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Accounting for CUSOs
Monday, June 5, 2017 6:40 AM

Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources

CUSOs (Credit Union Service Organizations) are becoming more and more popular these days. They can be a good way to outsource activities that are more efficiently accomplished by a third party.

A CUSO is a corporation, limited liability corporation, or limited partnership that provides services primarily to credit unions or members of affiliated credit unions.

Part 712 of the NCUA Rules and Regulations governs CUSO related activity. Parts of this section also apply to state-chartered credit unions. CUSOs must provide the National Credit Union Administration with access to their books and records, and allow NCUA to evaluate their internal controls but are not subject to NCUA regulations.

Credit unions may participate in a CUSO alone, with other credit unions, or with third parties that are not credit unions. Federally chartered credit unions are limited to an investment and/or loans of up to 1 percent of paid-in and unimpaired capital and surplus (shares plus undivided earnings plus current earnings). Investments and loans are considered separately. If the capitalization of the CUSO would result in the investing credit union becoming less than adequately capitalized (that is, net worth dropping below 6 percent of total assets), advanced approval from the NCUA regional office would be needed.

Preapproved CUSO activity includes:

  • Credit and lending
  • Checking and currency services
  • Clerical, professional and management services
  • Electronic transactions
  • Financial counseling
  • Fixed asset services
  • Insurance brokerages or agencies
  • Leasing
  • Record retention, security and disaster recovery
  • Securities brokerage
  • Shared branching
  • Travel agency services
  • Trust related services
  • Real estate brokerage services

As you can see, the potential is quite broad. Prohibited services include controlling either directly or indirectly another financial institution and investing in insurance companies, trade associations, liquidity facilities, or similar organizations.

CUSOs must maintain their records separately and distinct from any investing credit unions. Also, officials, senior management, or immediate family members may not receive salaries, commissions, investment income, or any other form of income from the CUSO, either directly or indirectly.

Investments in CUSOs are recorded as an investment on the general ledger (normally the 740 account number series). How this investment account is subsequently maintained depends on the level of influence of the credit union over the CUSO.

If the credit union owns less than 20 percent of voting common stock or does NOT exert significant influence over the CUSO, the cost method of accounting is used. The investment is recorded at the amount paid, and no further entries are made to this account except in the following instances:

  • Liquidating dividends – debit (reduce) the investment and credit income. (Normal operating dividends are recorded with a debit to cash and a credit to investment income.)
  • Other than temporary impairment in value. This does not necessarily mean net losses—only if the losses seriously impair future operations and substantially reduce net assets would there be an impairment. Of course, this is not defined anywhere, so you have to use your best judgment. In this case, you would debit Non-Operating Gains/Losses on Investments (400 account series) and credit the investment account.

If the credit union owns more than 20 percent of voting common stock or does exert significant influence over the CUSO, the equity method of accounting must be utilized. This means that the credit union must recognize their portion of net income or loss. If the credit union owns 40 percent of the CUSO, then they would recognize 40 percent of net income or loss, with the offset being the investment account. In this case, dividend payments reduce the investment account instead of being posted to income.

Loans to CUSOs are also recorded to an investment account (740 series) instead of to a loan account. Otherwise they are treated just like regular loans. Don’t forget to perform underwriting procedures—you need an analysis of the CUSO just like any other business requesting a loan.

If you have any questions regarding these accounting procedures, don’t hesitate to ask your auditor.