+-------------------------------------------------------+--------------+
|                                                       | **Page No.** |
+-------------------------------------------------------+--------------+
| **ACCURATE AND CURRENT RECORDS ESSENTIAL**            | **3**        |
+-------------------------------------------------------+--------------+
| > ***PURPOSE OF RECORDS***                            | ***3***      |
+-------------------------------------------------------+--------------+
| > ***BASIC ACCOUNTING RECORDS***                      | ***3***      |
+-------------------------------------------------------+--------------+
| #  Double-Entry System                                | **3**        |
+-------------------------------------------------------+--------------+
| #  Types Of Accounts                                  | ***4***      |
+-------------------------------------------------------+--------------+
| **BRIEF OUTLINE OF THE PRESCRIBED ACCOUNTING SYSTEM** | **4**        |
+-------------------------------------------------------+--------------+
| > ***MODIFIED CASH BASIS***                           | ***4***      |
+-------------------------------------------------------+--------------+
| > ***ACCRUAL BASIS***                                 | ***4***      |
+-------------------------------------------------------+--------------+
| > ***THE BASIC CREDIT UNION ACCOUNTING SYSTEM         | ***4***      |
| > DESCRIBED***                                        |              |
+-------------------------------------------------------+--------------+
| **Records Of Original Entry And Record Of Final       | ***5***      |
| Entry**                                               |              |
+-------------------------------------------------------+--------------+
| ## The Records Of Original Entry                      | ***5***      |
+-------------------------------------------------------+--------------+
| ## The Record Of Final Entry                          | ***5***      |
+-------------------------------------------------------+--------------+
| **BASIC CONCEPTS AND GENERAL PRINCIPLES**             | **5**        |
+-------------------------------------------------------+--------------+
| > ***SEPARATE ENTERPRISE***                           | ***5***      |
+-------------------------------------------------------+--------------+
| > ***GOING CONCERN CONCEPT***                         | ***5***      |
+-------------------------------------------------------+--------------+
| > ***MONETARY BASIS FOR ACCOUNTING***                 | ***6***      |
+-------------------------------------------------------+--------------+
| > ***CONSISTENCY IN ACCOUNTING FROM PERIOD TO         | ***6***      |
| > PERIOD***                                           |              |
+-------------------------------------------------------+--------------+
| > ***TIMELY RECOGNITION IN ACCOUNTING RECORDS***      | ***6***      |
+-------------------------------------------------------+--------------+
| > ***MATERIALITY***                                   | ***6***      |
+-------------------------------------------------------+--------------+
| > ***CONSERVATIVE ACCOUNTING***                       | ***6***      |
+-------------------------------------------------------+--------------+
| > ***INTERNAL CONTROL***                              | ***6***      |
+-------------------------------------------------------+--------------+
| > ***COMPLETE RECORDING OF INCOME AND EXPENSES***     | ***7***      |
+-------------------------------------------------------+--------------+
| > ***ACCOUNTING BASIS***                              | ***7***      |
+-------------------------------------------------------+--------------+
| > ***ACCOUNTING AND DIVIDEND PERIODS***               | ***7***      |
+-------------------------------------------------------+--------------+
| > ***FISCAL YEAR***                                   | ***7***      |
+-------------------------------------------------------+--------------+
| **ACCOUNTING PROFESSION PRONOUNCEMENTS**              | **7**        |
+-------------------------------------------------------+--------------+
| > ***HIERARCHY OF GAAP STANDARDS***                   | ***8***      |
+-------------------------------------------------------+--------------+
| > ***HIERARCHY OF REGULATIONS***                      | ***8***      |
+-------------------------------------------------------+--------------+
| **GENERAL LEDGER, SUBSIDIARY LEDGERS, AND ACCOUNT     | **8**        |
| RECONCILIATIONS**                                     |              |
+-------------------------------------------------------+--------------+
| > ***CHART OF ACCOUNTS***                             | ***8***      |
+-------------------------------------------------------+--------------+
| > ***GENERAL LEDGER***                                | ***9***      |
+-------------------------------------------------------+--------------+
| > ***SUBSIDIARY LEDGERS***                            | ***9***      |
+-------------------------------------------------------+--------------+
| > ***ACCOUNT RECONCILIATIONS***                       | ***9***      |
+-------------------------------------------------------+--------------+
| **PRINCIPLES AFFECTING THE RECORDING OF ASSETS**      | **9**        |
+-------------------------------------------------------+--------------+

