NEWS: You may recall a Compliance Courier that The League sent out in July 2021, titled “Examiners focus on accounting treatment for repossessed assets.” In that Courier, we looked at the accounting treatment required for repossessed personal property assets – such as vehicles – under Generally Accepted Accounting Principles (GAAP) and 5300 Call Report instructions. We alerted credit unions that examiners had cited credit unions for failing to record the collateral’s fair value at (or soon after) the date of repossession.
This month, the Wisconsin Office of Credit Union published a new letter to credit unions that changes some of that Compliance Courier analysis we provided back in 2021.
The OCU’s Letter CU 1-23: Treatment of Repossessed Assets and Deficiency Balances was issued to address what appears to be a fairly common examiner’s finding lately about accounting for repossessed assets. The letter says:
It has come to the Office of Credit Union’s attention that this Examiner’s Finding has been cause for a lot of concern and has led to many different questions surrounding the treatment of repossessed vehicle loans. The purpose of this letter is to provide clarification on this matter.
The letter goes on to provide detailed information on the proper accounting treatment when the credit union repossesses a debtor’s personal property. Your credit union’s accountants and auditors should review the letter and follow its instructions.
Of course, we in The League’s Legal Affairs Department are not CPAs, so many of the accounting nuances go right over our heads. That’s why we asked Josh Roberts, The League’s VP of System Collaboration & Development, to review the letter. This is what he told us:
The credit union should make every effort to sell the collateral as quickly as they can. According to the Wisconsin Office of Credit Union in Letter CU 1-23, “If the repossessed collateral is sold within six months of the vehicle being transferred to FRA [the Foreclosed and Repossessed Assets account], then the credit union can report any of the gains or losses from the sale or disposition of the asset, after including any reasonable costs to sell, as a Loan Recovery or Charge-off through the Allowance.” The letter from OCU goes on to say that “If the repossessed collateral is sold after six months of the vehicle being transferred to FRA, then any gain or loss on the sale or disposition of the asset must be reported as a Gain or Loss on the Disposition of Fixed Assets. These balances would not be run through the Allowance as a recovery or charge-off.”
The letter from OCU does not change the timing for moving the collateral to the FRA; credit unions are still required to make that adjustment after the 15-day redemption period is over.
Roberts added, “It’s worth noting that this is just for the accounting treatment of a charged-off vehicle loan from the credit union’s balance sheet. This does not change how the credit union collects on the loan, reports the loan, etc. In the past the difference between the accounting treatment and the collection treatment was a source of confusion.”
The process outlined in the new OCU letter differs somewhat from our summary in the 2021 Courier. The following paragraph, from the old Courier, now seems to be off-base:
When the vehicle is sold, the proceeds are used to clear the balance in the FRA account, which will dispose of the asset from the credit union’s balance sheet. If the vehicle is sold for less than the amount in the FRA account, the loss is posted to the credit union’s gain/loss on the disposition of an asset account. The similar steps are taken if the vehicle is sold for more than the balance in the FRA account; the gain on the sale is posted to the same gain/loss on the disposition of an asset account.
Again, have your accountants and auditors review Letter CU 1-23 for details. If you have questions about the proper accounting for repossessed assets and deficiency balances, reach out to the OCU at (608) 261-9543. You may also contact Josh Roberts via
email or at (608) 640-4065.
