Credit Union Update: Mergers

By Brian Sullivan, CPA, Audit Manager; and Clark Moorehead, CPA, Auditor

Accounting for mergers under the old accounting rules wasrelatively straightforward. To form the combined entity, the book values of the acquiring and acquired credit unions were added together. Beginning in January 2009, this “pooling of interests” accounting was replaced with the more complex “purchase accounting.” Under the purchase accounting rules, the acquired credit union and its assets and liabilities must be recorded at their estimated fair values.

Also, under the new merger accounting rules, the allowance is brought over to the combined entity’s financial statements at zero. On the other hand, as part of their analysis of the merger transaction, the external auditors and the NCUA will review the allowance for loan losses to ensure it is not underfunded at the merger date.

Assets and liabilities that should be valued at fair market value from the acquired credit union include held to maturity investments, loans, fixed assets and member certificates. Excluding fixed assets, the fair value adjustments relate primarily to interest rate differential and credit risk. The interest rate differential is calculated by comparing the interest rate on an investment or loan to market interest rates. If market interest rates are higher, then a discount must be recorded. If market rates are lower, then a premium must be recorded. The opposite is true in both cases for time-share accounts. The adjustments should be recorded as ‘contra-asset’ or ‘contra-liability’ accounts. The contra accounts are then amortized or accreted into income or expense. The simplest example is the recording of a purchase discount on a bond.

Equity acquired from the merger should be included in a separate account in the equity section of the acquirer credit union. It is not to be included with the current equity accounts of the acquirer credit union. We would recommend constant communications with your outside CPA firm throughout the merger process to ensure merger accounting is performed in accordance with generally accepted accounting principles.