+-------------------------------------------------------+--------------+
| > ***UNDER THE MODIFIED CASH BASIS OF ACCOUNTING***   | ***9***      |
+-------------------------------------------------------+--------------+
| **Assets -- General Basis for Recording**             | # 9          |
+-------------------------------------------------------+--------------+
| **Cash -- Unrestricted or Restricted**                | # 9          |
+-------------------------------------------------------+--------------+
| **Loans**                                             | # 9          |
+-------------------------------------------------------+--------------+
| **Investments**                                       | # 9          |
+-------------------------------------------------------+--------------+
| **Fixed Assets**                                      | # 10         |
+-------------------------------------------------------+--------------+
| **Depreciation**                                      | # 10         |
+-------------------------------------------------------+--------------+
| **Prepaid Expenses and Deferred Charges**             | # 11         |
+-------------------------------------------------------+--------------+
| **Assets Pledged**                                    | # 11         |
+-------------------------------------------------------+--------------+
| > ***UNDER THE ACCRUAL BASIS OF ACCOUNTING***         | ***11***     |
+-------------------------------------------------------+--------------+
| **Income on Loans**                                   | **11**       |
+-------------------------------------------------------+--------------+
| **Income on Investments**                             | **11**       |
+-------------------------------------------------------+--------------+
| **Amortization of Premium or Discount on Securities   | **11**       |
| Purchased**                                           |              |
+-------------------------------------------------------+--------------+
| **PRINCIPLES AFFECTING THE RECORDING OF LIABILITIES** | **11**       |
+-------------------------------------------------------+--------------+
| > ***UNDER THE MODIFIED CASH BASIS OF ACCOUNTING***   |              |
+-------------------------------------------------------+--------------+
| **Liabilities -- General Basis for Recording**        | **11**       |
+-------------------------------------------------------+--------------+
| **Accounts Payable**                                  | **11**       |
+-------------------------------------------------------+--------------+
| **Notes Payable**                                     | **11**       |
+-------------------------------------------------------+--------------+
| **Accrued Interest Payable**                          | **11**       |
+-------------------------------------------------------+--------------+
| **Dividends Payable**                                 | **11**       |
+-------------------------------------------------------+--------------+
| **Interest Refund Payable**                           | **12**       |
+-------------------------------------------------------+--------------+
| **Accrued Expenses**                                  | **12**       |
+-------------------------------------------------------+--------------+
| **Accrued Dividends**                                 | **12**       |
+-------------------------------------------------------+--------------+
| **Deferred Credits**                                  | **12**       |
+-------------------------------------------------------+--------------+
| **Liabilities Secured by Liens**                      | **12**       |
+-------------------------------------------------------+--------------+
| **Contingent Liabilities**                            | **12**       |
+-------------------------------------------------------+--------------+
| > ***UNDER THE ACCRUAL BASIS OF ACCOUNTING***         | ***12***     |
+-------------------------------------------------------+--------------+
| **Accrued Interest Payable**                          | **13**       |
+-------------------------------------------------------+--------------+
| **Accrued Expenses**                                  | **13**       |
+-------------------------------------------------------+--------------+
| **PRINCIPLES AFFECTING EQUITY**                       | **13**       |
+-------------------------------------------------------+--------------+
| > ***NET INCOME***                                    | ***13***     |
+-------------------------------------------------------+--------------+
| > ***UNDIVIDED EARNINGS***                            | ***13***     |
+-------------------------------------------------------+--------------+
| > ***DIVIDENDS***                                     | ***13***     |
+-------------------------------------------------------+--------------+
| > ***APPROPRAITION FOR LOSS CONTINGENCIES***          | ***13***     |
+-------------------------------------------------------+--------------+
| > ***DONATIONS***                                     | ***14***     |
+-------------------------------------------------------+--------------+
| > ***SHARES AS EQUITY***                              | ***14***     |
+-------------------------------------------------------+--------------+
| **PRINCIPLES AFFECTING THE RECORDING OF INCOME AND    | **15**       |
| EXPENSES**                                            |              |
+-------------------------------------------------------+--------------+
| > ***UNDER THE MODIFIED BASIS OF ACCOUNTING***        | ***15***     |
+-------------------------------------------------------+--------------+
| **General Rules for Recording Income and Expenses**   | **15**       |
+-------------------------------------------------------+--------------+
| **Basis for Recording Income**                        | **15**       |
+-------------------------------------------------------+--------------+
| **Basis for Recording Expenses**                      | **15**       |
+-------------------------------------------------------+--------------+
| **Tangible Fixed Asset Expenses**                     | **15**       |
+-------------------------------------------------------+--------------+
| **Amortization of Deferred Charges**                  | **15**       |
+-------------------------------------------------------+--------------+
| **Equipment Rental Expense**                          | **15**       |
+-------------------------------------------------------+--------------+
| **Loan Losses**                                       | **16**       |
+-------------------------------------------------------+--------------+
| **Other Gains and Losses**                            | **16**       |
+-------------------------------------------------------+--------------+
| **Cash Overage and Shortages**                        | **16**       |
+-------------------------------------------------------+--------------+
| **Donations**                                         | **16**       |
+-------------------------------------------------------+--------------+
| **Pension Plan Costs**                                | **16**       |
+-------------------------------------------------------+--------------+
| **NCUA Insurance Guaranty**                           | **16**       |
+-------------------------------------------------------+--------------+
| > ***UNDER THE ACCRUAL BASIS OF ACCOUNTING***         | ***16***     |
+-------------------------------------------------------+--------------+
| **Income on Loans**                                   | **16**       |
+-------------------------------------------------------+--------------+
| **Income on Investments**                             | **16**       |
+-------------------------------------------------------+--------------+
| **Accrued Expenses**                                  | **17**       |
+-------------------------------------------------------+--------------+
| **Accrued Interest on Loans Included in Valuation     | **17**       |
| Allowance**                                           |              |
+-------------------------------------------------------+--------------+
| **FINANCIAL STATEMENTS**                              | **17**       |
+-------------------------------------------------------+--------------+
| > ***PURPOSE***                                       | ***17***     |
+-------------------------------------------------------+--------------+
| > ***REQUIRED STATEMENTS***                           | ***17***     |
+-------------------------------------------------------+--------------+
| **Statement of Financial Condition**                  | **18**       |
+-------------------------------------------------------+--------------+
| **Statement of Income**                               | **18**       |
+-------------------------------------------------------+--------------+
| **Notes to Financial Statements**                     | **18**       |
+-------------------------------------------------------+--------------+
| **Disclosures About Fair Values of Financial          | **18**       |
| Instruments**                                         |              |
+-------------------------------------------------------+--------------+
| > ***OPTIONAL STATEMENTS***                           | ***19***     |
+-------------------------------------------------------+--------------+
| **Statement of Member's Equity (including Other       | **19**       |
| Comprehensive Income)**                               |              |
+-------------------------------------------------------+--------------+
| **Statement of Cash Flows**                           | **19**       |
+-------------------------------------------------------+--------------+
| > ***FULL AND FAIR DISCLOSURE REQUIRED***             | ***20***     |
+-------------------------------------------------------+--------------+
| > ***FULL AND FAIR DISCLOSURE DEFINED***              | ***20***     |
+-------------------------------------------------------+--------------+
| > ***REQUIRED CERTIFICATION***                        | ***20***     |
+-------------------------------------------------------+--------------+
| **DEFINITIONS OF TERMS**                              | **20**       |
+-------------------------------------------------------+--------------+

**ACCURATE AND CURRENT RECORDS ESSENTIAL**

***PURPOSE OF RECORDS***

The transactions of the credit union are compiled in its records which
serve as a source of information needed by the directors to properly
manage the credit union. The accounting records also serve as the basis
for reports to the members and interested third parties. Therefore, it
is essential that the records be accurate, current, and that they show
the true financial condition of the credit union. Prompt preparation of
reports will aid the credit union in achieving its objectives and
fulfilling the purposes for which it was formed.

***BASIC ACCOUNTING RECORDS***

Bookkeeping may be defined as the systematic recording of the financial
transactions of a business in 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-entry accounting system.
In this system each transaction results in at least two entries: a debit
(or entry on the left side of an account ledger) and a credit (or entry
on the right side of an account ledger). If the transaction requires
several debits and credits, the total of the debits and the total of the
credits must be the same. In other words, for every debit entry there
must be an offsetting credit entry and vice versa. Following this rule
and determining that the total debits equal the total credits can keep
the records in balance.

Record financial transactions as journal entries consisting of debits
and credits. Every transaction affects at least two accounts. Accounting
principles assign each type of account a normal debit or credit balance.
The normal balance coincides with what is done to increase the balance
in the account. For example, asset accounts are increased with debits;
therefore, the normal balance in an asset account is a debit.

Debit refers to the left side of an account and credit refers to the
right side. Calculate the account balance from the totals of the debit
and credit sides of an account and subtract the smaller sum from the
larger; and the difference is called the balance of the account. Debits
and credits affect asset and expense accounts in one way and liability,
equity, and revenue accounts in the opposite way.

**Types Of Accounts**

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

The \"Liability Accounts\" record what the credit union owes and the
\"Equity Accounts\" reflect the member's ownership interests. Together
these accounts include notes payable, members\' shares, undivided
earnings and reserves. The \"Liability Accounts\" and \"Equity
Accounts\" as well as the income accounts normally have credit balances.

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

**BRIEF OUTLINE OF THE PRESCRIBED ACCOUNTING SYSTEM**

The accounting records of federal credit unions should be maintained on
either of two accounting bases: namely, the modified cash basis or the
accrual basis. The accrual basis of accounting is recommended for credit
unions with assets totaling \$2 million or more at the end of the
accounting period.

***MODIFIED CASH BASIS***

Generally under a cash basis of accounting, income is recorded and
accounted for when actually collected and expenses are accounted for
when actually paid. Under the modified cash basis prescribed herein, the
accounting is based on the actual receipts and disbursements of the
credit union except that provisions should be made to reflect:

-   Liabilities which are not promptly paid when due,

-   Dividends and interest refunds applicable to the accounting period
    but not yet paid,

-   Deferred income or expenses applicable to future periods,

-   Estimated losses to be sustained on loans outstanding,

-   Estimated unrealized losses associated with mutual fund investments,
    and

-   Depreciation on fixed assets.

