing terms have the meaning indicated in thissection:

Accrual Basis of Accounting matches finan-cial statement recognition with the period of

occurrence. Under this basis of accounting, man-agement records income when earned and expensesand liabilities as incurred regardless of the actualreceipt of payment or disbursement.

Accrued Interest refers to Interest earned onloans, investments, or notes or mortgages payable,which has not been received or paid by the creditunion. Management may accrue interest periodi-cally on a time period consistent with the financialstatements.

Amortization refers to the systematic write-downof prepaid and deferred expenses over a predeter-mined period of time, such as the write-down of aninsurance premium orbond premium.

Collateral refers to real or personal propertypledged as partial or full security on a debt includ-ing completed documentation for repossession andsale of the collateral in the event of default. A co-maker may be accepted in lieu of collateral to fur-ther secure a debt.

Composite Depreciation Basis refers to de-preciating a group of fixed assets using a rate basedon the estimated average useful lives of the assets.No depreciation is recorded when the accumulateddepreciation allowance equals the book value of thefixed assets.

Deferred Charge or Deferred Expense refersto an expenditure not recognized as a cost of opera-tions during the period incurred, it is carriedforward and written off in one or more future peri-ods. Often it includes prepaid expenses such as

insurance premiums, stationery, and office sup-plies.

Deferred Credit refers to revenue or income re-ceived or recorded before it is earned. It includesincome held in suspense until:

Determination and deduction of offsettingcharges,


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Accounting Manual for Federal Credit Unions December 2002

Completion of a period of time (such as collec-tion of a related doubtful receivable), or

Identification occurs.

Donated Equity is a regulatory accounting termthat refers to equity in a credit union arising fromcontributions of real or personal tangible property(fixed assets).

Appropriation for Loss Contingencies refersto an appropriation of accumulated earnings setaside for possible decreases in the book values ofassets or other undetermined liabilities not other-wise reflected on the books. Establish contingencyappropriations as a precautionary measure only andinclude as a part of equity, as they represent isola-

tions (appropriations) of undivided earnings.

Undivided Earningsrefers to accumulated post-closing accumulated net income after distributionsto members, adjustments affecting prior period op-erations, appropriations required by law, andappropriations authorized by the credit unionboard.

Valuation Allowance refers to an account repre-senting management's judgment as to possible lossor decline in value within a specific class of assets

such as loans or fixed assets.

Modified Cash Basis of Accounting refers toa blend of the cash basis of accounting and the ac-crual basis of accounting. It is a form ofaccounting based on actual receipts and disburse-ments and includes provisions for:

a) Liabilities not paid when due;

b) Unpaid dividends and interest refunds applica-ble to the accounting period;

c) Deferred credits and charges applicable to fu-ture periods;

d) Estimates of anticipated losses on loans out-standing and other risk assets; and

e) Depreciation of fixed assets.

summary of accounting concepts

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