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Why Should I Accrue?
Wednesday, September 30, 2015 6:30 AM

By Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources, Inc.
From the CU Resources blog, 09/09/15

The Credit Union Membership Access Act requires all federally chartered credit unions with $10 million or more in assets to follow Generally Accepted Accounting Principles (GAAP). GAAP requires accounting on an accrual basis rather than a cash basis. So if a credit union is less than $10 million in assets, why should they bother to accrue?

There are several reasons. The first is the matching principle. GAAP requires accrual (that is, recognizing income and expense when it is incurred or earned rather than when it is paid or received) in order to properly match the earned revenue with the related incurred expenses.

Another reason (and one popular with examiners) is to avoid skewing the financial statements. If you recognize total dividend expense when dividends are paid, you will have a large expense at the end of a quarter and no expense the first two months in the quarter. Although having a more “even” flow of income is nice, the real reason to accrue the expense is that the occurrence is probable and it can be estimated. 

This also results in the recognition of a liability, so not only is the income statement more accurate, so is the balance sheet. Although technically you don’t have an obligation to pay the dividends until they are declared by the board of directors, more than likely they will be declared and you will owe the money to the members. Likewise, on the income side. You have earned income on investments or loans but have not received it yet, so you have an asset of money that is due to you.

Consistency is also important. Sometimes we see small credit unions accrue dividend expense but nothing else. If there is another expense that is just as material, it should also be accrued. So should loan income and investment income. If the only investment is an account at the corporate credit union, an accrual may not be necessary; but if the credit union has invested in certificates of deposit or other financial instruments, it would be worthwhile to accrue income earned but not yet received at month-end. The loan income accrual is normally very easy, and the number can be pulled from a computer-generated report.

One thing to keep in mind is that when an accrual is begun, the income or expense may be skewed at the beginning because of timing. For example, if you begin accruing interest on loans, the first month you may recognize income almost twice that of the normal amount because you are recognizing the normal receipts—and also recording the accrual. After the first month, the income should be back to normal.

Although it sounds like more work and it sounds confusing, once an accrual system has been started it is actually very easy and more accurate. It is worth the effort.