Has the unpopularity of the measure in any way influenced compliance by the industry with its requirements? Our survey indicates compliance has been slow in coming. This could be a reflection of the reticence with which the banking community has greeted its provisions.

What Are the Banks Supposed to

Be Doing?

SFAS 91 effects substantially all lending institutions; it requires that virtually all fees be treated as a yield adjustment over the life of the loan, using the interest method, instead of the industry practice of counting fees immediately in income. The statement allows direct costs associated with the loan to be deferred and amortized on a net basis with the fees. SFAS 91 severely limits the costs allowed to be deferred; most costs are not considered to be direct to the loan and must be expensed as incurred. If the statement was applied prospectively, it has the general effect of increasing expenses in the first years after adoption, because the fees to offset these expenses must be amortized over the life of the underlying loan. It should be emphasized, however, that this statement deals only with the timing and recognition of fees and costs. It does not directly affect the cash flows of the institution.

The following are the major provisions of the statement as viewed by the accounting firm of Arthur Young in its 1987 Update:

* Loan origination fees are to be deferred and recognized over the contractual lives of the related loans as a yield adjustment.

* Loan commitment fees, with one exception, are also to be deferred and amortized, in certain cases, over the lives of the related loans and, in other cases, over the commitment periods. The one exception involves fees based on unused lines of credit, which in certain narrowly defined circumstances are to be taken into income immediately. "Direct loan-origination costs" are to be deferred; all other loan-origination costs" are to be deferred; all other loan-origination costs are to be recognized when incurred.

* "Direct loan-origination costs" include only: 1) incremental direct costs incurred in transactions with independent third parties; and 2) certain costs directly related to specific activities, such as evaluating the borrower and collateral, performed by the lender for a completed loan.

Are these requirements being met by financial institutions?

A Look at S&L Annual Reports

The effective date for application of SFAS 91 was fiscal years beginning after December 15, 1987-1988 for calendar year entities. A sample of the top 150 S&Ls' annual reports for 1987 and 1988 was analyzed for evidence of application. Many of the top 150 thrift institutions are privately held and issue no annual report; they are only required to submit a statement of financial condition, which does not contain the appropriate information. Accordingly, only 69 of the annual reports had information that was usable for purposes of the study.

The published annual report and Form 10-K filed with the SEC were used as sources of information. Three area of the annual report were searched for information about SFAS 91: 1) management's discussion and analysis; 2) summary of significant accounting policies; and 3) the footnotes to the financial statements disclosing accounting changes. Each annual report was ranked by the quantity and quality of the information concerning the statement.

* No mention of SFAS 91;

* A very brief mention of the statement;

* An indication that a restatement had been made; and

* An indication that a restatement had been made along with an analysis or description of the impact on that particular S&L's operations--e.g., comparison with prior policy or management's view of the expected impact.

As part of the description of the change in accounting, each S&L reported the impact or expected impact on the financial statements, which as part of the study were classified as follows:

* Significant impact on net earnings;

* No material effect on net earnings;

* Unable to determine the impact of the change; and finally

* A quantified impact of the change.

The final category includes all companies that applied the statement retroactively. Since prior years were restated for these companies, the impact on prior years was known.

SFAS 91 says that early application is encouraged but not required, and that it can be applied retroactively, restating prior years, or prospectively, only dealing with transactions that occur after the effective date. Each annual report was checked for early application and whether the change was applied retroactively or prospectively.

What Did the Reports Show?

To evaluate the disclosures, numeric values were assigned from zero (no disclosure) to nine (complete disclosure) including quantified impact of change. Twelve companies of the sample of 69 made no mention of SFAS 91 and received a zero rating. Only two thrifts provided the full disclosure leading to a nine rating. The majority of the companies fell between a two rating and a six rating, indicating a fairly substantial discussion somewhere in the report (see Figure 1).

Figure 2 shows that, in the first area of possible disclosure, management's discussion and analysis, 32 companies made no mention of the new accounting statement. These 32 include the 12 companies that made no mention of the statement at all. In contrast to these 32, 25 annual reports contained a detailed discussion of the impact of SFAS 91. The other 12 fell somewhere between these extremes.

In the second area of analysis, summary of significant accounting policies--usually the first footnote to the financial statements--30 S&Ls made no mention of the new accounting requirements. This was surprising because you would expect every thrift would present its current policy for dealing with loan origination and commitment fees in its summary of significant accounting policies.

The final area of disclosure was mentioned in one or more of the other notes to the financial statements, or for that matter, elsewhere in the financial statements, the annual report, or Form 10-K. Only 11 companies fell into this category.

Measuring the Impact of

Applying SFAS 91

Estimates of the impact of changing to the new accounting ranged from no mention to an estimated or actual dollar impact on net earnings. As Figure 3 shows, the 12 companies that did not mention SFAS 91 obviously made no projections of impact. Another 12 were unable to quantify the effects of implementing the new statement (see group B in Figure 3). Many of these companies felt there would be a substantial effect on net earnings but were unwilling to project an amount. Thirteen companies felt the new statement would have no material effect on net earnings. Many of these companies stated that they had substantially the same system in place, so implementing the new statement would pose no major problems. Another reason given was that a substantial number of their loans were adjustable rate mortgages, which would lessen the impact of this statement. Sixteen of the companies indicated that SFAS 91 would have a significant impact on net earnings, especially in the first year. Many justified or temperedd this remark by noting that all thrifts would be impacted in the same manner.

TABULAR DATA OMITTED

The final category comprises those companies that projected the impact of the statement or had implemented the statement through early application. Sixteen companies fell into this category. One company stated that implementing the new statement would decrease fee income by 40% for the coming year.

Prospective application was the most popular choice of the sample studied. Fifty-nine of the companies chose this option. Significantly, most of the companies that chose retroactive application were the largest $&Ls. Eight of the 10 were in the top 23 in the sample and the top 32 in overall size. The two that were smaller are subsidiaries of a large money center bank.

Only six of the 69 companies in the study decided on early application of the statement even though it was encouraged by the FASB.

The Report Card

The study indicates a very mixed response to SFAS 91. For those S&Ls that made no mention of the new statement, loan origination fees must not be significant or they chose to ignore the required disclosures. In any event, the goal of FASB for improved financial reporting in these cases missed the mark.

Because the statement allows for either retroactive or prospective application, the goal of comparability in financial reporting in the industry is deferred until the loans accounted for under other methods run their course. And so diversity has increased in the short-run, with smaller or less sophisticated institutions bearing the greatest hardship in terms of implementation.

REFERENCES

Statement of Financial Accounting Standards No. 91, Financial Accounting Standards Board, December 1986.

Hazard, Albert W. and Raymond E. Perry, "What FASB Statement No. 91 Means for Accountants and Auditors,: Journal of Accountancy, med, (February 1988), pp. 29-36.

Ellis, Linda, "Accounting Rule Seen Hurting Thrift Earnings," American Banker, (August 11, 1987), pp. 3, 16.