The foregoing exceptions to maintenance of accounting records on a
strictly cash basis are designed to recognize in the accounts certain
significant financial transactions not involving the concurrent receipt
or disbursement of cash and to reflect their effect in financial reports
prepared from the accounts. In unusual circumstances, there may be other
significant non-cash financial transactions that should be recorded.
Therefore, the above list is not all-inclusive.

Credit unions for which adoption of the accrual basis of accounting is
not required or practicable should use the modified cash basis of
accounting.

***ACCRUAL BASIS***

The accrual basis of accounting refers to that method under which
liabilities and expenses are recorded when incurred, whether or not
paid, and income is recorded when earned, whether or not received. It is
intended that credit union accounting be maintained on the accrual basis
by all credit unions for which they deem such basis practicable.

Generally accepted accounting principles require the accrual basis of
accounting.

***THE BASIC CREDIT UNION ACCOUNTING SYSTEM DESCRIBED***

For credit unions following either the accrual basis or the modified
cash basis of accounting, the majority of entries originate with the
receipt or disbursement of cash. Other entries are relatively few in
number and consist generally of adjustments or transfers between
accounts, establishment and maintenance of an allowance for loan losses,
write-offs of bad loans, and recording depreciation of tangible fixed
assets. In addition, credit unions following the accrual basis of
accounting should make entries to record accrued income and expenses.

**Records Of Original Entry And Record Of Final Entry**

A bookkeeping system can be broken down into two distinct parts: Records
of Original Entry (the Journal and Cash Record) and Records of Final
Entry (the General Ledger). In addition, the Cash Received Voucher or
its equivalent and the Journal Voucher or its equivalent serve as
memorandum records of the original transactions and the sources of
entries in the Journal and Cash Record.

**The Records Of Original Entry**

The Records of Original Entry are diaries of the transactions as they
occur. The Journal and Cash Record is the main record used for this
purpose. Each day\'s cash receipts, disbursements and other transactions
are entered in the Journal and Cash Record in chronological sequence.
Thus, a running history of each day\'s transactions are kept and may be
summarized as needed.

At the end of a given period, usually the month end, the total of all
transactions pertaining to each account can be obtained by totaling the
debit and credit columns of the Journal and Cash Record. The accuracy of
the entries can be proved in part by balancing the debit columns against
the credit columns.

**The Record Of Final Entry**

The Record of Final Entry is the General Ledger. This record serves as a
means of summarizing the entries in a form that will enable the
bookkeeper to prepare reports on the results of operations to date.
Entries in the General Ledger consist of posting (simply transferring)
the debits and credits (either individually or in total at the end of
the month) for each account in the Journal and Cash Record to the
corresponding account in the General Ledger and computing the net
balance for each account. The result obtained shows the current balances
of the credit union\'s accounts and the results of operations for the
period.

Sometimes, when a General Ledger account summarizes a large number of
transactions, it is necessary to provide detailed information about this
account with a record known as a Subsidiary Ledger. The Individual Share
and Loan Ledgers are examples of subsidiary records which show the
detailed share and loan transactions with each member. The Share and
Loan accounts in the General Ledger reflect the total transactions with
all members. These General Ledger accounts are called Control Accounts
since they act as a control or check over the numerous postings to the
individual or subsidiary ledgers. Subsidiary records are balanced with
related control accounts on a monthly basis and the reconcilement, or
other proof of balancing, is retained.

**BASIC CONCEPTS AND GENERAL PRINCIPLES**

The basic concepts and general principles of the detailed accounting
principles and standards for federal credit unions are:

***SEPARATE ENTERPRISE***

Each credit union is a separate corporate enterprise requiring the
maintenance of comprehensive accounting records and financial reporting
practices to provide meaningful information to members, officers,
directors, the supervisory committee, the National Credit Union
Administration (NCUA), and interested third parties.

***GOING CONCERN CONCEPT***

Each credit union should normally maintain its accounts as a \"going
concern\" on the basis that its operations will continue indefinitely.
Therefore, assets and liabilities should represent the value to the
credit union as a \"going concern\" and should not present liquidation
values.

Whenever unusual circumstances indicate a limited life for a credit
union, e.g., if the credit union liquidates, the \"going concern\"
concept no longer applies. As a result, a statement of realistic assets
and liabilities and appropriate revenues and expenses may require
adjustments. These adjustments could include:

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

-   Evaluation of the realizable value of fixed assets in liquidation,
    and

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

***MONETARY BASIS FOR ACCOUNTING***

State account values in terms of the dollar amounts involved at the time
transactions occur. Recording each transaction in terms of dollar units
provides the best feasible indicator of its relative impact on the
overall operations of the credit union. It also permits identification
of the amount of assets, liabilities, equity, income, or expenses
represented by the transaction.

***CONSISTENCY IN ACCOUNTING FROM PERIOD TO PERIOD***

Follow consistent accounting practices from one accounting period to the
next. Should a material change in accounting treatment occur, disclose
the facts on credit union financial statements. Include the dollar
effect upon the balance sheet and the changes in net income for the
period. For example, if a credit union converts to the accrual system of
accounting because assets exceed \$10 million, it should make a complete
conversion at one time and report the conversion on the current period
financial statements.

***TIMELY RECOGNITION IN ACCOUNTING RECORDS***

Record accounting transactions in a timely manner so all material
information applicable to each accounting period shows in the records.
Provide for estimated losses to be sustained in the collection or
conversion of loans and other assets via charges against current
expenses to properly recognize the reasonable value of assets,
liabilities, and shareholders' equity in accounting records and
financial reports. Estimate amounts for accruing income or expenses if
actual amounts are not known and cannot be determined readily. Absorb
differences between the actual and estimated amounts in the operations
of the subsequent accounting period.

***MATERIALITY***

Recognize material facts relating to credit union financial activity in
the accounts and report them on financial statements. GAAP provides that
a statement, fact, or item is material if, giving full consideration to
the surrounding circumstances as they exist at the time, it is of such a
nature that its disclosure, or the method of treating it, would be
likely to influence or to \"make a difference\" in the judgment and
conduct of a reasonable person. The accumulation of many small items,
each of which in itself would not be \"material", would be \"material\"
if the overall effect would tend to influence the judgment and conduct
of a reasonable person.

***CONSERVATIVE ACCOUNTING***

Maintain accounting records on a conservative basis. Make reasonable
provisions in the accounts for potential losses on assets and for the
settlement of liabilities. Do not materially overstate nor understate
its assets, liabilities, revenues or expenses.

***INTERNAL CONTROL***

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

-   An organization plan to provide, to the extent feasible,
    segregations of duties so different employees will handle the
    operational, custodial and accounting functions;

-   A system of authorization and recording procedures adequate to
    provide reasonable accounting control over assets, liabilities,
    income and expenses;

-   The employment of personnel capable of performing duties and
    responsibilities; and

-   A supervisory committee to conduct effective and timely audits of
    records and accounts including verification of members\' accounts,
    with assistance provided, where needed, by an independent auditing
    firm.

***COMPLETE RECORDING OF INCOME AND EXPENSES***

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

***ACCOUNTING BASIS***

GAAP requires the accrual basis of accounting because it provides the
most complete and informative record of financial activities. The
accrual basis refers to recording liabilities and expenses when
incurred, whether or not paid, and income when earned, whether or not
received. Credit unions with less than \$10 million in assets do not
have to adopt the full accrual basis of accounting. The alternative
method is the modified cash basis of accounting. When a credit union's
assets reach \$10 million or greater, management must convert to the
accrual basis of accounting.

