Losses on Overdrawn Accounts
Posted by Ms. Cheryl Ehmann, AVP Supv Comm Annual Reviews, Credit Union Resources, Inc on 4/5/2017

Although members love their credit unions, and credit unions are generally pretty conservative in their business practices, losses on member accounts are a cost of doing business in our industry.

A question might arise as to how to account for these losses.  Should they be posted to an expense account, either operating or non-operating, or should they be posted to an Allowance for Loan Losses account?

Before you can make this call, you need to review the NCUA Letter to Credit Unions 05-CU-03, Overdraft Protection (Bounce Protection) Programs.  This letter was issued in February 2005, and specifically addresses member accounts covered by overdraft protection.  On page 7 of this document, under Safety & Soundness Concerns, NCUA states “When overdrafts are paid, credit is extended.”  On page 8, NCUA states “In addition, overdraft balances should generally be charged off when considered uncollectible….”.  On page 9 we learn that “Overdraft balances should be reported on regulatory reports as loans.  Accordingly, overdraft losses should be charged off against the allowance for loan and lease losses.”

Although this letter only specifically addresses accounts covered by overdraft protection, it seems the same logic could be applied to other overdrawn accounts – however, nowhere in regulation or in accounting literature is the handling of overdrawn accounts not covered by overdraft protection addressed.

So the main question is – does this reasoning apply to all overdrawn accounts or is there something unique about those covered under overdraft protection? 

In my humble opinion, the reasoning does apply to all member accounts, and I believe the account losses should be posted to an Allowance account.  Often a separate Allowance account is established for these losses to facilitate historical tracking. 

For those that believe the reasoning does not apply to all accounts, the course of action would be to post losses covered by overdraft protection to an Allowance account, and post other losses to an expense account.

The expense account should be an operating expense (NOT non-operating), as these losses are expected to occur in the normal course of business.  And don’t forget about fees – only the portion of the overdraft related to the transaction that was paid should be posted to Allowance or to expense – fees should be reversed against fee income so income is not overstated.

There is no right or wrong answer here.  Whatever you decide to do, document why you decided to do it.  Individual examiners or auditors may or may not agree, but you can at least argue the point!

Categories: Financial & Auditing
Comments (1)
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Posted by Debbie Rightmire on 4/5/2017 9:50 AM:
Thanks for this clarification Cheryl. It's a question I am frequently asked. Another one of your expert commentaries I will add to my workshop information. Some of the confusion arises when the overdrawn losses are posted to the Allowance account but not reported on page 9 of the call report as a charge off or recovery. It makes reconciling the Allowance for Loan Loss account impossible. Since disclosure of NCOs tends to be one of the most frequent mistakes made on the call report, the reconcile was a way to verify the NCO amount being disclosed was accurate. Without disclosure of overdraft losses and recoveries on the call report, the reconcile to determine the accuracy of the NCO disclosure is no longer valid.
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