WASHINGTON (12/31/15)--At least some types of credit union shares qualify as equity on an accounting basis, the World Council of Credit Unions (World Council) wrote to the International Accounting Standards Board (IASB) this month. The World Council believes that, for example, U.S. corporate credit union capital shares count as equity, since they give credit unions options for supplemental capital.
The IASB released an exposure draft earlier this year on its Conceptual Framework for Financial Reporting, in which it proposed to add the following paragraph to the conceptual framework:
“A faithful representation provides information about the substances of an economic phenomenon instead of merely providing information about its legal form. Providing information about a legal form that differs from the economic substance of the underlying economic phenomenon would not result in a faithful representation.”
The World Council strongly opposes the inclusion of that paragraph, saying it would not produce clear and consistent accounting treatment for credit union shares.
“We believe that the IASB finalizing the proposed addition to paragraph 2.14 would be detrimental to the international credit union movement because not all accountants are familiar with the corporate structures of credit unions and other cooperatives,” the World Council’s letter reads.
“We are concerned that accountants who are not familiar with credit unions may choose to classify all credit union shares as liabilities even if the same accountant would classify joint-stock company shares with the same terms and conditions as equity.”
The World Council argued that credit union shares represent equity because the shareholders own the credit union.
“These shares represent equity as a legal matter, confer corporate voting rights, and also have a claim on the residual assets of the credit union in liquidation in the same manner as joint-stock company shares,” the letter reads. “We believe that the shares with the most subordinate claim on an institution’s undivided equity should qualify as equity because the holders of this class of shares are the owners of the institution.”
Though this is an International Financial Reporting Standards proposal, it may affect generally accepted accounting principles in the United States in the long run because IASB and the Financial Accounting Standards Board have agreed to try to converge the two standards long term.