Determine the proper accounting basis using the following guidelines:

-   If assets total \$2 million or more at the end of the accounting
    period, adoption of the accrual basis is *recommended*;

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

-   If following the accrual basis, credit unions with less than \$10
    million in assets may apply the cash basis to particular accounts
    where the results would be only insignificantly different from the
    accrual basis. For this purpose, \"insignificantly\" refers to
    differences which would not be considered important for a proper
    evaluation of condition or operations of the credit union; and

-   If adoption of the accrual basis is not required or practicable, use
    the modified cash basis. Under the modified cash basis, accounting
    is based upon the cash receipt and disbursement transactions except
    to make provision to reflect:

> a\) Liabilities not paid promptly when due;
>
> b\) Dividends and interest refunds applicable to the accounting period
> but not yet paid;

c)  Deferred credits and charges applicable to future periods;

d)  Estimated losses to be sustained on loans outstanding 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 period selected by the credit union to close its books.
Each credit union must close its books at least annually at the end of
the fiscal year. Federal credit unions *may choose* to close the books
at the end of each regular share account dividend period unless
dividends are paid more frequently than monthly.

### FISCAL YEAR

The fiscal year of all federal credit unions should track the calendar
year beginning on January 1 and ending on December 31.

***ACCOUNTING PROFESSION PRONOUNCEMENTS***

Alternatives to the accounting principles authorized by 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. These
alternatives provide the flexibility required for meaningful accounting
under a variety of circumstances in credit unions of different size and
scope of operations. *Absolute uniformity is not required so long as
each credit union conforms its accounting to authorized generally
accepted accounting principles.* Consistency in accounting from period
to period and disclosure of material accounting changes is necessary.

The Financial Accounting Standards Board (FASB), the Accounting
Standards Executive Committee (AcSEC) of the American Institute of
Certified Public Accountants (AICPA), and their committees establish
generally accepted accounting principles (GAAP), accounting guidelines,
and preferred accounting treatment for various activities. Credit unions
should refer to such accounting profession pronouncements for guidance
where a particular activity is not addressed by this manual or other
NCUA publications. Credit unions may adopt such accounting profession
pronouncements provided they are not inconsistent with the principles,
standards, and procedures set forth herein or statutory or regulatory
requirements.

Refer activities unique to credit unions and not addressed in existing
accounting industry literature or in NCUA publications to an independent
accountant for review and comment. Copies of the correspondence should
be maintained in the credit union\'s files.

***HIERARCHY OF GAAP STANDARDS***

External sources such as the FASB issue accounting standards in multiple
forms. Following is the hierarchy of standards:

1.  FASB Statements and Interpretations, APB Opinions, and AICPA
    Accounting Research Bulletins;

2.  FASB Technical Bulletins, AICPA Industry Audit and Accounting
    Guides, and AICPA Statements of Position;

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

4.  AICPA accounting interpretations, "Qs and As" published by the FASB
    staff, as well as industry practices widely recognized and
    prevalent; and

5.  Other accounting literature, including FASB Concepts Statements;
    AICPA Issues Papers; International Accounting Standards Committee
    Statements; GASB Statements, Interpretations, and Technical
    Bulletins; pronouncements of other professional associations or
    regulatory agencies; AICPA Technical Practice Aids, and accounting
    textbooks, handbooks, and articles.

***HIERARCHY OF REGULATIONS***

The NCUA issues guidance in multiple forms. As management refers to the
various forms of guidance, it is important to utilize the hierarchy of
regulations:

1.  Federal Credit Union Act,

2.  NCUA Rules and Regulations,

3.  NCUA Interpretive Ruling and Policy Statement (IRPS) -- if the IRPS
    was issued "for notice and comment", it has the same force a the
    NCUA Rules and Regulations, and

4.  All other forms of regulatory guidance including:

-   Federal Credit Union Bylaws,

-   NCUA Letters to Credit Unions,

-   NCUA Instructions,

-   The NCUA Accounting Manual, and

-   NCUA General Counsel Opinions.

**GENERAL LEDGER, SUBSIDIARY LEDGERS, AND ACCOUNT RECONCILIATIONS**

***CHART OF ACCOUNTS***

Federal credit unions must design their own chart of accounts.
Management is responsible for reporting financial information to the
NCUA on the periodic Call Report. Therefore, we recommend the credit
union's chart of accounts closely mirror the Call Report for ease of
reporting. Use the prescribed financial report forms in Section 900 as a
guide for financial reports intended for posting to members.

Whatever chart of accounts numbering system management adopts for its
general ledger accounts, it should permit the classification of
transactions in at least the detail required to properly complete the
NCUA call report forms.

***GENERAL LEDGER***

The general ledger is a comprehensive record of individual accounts on
the chart of accounts. The chart of accounts is a listing of general
ledger account numbers and account names. The general ledger accounts
contain entries pertaining to a specific asset, liability, equity,
income, or expense. Some computer systems will print various levels of
detail for general ledger reports. Subsidiary ledgers and account
reconciliations support the general ledger.

***SUBSIDIARY LEDGERS***

Subsidiary ledgers store the details of certain general ledger accounts.
Subsidiary ledgers support general ledger accounts. Use of subsidiary
ledgers may reduce the number of general ledger accounts. The fewer the
number of accounts, the easier it is to avoid errors and find them when
they occur. Subsidiary ledgers are often set up for loans, cash,
investments, prepaid expenses, fixed assets, shares, equity, income, and
operating expenses. The better the system of organizing account details
in subsidiary ledgers, the easier it is to avoid errors and find them
when they occur.

***ACCOUNT RECONCILIATIONS***

Account reconciliations prove account balances on a regular basis. Staff
will typically prepare these at least monthly. Accounts such as
corporate investments may require reconciliation weekly or daily.
Reconciliations are not necessary for all accounts. Management's written
policy or procedures will guide staff to complete reconciliations
appropriate for the credit union.

**PRINCIPLES AFFECTING THE RECORDING OF ASSETS**

***UNDER THE MODIFIED CASH BASIS OF ACCOUNTING***

The principles and standards of accounting relating to assets of federal
credit unions following the modified cash basis of accounting are set
forth below.

**Assets -- General Basis for Recording**

Record assets at their cost to the credit union, normally. 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 in separate accounts from
other cash accounts. Show each category of *restricted* cash separately
on financial reports, other than change funds or petty cash.

**Loans**

Record the unpaid balances of loans outstanding and other receivables.
Maintain appropriate valuation allowance accounts to cover estimated
losses. Under the accrual basis of accounting, amortize net loan
origination fees and costs over the life of the related loans using the
interest method. Under the modified cash basis of accounting, at a
minimum, amortize origination fees over 10 years or the life of the
loan, whichever period is shorter.

**Investments**

Record investments and related transactions based on the principles and
standards described below. Generally, depository instruments are
recorded at amortized cost while securities are recorded as follows:

-   Classify *debt and equity* securities purchased and held principally
    for the purpose of selling them in the near term as *trading
    securities* and report at fair value through the income statement.

-   Classify *debt* securities (not equity) management has the positive
    intent and ability to hold to maturity as *securities
    held-to-maturity* and report at amortized cost, i.e., cost adjusted
    for the amortization of premiums or the accretion of discounts.

