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Financial Institution Letters
Changes in Accounting for Derivative Loan Commitments and Loan Sales Agreements
Institutions should follow Accounting Principles Board Opinion No. 20, Accounting Changes (APB 20), if a change in their accounting for derivative loan commitments, best efforts contracts, or mandatory delivery contracts is necessary. APB 20 defines various types of accounting changes and addresses the reporting of corrections of errors in previously issued financial statements. APB 20 states, [e]rrors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared.
For regulatory reporting purposes, an institution must determine whether the reason for a change in its accounting meets the APB 20 definition of an accounting error. If the reason for the change meets this definition, the error should be reported as a prior period adjustment if the amount is material. Otherwise, the effect of the correction of the error should be reported in current earnings.
If the effect of the correction of the error is material, the institution should also consult with its primary federal regulatory agency to determine whether any of its prior regulatory reports should be amended. If amended regulatory reports are not required, the institution should report the effect of the correction of the error on prior years' earnings, net of applicable taxes, as an adjustment to the previously reported beginning balance of equity capital. For the Call Report, the institution should report the amount of the adjustment in Schedule RI -A, Item 2, Restatements due to corrections of material accounting errors and changes in accounting principles, with an explanation in Schedule RI-E, Item 4. On the 5300 Call Report, the credit union should report the adjustment directly to undivided earnings in the Statement of Financial Condition. For the TFR, the institution should report the amount in Schedule SI, Line SI668, Prior period adjustments.The effect of the correction of the error on income and expenses since the beginning of the year in which the error is corrected should be reflected in each affected income and expense account on a year-to-date basis beginning in the next quarterly Income Statement (Call Report), Income and Expense schedule (5300 Call Report), or Consolidated Statement of Operations (TFR) to be filed and not as a direct adjustment to retained earnings.
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