October 28, 2005

Attention: Technical Director
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
Via email: [email protected]

Re: Exposure Draft. “Business Combinations”,
        a replacement of FASB Statement No. 141

File reference No. 1204-001

Dear Director:

America’s Community Bankers (“ACB”) is pleased to comment on the Exposure Draft (“ED”) issued by the Financial Accounting Standards Board (“FASB”) containing proposed amendments to the accounting for business combinations. The ED proposes to amend FASB Statement No. 141 and require all business combinations to be accounted for by applying the acquisitions method of accounting (formerly called the purchase method), including combinations involving only mutual entities. The ED contains additional changes to the accounting for business combinations, one of which will disallow the carrying over of a separate valuation allowance for loans that are acquired in a business combination. Our comments in this letter will focus on the concerns that ACB has on the potential impact that the proposed standard would have on mutual combinations and a general disagreement with the proposed prohibition on bringing over a valuation allowance as a component of the net fair value of acquired loans. For your reference, we have attached a letter submitted to FASB in March 2001 that provides detailed information on the mutual combinations issue and a proposed alternative approach.

ACB Position

ACB maintains the position that the use of acquisition accounting, as described in the ED, is inappropriate for mutual combinations and will result in arbitrary and costly revaluations, and financial statements that will not truly reflect the essence of the underlying combination transaction. We are not advocating the maintenance of pooling-of-interests, rather we believe that FASB should require mutuals to use a net asset value approach, or similar variation of acquisition accounting using estimations of the fair market values of assets and liabilities assumed.

ACB has been very active in dialogue with FASB over the past several years, continuously expressing serious concerns that an acquisition accounting model is not relevant for combinations of mutual banks. Simply put, forcing mutual banks to use the acquisition method when combining interests will result in financial statements containing information that lacks consistency, understandability and usefulness. ACB believes that a mutual combination, for all practical purposes, is not an acquisition or purchase because, among other things, no financial consideration is exchanged between the combining entities. Mutual savings associations and savings banks have a unique capital structure made up entirely of retained earnings and they have no stock or stockholders. The proposed acquisition approach, if adopted in its current form, would require mutuals to identify an acquiring bank, then determine a fair value of the theoretically “acquired” institution based on the value of the exchanged members interests. This fair value would then be recognized as a direct addition to capital or equity, not retained earnings. As ACB has repeatedly stressed, the resulting financial statements will not truly reflect the true essence of the underlying combination transaction.

If FASB moves forward and requires mutuals to use the acquisition method, it is certain to cause strategic and competitive pressures on mutual banks in the US today. The financial health of banks is contingent on their maintaining an ability to merge or combine resources if needed, without incurring inflated fees associated with trying to make an unpractical model work and producing distorted financial statements based on hypothetical valuation data. Mutuals cannot readily obtain a quoted stock price as there is no stock, nor is there a “purchase” price when they decide to enter into a combination with another mutual. ACB believes that with the proposed acquisition model, valuations will be performed inconsistently, and readers of the combined entity’s financial statements will be left with less transparent information, and preparers with less confidence in the reported numbers.

Alternative Approach

A more beneficial approach, one that ACB has relayed to FASB in previous letters and verbal communications, would be a net asset value model where assets and liabilities would be valued in an approach similar to the acquisition model prescribed by the ED. The accounting treatment proposed by ACB, which would begin with an estimate of the fair market value of assets acquired and liabilities assumed, is consistent with the provisions of FAS 141. An excess net asset amount would typically result from the estimation, but no portion of the excess would be allocated as a pro rata reduction in asset values. Second, the excess net asset value would be recognized in part or in whole as other income to the amount less than or equal to the pre-existing book value of the equity of the acquired institution. Any remaining value of net assets above the acquired institution’s book value would be treated as a component of other comprehensive income that would be amortized into net income over an appropriate time period. Any obligations created by the combination that would not otherwise exist would be recognized as liabilities.

The proposed ED’s theoretical acquisition accounting makes perfect sense for stock-owned organizations, but is unfortunately a model that will not work for mutual entities. ACB is not asking FASB to reconsider the prohibition of pooling of interests, but we urge the Board to reconsider the devastating impact that the proposed acquisition method would have on the ability of mutual banks to merge or combine resources to compete and survive in the 21st century. ACB and its members are ready to assist FASB in reaching a workable alternative that would achieve FASB’s goal of more accurate and transparent financial reporting for all entities.

Carryover of Valuation Allowance for Acquired Loans

In addition to the mutual combinations issues, ACB is concerned with the language in paragraph 34 of the ED that reads, “The acquirer shall not recognize a separate valuation allowance as of the acquisition date for assets to be recognized at fair value in accordance with this Statement. For example, an acquirer would recognize receivables (including loans) acquired in a business combination at fair value… and would not recognize a separate valuation allowance for uncollectible receivables at that date. Uncertainty about collections and future cash flows is included in the fair value measure.”

ACB believes that the ability to carryover an allowance for loan and lease losses is an essential component of accurate and clear bank financial statements, and if disallowed, will hinder comparability between financial institutions. ACB recognizes that assets and liabilities acquired should be measured at their fair value, but we do not believe that the carrying over of a separate valuation allowance is inconsistent with a fair value approach. ACB opposes paragraph 34 in the ED, and we believe that the most transparent presentation of uncertainty about collections and future cash payments on acquired loans is achieved when reported as a separate allowance on bank financial statements. Disallowing this presentation forces further complexity on users of these financial statements in understanding the proposed disclosure-based approach.

Conclusion

ACB appreciates the continued efforts of FASB to provide high-quality accounting standards and ultimately improve financial reporting. However, ACB believes that the provisions in the ED requiring the imposition of acquisition accounting on mutual combinations and the disallowance of a separate valuation allowance for acquired loans are inconsistent with FASB’s objective of improving the completeness, relevance and comparability of financial information about business combinations being reported in financial statements. If ignored, ACB fears that these provisions will force mutual banks to use an acquisition accounting approach that does not fit their business model, and will result in less transparent data being reported on acquired loans. Each of these end results causes decreased comparability and transparency in bank financial statements.

ACB appreciates the opportunity to comment on this important matter. If you have any questions, please contact the undersigned at (202) 857-3158 or [email protected].


Sincerely,

Dennis M. Hild
Vice President – Accounting & Financial Management Policy



Attachment: ACB Letter to FASB dated March 16, 2001