-   Classify *debt and equity* securities not classified as either
    *trading* or *held-to-maturity* securities as *securities
    available-for-sale.* Report at fair value through a separate
    component of equity in the balance sheet, *Accumulated Unrealized
    Gains/Losses on Available-for-Sale Securities,* an item of Other
    Comprehensive Income.

-   Amortize *premiums paid for securities* using the interest method by
    periodic entries offsetting income on investments over the period
    from acquisition to maturity. Record amortization on a timely basis
    corresponding to the recording of the related income. If interest on
    investments is recorded at the time the income is received by cash
    payments, record the premium amortization similarly.

-   Record *discounts on securities* using the interest method as income
    over the period from acquisition to maturity by periodic entries
    augmenting income from investments. Coordinate entries to record the
    write-off of discounts with the recording of the related income.

-   Record *income earned on investments* as income when received. An
    exception is income automatically reinvested in common trust
    investments, marketable equity securities, bank passbook accounts,
    savings and loan shares, which should be recorded as an increase in
    the carrying value of the investments when notice of income credits
    are received by the credit union; the offsetting credit should be to
    income from investments; and

-   Record *accrued interest purchased on bonds and securities* as an
    asset and clear it by an offset against interest received when the
    first interest payment on the related securities is received.

Refer to Section 300 of this manual for more detailed information
regarding investments.

**Fixed Assets**

Record fixed assets in accordance with the following principles:

-   Record *acquisitions of tangible fixed assets* at cost. The
    acquisition cost is the net purchase price of the asset plus all
    incidental costs necessary to put the asset in condition for use,
    such as freight and installation cost. If management exchanges
    property for an asset, record cost as the amount of cash paid plus
    the recorded amount of the asset surrendered. Do not recognize a
    gain, if any, on the transaction; do recognize the entire loss on
    the exchange, if any. If management acquires property via exchange
    without cost, use the fair market value as the "cost";

-   Establish a dollar value limit, i.e., \$250, under which management
    records tangible property purchases as current expense even though
    the items may be serviceable for more than 1 year;

-   Show cost of land (and land improvements) separately from the cost
    of the buildings and other improvements. In combination purchases,
    record the cost of land based on a fair market value estimate;

**Depreciation**

Fixed asset depreciation is a system of distributing the cost and other
basic values of fixed assets less salvage over the estimated useful life
of the unit (which may be a group of assets) in a systematic and
rational manner. Record depreciation in each accounting period by
debiting expense and crediting valuation allowance accounts under either
of two bases:

-   Use the *unit depreciation basis* to record depreciation over the
    estimated useful lives of assets based on the cost of the assets
    less estimated salvage value. For assets having a remaining use, the
    depreciation shall not exceed the carrying value of the asset less:

a.  the salvage value, or

b.  \$1.00.

Maintain a depreciation record for each depreciable item. Management may
use either the straight-line, declining balance, or the sum of years\'
digits methods for the purpose of computing the periodic amounts of the
depreciation to be charged; and

-   Under the *composite basis*, record depreciation continuously based
    on established composite rates. The accumulated depreciation
    allowance account under the composite-life method of depreciation
    cannot exceed the related fixed assets account.

**Prepaid Expenses and Deferred Charges**

Record costs affecting subsequent accounting periods as prepaid
expenses, if material in amount, and amortize them over the accounting
periods to which applicable. Examples include insurance premiums,
stationery and supplies, advances for accounting services, annual share
insurance premium, NCUA operating fee, and organization costs. Amortize
deferred organization costs over a period not extending beyond the year
incurred and the two subsequent fiscal years.

**Assets Pledged**

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

***UNDER THE ACCRUAL BASIS OF ACCOUNTING***

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

**Income on Loans**

Accrue interest earned each month or dividend period on loans
outstanding, as a debit to assets and a credit to income. Do not accrue
interest on loans 3 months or more delinquent.

**Income on Investments**

Accrue income on investments each month or dividend period based on the
time the investments were held and the income was not received.

**Amortization of Premium or Discount on Securities Purchased**

Whether management accrues interest on investments monthly, quarterly,
semiannually, or annually, record the premium amortization based on the
same time periods. Likewise, accrete discounts on securities via
periodic entries increasing accrued income from investments. Record
entries to write-off the discount within the same periods of time.

**PRINCIPLES AFFECTING THE RECORDING OF LIABILITIES**

***UNDER THE MODIFIED CASH BASIS OF ACCOUNTING***

**Liabilities -- General Basis for Recording**

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

**Accounts Payable**

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

**Notes Payable**

Record funds borrowed to show the outstanding amount payable on the
notes. Include balances of senior liens on assets repossessed or
foreclosed where the credit union acquires title subject to the prior
liens.

**Accrued Interest Payable**

If management records accrued interest, the offsetting charge is the
expense account, Interest on Borrowed Money. Recording accruals of
interest due on notes payable is not required.

**Dividends Payable**

Upon declaration of a dividend, record the actual or estimated amount
payable as a liability unless the dividend is paid or credited to share
accounts in the last month of the dividend period. Offset the charge to
Dividend Expense or Accrued Dividends Payable.

**Interest Refund Payable**

Upon declaration of an interest refund, record the actual or estimated
amount payable as a liability unless the refund is paid or credited to
share accounts in the last month of the dividend period. Offset the
charge to Interest Refunds. Management may record estimated interest
refunds monthly.

**Accrued Expenses**

When expenses are not paid promptly, accrue them as liabilities and
debit expenses. When disbursement takes place, reverse these
liabilities. Except for dividends, credit unions following the modified
cash basis are not required to accrue expenses and allocate the costs to
the periods benefited.

**Accrued Dividends**

Whenever management specifies or contracts a dividend rate on any type
of account in advance, accrue the expense monthly or at the end of the
shortest dividend period offered by the credit union on any type of
account. The only exception to this rule is, accruals are never required
more frequently than monthly.

Dividends in any dividend period cannot exceed:

a)  Undivided earnings available at the beginning of the period;

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

**Deferred Credits**

Deferred credits include discounts on FHA loans and discount on loans
purchased from other credit unions. Record deferred credits separately
and amortize by crediting income during subsequent periods as the income
is earned. Report the amounts of discounts on loans recorded as deferred
credits as deductions from the related asset accounts in financial
reports.

**Liabilities Secured by Liens**

Report the nature and extent to which particular liabilities are secured
by a lien on assets on the financial statements.

**Contingent Liabilities**

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

-   Prior to issuing financial statements, it is probable a loss will
    actually occur because an asset was impaired or a liability was
    incurred on the date of the financial statements; and

-   Management can make a reasonable estimate of the resulting loss.

> *[Note]{.underline}*: Estimate the amount of the accrued contingent
> loss realistically based on all information available. If some amount
> within a range appears at the time to be a better estimate than any
> other amount within the range, that amount shall be accrued. If no
> amount within the range is a better estimate than any other amount,
> however, the minimum amount in the range shall be accrued.

If both of the above conditions are not met but a reasonable possibility
exists that a loss may have been incurred, or if the estimated amount is
not material, a contingent loss need not be accrued but disclosed as a
note to the financial statements.

Examples of contingent liabilities are pending or threatened litigation,
selling loans with recourse, guarantees of the indebtedness of others,
and agreements to repurchase assets sold previously.

