THIS DRAFT SHOULD NOT BE RELIED UPON FOR ACADEMIC, SCIENTIFIC, LEGAL OR OTHER USES. THIS DRAFT CONSISTS OF UNVETTED, UNVERIFIED STATEMENTS THAT COULD CHANGE AT ANY TIME.
The National Cooperative Bank(1) (NCB) was founded by act of congress in 1988. It's subsidiary, NCB, FSB is founded to facilitate funding for cooperative organizations, such as Common Interest Real-estate Associations (CIRA) by serving the unique banking needs of these entities. The NCB is by itself organized as a CIRA -- each investor or borrower from the Bank is a member who is required to purchase stock in NCB. Typically, CIRA who borrow from the Bank are required to mainted a membership equity of 1% of the initial debt. So for example, a CIRA that in 1990 formed by mortgaging its building for $1 million, was required to invest in the NCB stock by paying in $10,000 as its membership contribution.
NCB issues various types of stock. The voting stock is issued based on the 1% of the membership contribution discussed earlier. Stock dividends are generally of B-2 class stock which is non-voting, and is transferreable only with NCB approval upon liquidation or re-financing. When a refinancing occurs, the stated value of B-2 stock is credited against any additional contribution required. When a liqudation occurs, the assumption is that it is by virture of some type of take over or merger by another qualified CIRA. The stated value of the B-2 is thus transferred to the acquiring CIRA.
The issues with NCB B-2 stock and stock dividends are two fold. First, should the carrying value of such stock be recognized and disclosed as an asset for the CIRA? Secondly, what should be the treatment of B-2 stock? Some accountants have maintained that because the B-2 stock is only
To augment the situation, many CIRA members are not trained in accounting, banking or finance. The financial statement must be very clear about the position of the financial statement. To that effect, there may be a tradeoff between the technically correct accounting treatment and the useability to the user. Typically, users of the CIRA's financial statement are the mortgage holding creditors, potential buyers and the stockholders. The former two groups are financial astute and rely on the financial statement for their decision, including those to buy units at the CIRA. The latter group relies on the statement for an understanding of its position and operation. Thus, a built-in conflict of needs of usability augment the issue of valuation, recognition and disclosure of unusual financial instruments such as a NCB stock.
No direct authoratative literature regarding NCB(2) stock for CIRA exists. The AICPA guide for CIRA appears to treat the entire deposit amount, including non transferreable non-redeemable stock as asset. The Internal Revenue Service (IRS Rev. Proc 94-40), referring to United States Code's National Consumer Cooperative Bank Act(3)(4) considers all stock dividends included in gross income. Financial Accounting Standard (FAS) No. 109 "Accounting for Income Taxes"(5) is relevant for defferred tax arising from temporary differences between book and tax.
Generally, B-2 stock dividends are declared and distributed annually. The stock dividends have a stated value based on the percentage of stock dividends multiplied by the cash contribution at the bank. For example, if a $10,000 membership contribution is held by the Bank, and a 8% stock dividend is declared, then the CIRA is awarded $80 of B-2 stock. Some accountants have argued that because the $80 will be realized in the remote future, that its value is simply "intrinsic" and can not be measured at all. Accordingly, the treatment of the B-2 stock is as if it has no stated value.
Other accountants have taken the position that the B-2 stock has "probable future economic benefit", in the case of liqudation or the more likely situation of refinancing with NCB. The latter typically include a higher leve of debt in mortgage, which requires additional funds to be contributed in order to adhere to the 1% stipulation of the NCB charter. For example, the CIRA which financed $1 million in 1980 has undertaken major renovation and repair in 2004. For this purpose it refinanced its mortgage with NCB for $10 million (such a refinance could be awarded because of increased property values). In between 1980 and 2003, the B-2 stock accumilated in the account were $1,000. The CIRA was required to contribute to its membership at NCB a total of $100,000, of which $10,000 were carried forward from the initial mortgage and $1,000 were credited based on its B-2 stock balance. In 2004, NCB declared a 7% B-2 stock dividends and the CIRA received approximatley an additional $7,000 in B-2 stock, bringing its total B-2 stock dividends to $8,000.
Because the refinancing generally required a higher level of debt in mortgage, the stock value become significant, if not outright material, especially as time elapse with additional dividends credited.
According to the example above, the $1,000 credit of B-2 stock is a "probable future economic benefit" when a refinancing of the debt occurs. The caveat is that refinancing may not occur with NCB and the CIRA may turn to another bank. Under such circumstances, the B-2 stock simply remains as credit to the CIRA until such time the CIRA liqudates or again elects to refinance with NCB.
The issue of valuation directly affects the recognition of the NCB stock in
aggergate (voting and non-voting) and the dividends thereof. Accountants who
have not treated NCB stock as asset, do not recognize the increase in the stock
as Other Comprehensive Income. However, IRC requirements mandates the inclusion
of such stocks in gross income. Accordingly, a book-to-tax difference arise
with possible deferred tax asset, depending of materiality and other FAS 109
Accountants who take the position that NCB stock, including its non voting B-2 stock are assets, use the stated value of the stock (dervied from the cash contribution for membership at NCB) as the recognized value. The recognition is not of operating income but as other gains to stockholder's equity. The style of disclosure on the face of the statement but one way to recognize such gains is as OCI. No book-to-tax differences are required.
On the face of the statement, the AICPA guide recommends that NCB stock be displayed at stated value under "Other Investments" or "Other Assets". The stated value is typically assumed to be the aggrgeate of all NCB stock held by the CIRA. A footnote disclosure should indicate that there is a component of NCB B-2 stock which is non-voting, and redeemable or transferable only upon liquidation or refinance; the values of the contributed cash and accumilated B-2 stock; and the treatment elected by the CIRA for valuation and recognition of the stock.
Some accountant elect to only recognize the voting portion of the NCB stock, without recognizing B-2 stock dividends and include a footnote with the above referenced disclosure. However, as discussed above, when material amounts of B-2 stock dividends are issued, a book-to-tax difference arise, requiring consideration of FAS 109 and recognition of deferred tax asset.
According to IRS Rev. Proc. 94-40 the tax treatment of all NCB dividends are
included in gross income. The tax code is silent about the balance sheet
recognition of NCB stock which may have tax implication for local tax which are
based on book value of certain assets.
There is room for additional guideance from the issuers of authoratative literature regarding the treatment of NCB stock, its dividends and treatment upon liqudation or refinance. The treatment of valuation and recognition of such stock and related dividends is inconsistent because some accountants place greater emphasis of the lack of value and need for conservatism when considering non-voting B-2 stock. Other accountants emphesieze the "probable future benefit" principle guiding the recognition of assets. Based on these considerations, because adequate disclsoures allow users of the financial statement to make informed choices, the author takes the latter position with the apporpriate disclosures and proper classification on the face of the financial statement.
Yigal Rechtman (2006) ©
1. Additional information available at www.ncb.coop
2. Definition of a cooperative bank is at IRC 7701(a)(32).
3. 12 USC §3019 (1994).
4. National Consumer Cooperative Bank Act section 109(b)(5), 12 U.S.C. § 3019(b)(5).
5. Financial Accounting Standard No. 109, par. 16.