***UNDER THE ACCRUAL BASIS OF ACCOUNTING***

The principles and standards applicable to the modified cash basis of
accounting apply under accrual basis of accounting, except as follows.

**Accrued Interest Payable**

Record in each month or dividend period the accrued interest payable on
notes and mortgages with an offsetting debit to interest expense.

**Accrued Expenses**

Examples of accrued expenses are dividends and salaries. Accrue expenses
to allocate costs to the periods benefited. Record the accruals normally
each month or dividend period so all significant expenses are shown on
financial reports provided to directors and members.

**PRINCIPLES AFFECTING EQUITY**

***NET INCOME***

The net income or loss for the current accounting period should
represent the difference between all income and expense items.

***UNDIVIDED EARNINGS***

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

Debit or credit undivided earnings with amounts required to establish or
adjust other appropriation accounts, including the appropriation for
loss contingencies or the special appropriation for losses established
when so ordered by the NCUA Board. Other direct charges or credits to
undivided earnings only include error correction for material amounts
which represent adjustments affecting prior accounting periods. Material
errors in such financial statements could include arithmetic mistakes,
the misuse or deletions of information, mistakes in the applications of
accounting principles or procedures, and improper interpretations of the
accounting aspects of major transactions. Error correction should not
result in the restatement of the prior year\'s financial statements to
disclose the error correction but should be reflected in current period
financial statements and those going forward.

Do not treat normal recurring corrections and adjustments which are the
natural result of the use of estimates inherent in the accounting
process as prior-year adjustments. Normal recurring corrections include
changes in estimated loan losses, accumulated depreciation on disposed
assets, and estimated dividends. These changes are properly recorded as
transactions affecting the current year in the appropriate income and
expense accounts. The determination of net income for the period must
include all items of profit and loss recognized during a period,
including accruals of estimated loss from loss contingencies.

***DIVIDENDS***

Declare and pay dividends to shareholders from current income, plus any
available balances of undivided earnings. Charge the dividends as a
current year expense. Management should use caution in expending
undivided earnings to meet current operating expenses, particularly for
payment of above market dividends. Rather, credit unions should strive
to build capital.

***APPROPRIATION FOR LOSS CONTINGENCIES***

Management can establish an appropriation for contingencies for possible
or unforeseen decreases in the value of assets or for other unforeseen
or indeterminate liabilities not otherwise shown on the credit union\'s
records. Any such appropriation established only as a precautionary
measure will represent a segregation of undivided earnings and should be
so classified in financial reports. Do not use contingency
appropriations as a substitute for valuation requirements for the amount
of currently estimated losses on loans or other assets. When the net
loss during any accounting period exceeds available undivided earnings,
reduce the appropriation for loss contingencies and/or other
segregations of undivided earnings to offset such excess.

Even if management established an Appropriation for Loss Contingencies
for a particular liability or expenditure, do not charge such
expenditures directly to the appropriation. Record the loss or cost as
an operating expense.

Establish the Appropriation for Loss Contingencies for a particular
event by a debit to Undivided Earnings. When the event occurs, or the
liability is paid, credit the balance of the account back to Undivided
Earnings. Transfers from the Appropriation for Loss Contingencies to
Undivided Earnings must be in amounts equal to costs charged to expenses
during an accounting period, thereby eliminating any reduction in
Undivided Earnings which would have occurred due to the contingency
taking place.

***DONATIONS***

GAAP affects how credit unions with \$10 million or more in assets
measure and disclose donated assets and services on their financial
statements. Credit unions under \$10 million in assets may follow GAAP
or the regulatory-basis of accounting described herein. Regardless of
the method used, management must consistently apply the method they
choose, GAAP or regulatory-basis, as outlined in this section.

From a regulatory perspective, NCUA considers the donation of assets and
services from a sponsor to a credit union as a reciprocal transfer
(i.e., in return, sponsor gets the fringe benefit to employees of
on-site financial services). Thus, management does not have to report
the donation of assets and services by the sponsor on their financial
statements. From a GAAP perspective, management must recognize the fair
value of the contributed use of facilities or other services as both a
revenue and an expense in the period received and expended.

Under GAAP, record donations and gifts received (including donations
made for the specified purpose of enabling the credit union to pay
dividends) as income and show them as part of net income for the current
month. The regulatory approach provides as an exception to the
foregoing, if a credit union receives a gift of a tangible fixed asset
of substantial value (i.e., a building or a computer) in order to
exclude such amounts from current income and undivided earnings, offset
the entry for the fair market value of the asset recorded in the fixed
asset account to Donated Equity. Depreciate these donated assets via
charges to expense over their remaining useful lives.

GAAP requires inclusion of all contributions made or received in
expense/income when made/received. Contributions include many of the
"donations" credit unions receive (i.e., office space, telephone
services, data processing support); and some volunteer services (i.e.,
some accounting/auditing services, some legal advice, etc.). Under GAAP:

-   Recognize some contributions simultaneously received and used as
    both a revenue and an expense 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 sponsoring entity could discontinue
    providing the space at any time. If the sponsoring entity provides
    the facility for a specified period of time (i.e., 5 years), the
    promise must be set up as a receivable at its fair value.

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

1)  Create or enhance non-financial assets, or

2)  Require specialized skills, are provided by individuals possessing
    those skills, and are typically purchased if not donated.

For example, if the above two conditions are met, GAAP requires
recognition of an audit performed by uncompensated Supervisory Committee
members as a revenue and an expense on the credit union's books.

***SHARES AS EQUITY***

Classify shares as equity in the Statement of Financial Condition:

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

-   Shares function as equity and represent ownership; and

-   Share dividends are based on earnings and are not guaranteed.

In some jurisdictions, boards of directors may allow individual members
to deposit more than the member's ownership interest. In these cases,
management should properly classify excess shares as liabilities on the
Statement of Financial Condition.

**PRINCIPLES AFFECTING THE RECORDING OF INCOME AND EXPENSES**

***UNDER THE MODIFIED CASH BASIS OF ACCOUNTING***

The principles and standards of accounting relating to income, expenses,
gains, and losses of federal credit unions following the modified cash
basis of accounting are set forth below.

**General Rules for Recording Income and Expenses**

Record all income, expenses, gains, and losses affecting each accounting
or dividend period through income and expense accounts. To correct an
error affecting prior accounting period operations, refer to GAAP.

**Basis for Recording Income**

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

**Basis for Recording Expenses**

Expenses are the uses and consumption of goods and services in the
process of producing income. Pay and record expenses related to current
operations promptly when due. Record all expenses incurred but not paid
at the end of the month as current month expenses: as accounts payable
or accrued expenses. Record significant amounts of expenses paid or
accrued if applicable to future periods as prepaid or deferred expenses
and amortize them over the periods to which they apply.

**Tangible Fixed Asset Expenses**

Expense depreciation of fixed assets over the useful lives of the assets
under the unit or the composite basis.

-   When management computes depreciation on a unit basis, eliminate the
    amount of the retired asset together --- including any related
    depreciation allowance. Record any material difference between the
    net amount realized from disposition and the net carrying value of
    the depreciable assets as an \"other gain or loss\" and show it in
    financial reports separate from regular operating income or expense;
    and

-   When management computes depreciation on a composite-life basis,
    credit the cost of retired units to the appropriate fixed asset
    account; charge the same amount less salvage value to the allowance
    for depreciation account. Do not recognize gain or loss in the
    accounts since items in the group will retire both before and after
    expiration of the estimated average life. When retirements are
    abnormal or unusual, record gains or losses in the accounts, similar
    to the unit basis since composite rates do not anticipate such
    retirements.

**Amortization of Deferred Charges**

Examples of deferred charges include prepaid insurance, leasehold
improvements, and organization expenses. Include debits in expenses each
month or dividend period for amortization of deferred charges.

**Equipment Rental Expense**

Charge rental charges under equipment leases directly to expense unless
they represent installment purchases of fixed assets. If a rental
agreement represents an optional purchase contract the credit union
plans to exercise by purchasing the equipment, record the cost of the
equipment as a fixed asset and a liability. Thereafter, payments made
will reduce the liability amount, and management will record appropriate
depreciation expense. Refer to GAAP for further guidance.

**Loan Losses**

Record losses on loans and related assets as described below:

-   Charge off loan losses as they occur, with the approval of the board
    of directors, by debits to Allowance for Loan Losses. Record
    recoveries on loans charged off, as they occur, as credits to
    Allowance for Loan Losses;

-   Establish and maintain Allowance for Loan Loss to reflect the
    estimated amount of losses on:

> \(1\) Originated member loans.
>
> \(2\) Loans purchased from other credit unions.
>
> \(3\) Lease receivables.

The value of the allowance account should be adjusted monthly or at the
end of the regular share dividend period, if longer than monthly. For
this purpose, management should determine the amount of the allowance
adjustment based on a logical, documented, defensible method which will
result in the estimation of all probable losses inherent in the loan
portfolio as a given date, and (losses) which are reasonably estimable.

**Other Gains and Losses**

Normally include other gains and losses when determining periodic net
earnings or losses. Report non-recurring gains or losses (those
unrelated to ordinary credit union activities) separately as
non-operating income or expense on periodic income and expense
statements. For example, charge a gain or loss from the sale of a credit
union office building, and any loss charged off on a note or contract
taken in connection with a sale of credit union office quarters to Other
Losses.

**Cash Overage and Shortages**

Record cash overages and shortages from the processing of cash
transactions as debits or credits to expense daily. Adjust the cash over
and short expense accounts whenever the reason for the cash overage or
shortage is determined. Consider any overage or shortage in negotiable
instruments a \"cash overage or shortage\" and record the appropriate
adjustment at least prior to the close of each month.

**Donations**

Refer to the discussion in Principles Affecting the Recording of Equity.

**Pension Plan Costs**

Pension plan accounting is beyond the scope of this publication. Seek
assistance from an independent accountant.

**NCUA Insurance Guaranty**

Do not record any guaranty provided by the NCUA to a credit union to
make it insurable under Title 11 of the Federal Credit Union Act, as
amended. This guaranty represents a claim by the credit union against
the NCUA which is payable only in the event of liquidation of the credit
union and then only to the extent needed to reduce or eliminate loss
claims against the Title 11 share insurance fund. Amortize guaranties
through charges to expense in accordance with the terms of the guaranty
agreement.

***UNDER THE ACCRUAL BASIS OF ACCOUNTING***

The principles and standards of accounting applicable to the modified
cash basis of accounting apply under the accrual basis of accounting,
except as follows:

**Income on Loans**

Record interest income earned each month or dividend period on loans
outstanding as income and as an asset although it may not have been
received. Many computerized loan systems will calculate the amount to
accrue. Maintain supporting documentation for the accrual.

**Income on Investments**

Management should record income as noted:

-   Record income for investments in savings and loan associations and
    other credit unions in each month or dividend period the investments
    are held and the interest or dividend income was not received. For
    example, accrue the amount of each quarterly or other distribution
    applicable to each dividend period as Accrued Income on Investments
    with an offsetting entry to Income from Investments;

-   Record income for mutual fund and common trust investments as income
    for the month or dividend period based on the time the investments
    are owned. Adjust the amount each month or dividend period as
    required based on the change in value. If management receives income
    during the period, record the amount as the actual amount of
    interest earned for the preceding period;

-   Record income for other investments each month or dividend period
    based on the actual time the investments are held and interest or
    dividend income was not received. Recognize the amount earned as
    income and as an asset. Accrue interest earned on the general type
    of government securities each month or dividend period based on the
    applicable portion of the semiannual interest. Accrue interest on
    appreciation-type savings bonds in each month or dividend period
    based on the pro rata amount of the bond appreciation for the period
    shown on the bond\'s table of redemption values. Accrue interest on
    loans to other credit unions, certificates of deposit and deposits
    in other credit unions to record interest earned each month or
    dividend period based on the actual time the investments or deposits
    are held; and

-   Record differences between the amount of income 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, uncompensated leave, dividends, supervisory committee
audit, taxes, and interest on borrowed funds. Pay or accrue expenses and
match them against periodic revenues with offsetting credits, where
necessary, to cash, payables, or accrued expenses.

**Accrued Interest on Loans Included in Valuation Allowance**

Include an amount to cover potential losses on accrued interest
receivable from loans in the valuation allowance for estimated losses on
outstanding loans. Do not accrue interest on any loans 3 months or more
delinquent. Reverse previously accrued interest on such loans via
appropriate entries to Accrued Interest and Interest Income.

**FINANCIAL STATEMENTS**

***PURPOSE***

Federal credit unions' financial statements must present their financial
position fairly as of a particular date. This is the most important
external function of the accounting process. Financial statements must
be posted in a conspicuous location for the information of members at
each credit union location and as required by the NCUA. The results of
operations for a particular period must follow GAAP if assets are \$10
million or more. Other credit unions may follow GAAP and must follow the
principles prescribed herein. Management uses financial statements to:

-   Make sound decisions,

-   Effectively manage the credit union, and

-   Show how management has carried out its stewardship to shareholders,
    creditors, and others having an interest in the credit union.

***REQUIRED STATEMENTS***

Management must prepare two financial statements every month for
internal and external use. These statements are:

-   Statement of Financial Condition, and

-   Statement of Income.

**Statement of Financial Condition**

The Statement of Financial Condition (balance sheet) and notes thereto
should show the financial condition of the credit union as of the date
it represents. The statement should:

-   Recognize the basic concepts of the principles and standards of
    accounting by showing, on a conservative basis, assets and
    liabilities including contingent losses, appropriate classifications
    of credit union equity; and identify any significant changes in the
    supporting accounting practices from those used in the previous
    presentation;

-   Provide valuation allowances as deductions from related assets to
    show estimated amounts of losses as well as depreciation on tangible
    assets. Management should include estimated losses to be sustained
    in collateral collection or value realization;

-   Separate unrestricted cash and restricted cash, and identify the
    nature and extent of any assets pledged or hypothecated;

-   Reflect the nature and extent to which specific liabilities are
    preferred liens on assets; i.e., indicate for any real estate
    mortgage the particular assets pledged as security;

**Statement of Income**

This statement and notes thereto should reflect all income, expenses,
gains, and losses of the credit union for the period for which prepared.
It should:

-   Reflect the results of operations in accordance with GAAP or at a
    minimum, the principles prescribed herein;

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

-   Include within regular operations, increases and decreases in the
    valuation allowance established for estimated losses on loans and
    loan assets; and

-   Include as income all fees and charges made to members and
    borrowers.

**Notes To Financial Statements**

The objective of notes to financial statements is to provide information
not sufficiently described within the body of the financial statements.
Notes to financial statements are an integral part of the statements and
should provide:

a)  A description of significant accounting policies followed;

b)  An explanation of changes in methods or techniques of handling
    accounting transactions;

c)  An explanation of creditors\' rights to specifically pledged assets;

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

e)  The market value of investments.

**Disclosures About Fair Values of Financial Instruments**

Credit unions with less than \$10 million is assets may wish to
disclose, either in the body of the financial statements or in the
accompanying footnotes, the fair values of financial instruments on
their statements of financial condition. GAAP generally exempts all
entities with assets of \$100 million or less from fair value disclosure
requirements.

The disclosure may be advisable for all financial instruments, both
assets and liabilities, recognized and not recognized in the statement
of financial condition, *[for which it is practicable to estimate fair
value]{.underline}.* Refer to GAAP for guidance. It details procedures
for estimating the fair value of \"financial instruments\" and
illustrations for applying the disclosure requirements about fair value
of financial instruments. For those affected credit unions, we recommend
management obtain a copy of GAAP and prepare a financial statement
footnote including the methods for establishing the fair value of the
assets, liabilities, and equity. These methods should provide the basis
for the dollar estimates of the fair value. Retain historical records of
your fair value calculations based on these methods and maintain an
overall policy documenting these methods. If it is not practicable to
estimate the fair value of a particular financial instrument, disclose
in the footnote the pertinent characteristics of the instrument and the
reason for impracticability of setting a fair value (i.e., it would be
excessively expensive to estimate).

Federal credit unions must provide fair value information on the
quarterly/semiannual NCUA Call Reports. Include fair value information
on the statement of condition as management and the independent auditing
firm agree (i.e., if you are seeking an unqualified opinion).

***OPTIONAL STATEMENTS***

The following statements are optional for credit unions under \$10
million. Post these statements with the required statements if
management prepares them. Prepare the first two on a quarterly basis or
at the end of the regular share account dividend period (if the dividend
period is longer than quarterly). Prepare a Statement of Cash Flows at
least 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 show changes in total earnings
during the period reported. At management's option, prepare this
statement quarterly or at the end of the regular share account dividend
period (if the period is longer than quarterly) and present it with
other financial statements.

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

Credit unions with more than \$10 million in assets may complete this
statement quarterly or at the end of the regular share account dividend
period (if the period is longer than quarterly) and present it with
other financial statements. Management prepares this statement to report
a measure of all changes in equity resulting from recognized
transactions and other economic events of the period other than
transactions with owners in their capacity as owners. This statement
must accomplish two objectives:

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

b)  Display the accumulated balance of Other Comprehensive Income
    separately from Retained Earnings and Additional Paid-in Capital in
    the equity section of a Statement of Financial Condition.

Other Comprehensive Income is total non-owner changes in equity during a
period from transactions and other events and circumstances. It includes
all changes in equity during a period except those resulting from
investments by owners and distributions to owners.

**Statement of Cash Flows**

This statement provides relevant information about cash receipts and
cash payments during the reporting period and supplements the Statement
of Financial Condition and the Statement of Income. At management's
option, prepare the Statement of Cash Flows at least annually under the
accrual basis of accounting. Management may prepare the statement more
frequently. Federal credit unions not using the accrual basis of
accounting may prepare this statement.

The Statement of Cash Flows, when used with the related disclosures and
other financial statements, should help to assess:

a)  Management\'s ability to generate positive future cash flows;

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

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

d)  Effects on the credit union\'s position of both its cash and
    non-cash investing and financing transactions during the reporting
    period.

More information pertaining to the Statement of Cash Flows, and its
preparation and illustrations are found in Section 900 of this manual.

***FULL AND FAIR DISCLOSURE REQUIRED***

The financial statements described above shall provide full and fair
disclosure of all assets, liabilities, appropriations, and retained
earnings. A limited number of valuation allowance accounts may be
necessary to fairly present all income and expenses and the overall
financial position for the reporting period.

***FULL AND FAIR DISCLOSURE DEFINED***

\"Full and fair disclosure\" is the level of disclosure a reasonable
person would provide to a member of a credit union, a creditor, or the
NCUA in order to fairly inform them of the financial condition and the
results of operation. Management provides full and fair disclosure by
preparing financial statements consistent with this accounting manual or
GAAP as long as GAAP is not inconsistent with regulatory requirements.

***REQUIRED CERTIFICATION***

When presenting financial statements to members, creditors, and the
NCUA, include a declaration by the treasurer and the president that the
report is true and correct to the best of their knowledge and belief,
and presents fairly the financial position and the results of operations
for the reporting period. In the absence of the president, any other
officer designated by the board of directors may make such declaration.

**DEFINITIONS OF TERMS**

**(presented alphabetically)**

Unless the context requires otherwise, the following terms have the
meaning indicated in this section:

***Accrual Basis of Accounting*** matches financial statement
recognition with the period of occurrence. Under this basis of
accounting, management records income when earned and expenses and
liabilities as incurred regardless of the actual receipt of payment or
disbursement.

***Accrued Interest*** refers to Interest earned on loans, investments,
or notes or mortgages payable, which has not been received or paid by
the credit union. Management may accrue interest periodically on a time
period consistent with the financial statements.

***Amortization*** refers to the systematic write-down of prepaid and
deferred expenses over a predetermined period of time, such as the
write-down of an insurance premium or bond premium.

***Collateral*** refers to real or personal property pledged as partial
or full security on a debt including completed documentation for
repossession and sale of the collateral in the event of default. A
co-maker may be accepted in lieu of collateral to further secure a debt.

***Composite Depreciation Basis*** refers to depreciating a group of
fixed assets using a rate based on the estimated average useful lives of
the assets. No depreciation is recorded when the accumulated
depreciation allowance equals the book value of the fixed assets.

***Deferred Charge or Deferred Expense*** refers to an expenditure not
recognized as a cost of operations during the period incurred, it is
carried forward and written off in one or more future periods. Often it
includes prepaid expenses such as insurance premiums, stationery, and
office supplies.

***Deferred Credit*** refers to revenue or income received or recorded
before it is earned. It includes income held in suspense until:

-   Determination and deduction of offsetting charges,

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

-   Identification occurs.

***Donated Equity*** is a regulatory accounting term that refers to
equity in a credit union arising from contributions of real or personal
tangible property (fixed assets).

***Appropriation for Loss Contingencies*** refers to an appropriation of
accumulated earnings set aside for possible decreases in the book values
of assets or other undetermined liabilities not otherwise reflected on
the books. Establish contingency appropriations as a precautionary
measure only and include as a part of equity, as they represent
isolations (appropriations) of undivided earnings.

***Undivided Earnings*** refers to accumulated post-closing accumulated
net income after distributions to members, adjustments affecting prior
period operations, appropriations required by law, and appropriations
authorized by the credit union board.

***Valuation Allowance*** refers to an account representing
management\'s judgment as to possible loss or decline in value within a
specific class of assets such as loans or fixed assets.

***Modified Cash Basis of Accounting*** refers to a blend of the cash
basis of accounting and the accrual basis of accounting. It is a form of
accounting based on actual receipts and disbursements and includes
provisions for:

a)  Liabilities not paid when due;

b)  Unpaid dividends and interest refunds applicable to the accounting
    period;

c)  Deferred credits and charges applicable to future periods;

d)  Estimates of anticipated losses on loans outstanding and other risk
    assets; and

e)  Depreciation of fixed assets.